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, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Mountainview Road
Upper Saddle River, New Jersey 07458
------------------------------------
(Address of principal executive offices)
(201) 258-8450
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 8, 1999 the Registrant had a total of 11,971,144 shares of Common
Stock, $.01 par value, outstanding.
<PAGE>
INDEX
PROFESSIONAL DETAILING, INC.
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Balance Sheets
September 30, 1999 and December 31, 1998........................ 3
Statements of Operations -- Three and
Nine Months Ended September 30, 1999 and 1998................... 4
Statements of Cash Flows -- Nine
Months Ended September 30, 1999 and 1998........................ 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations............................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 3. Default Upon Senior Securities....................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.. Not Applicable
Item 5. Other Information.................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K..................... Not Applicable
SIGNATURES ............................................................. 18
</TABLE>
2
<PAGE>
PROFESSIONAL DETAILING, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................. $ 58,265,515 $ 56,989,233
Short-term investments .................................... 1,499,919 2,422,111
Contract payments receivable .............................. 12,939,669 8,426,029
Unbilled costs and accrued profits on contracts in progress 3,115,247 3,578,341
Deferred training ......................................... 1,985,038 1,222,103
Other current assets ...................................... 886,059 771,136
Deferred tax asset ........................................ 336,400 368,400
------------ ------------
Total current assets ......................................... 79,027,847 73,777,353
Net property, plant & equipment .............................. 3,349,727 3,070,397
Other long-term assets ....................................... 4,744,155 542,605
------------ ------------
Total assets ................................................. $ 87,121,729 $ 77,390,355
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ......................................... $ 4,521,472 $ 1,311,648
Payable to affiliate ..................................... -- 56,236
Accrued incentives ....................................... 8,604,172 7,590,954
Accrued salaries and wages ............................... 3,647,029 2,614,878
Unearned contract revenue ................................ 6,890,205 9,627,035
Other accrued expenses ................................... 5,213,706 5,528,701
------------ ------------
Total current liabilities .................................... 28,876,584 26,729,452
------------ ------------
Long-term liabilities:
Deferred tax liability ................................... 150,459 32,000
Other long-term liabilities .............................. 376,168 263,455
------------ ------------
Total long-term liabilities .................................. 526,627 295,455
------------ ------------
Total liabilities ............................................ 29,403,211 27,024,907
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding
September 30, 1999 - 11,970,831 and
December 31, 1998 - 11,946,444 ......................... 119,708 119,464
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding ........... -- --
Additional paid-in capital ................................... 47,219,256 46,829,308
Retained earnings ............................................ 11,774,332 4,896,066
Accumulated other comprehensive income ....................... 55,825 5,161
Deferred compensation ........................................ (22,609) (56,557)
Loan to officer .............................................. (1,427,994) (1,427,994)
------------ ------------
Total stockholders' equity ................................... 57,718,518 50,365,448
------------ ------------
Total liabilities & stockholders' equity ..................... $ 87,121,729 $ 77,390,355
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .......................................... $ 44,549,035 $ 28,840,395 $130,073,740 $ 83,504,521
Program expenses (including related party amounts
of $754,818 and $480,501 for the quarters ended
September 30, 1999 and 1998, respectively,
and $2,210,105 and $1,496,449 for the nine
months ended September 30, 1999 and 1998,
respectively) ................................. 34,378,219 21,157,681 98,678,918 59,542,281
------------ ------------ ------------ ------------
Gross profit ..................................... 10,170,816 7,682,714 31,394,822 23,962,240
Compensation expense ............................. 4,581,393 4,197,838 13,633,708 11,889,214
Other general, selling and administrative expenses 2,095,357 1,829,535 5,914,024 4,381,338
Acquisition and related expenses ................. 406,255 -- 1,741,102 --
------------ ------------ ------------ ------------
Total general, selling and administrative expenses 7,083,005 6,027,373 21,288,834 16,270,552
------------ ------------ ------------ ------------
Operating income ................................. 3,087,811 1,655,341 10,105,988 7,691,688
Other income, net ................................ 901,243 807,019 2,504,769 1,410,016
------------ ------------ ------------ ------------
Income before provision for income taxes ......... 3,989,054 2,462,360 12,610,757 9,101,704
Provision for income taxes ....................... 1,793,654 933,811 5,062,490 969,012
------------ ------------ ------------ ------------
Net income ....................................... $ 2,195,400 $ 1,528,549 $ 7,548,267 $ 8,132,692
============ ============ ============ ============
Basic net income per share ....................... $ 0.18 $ 0.13 $ 0.63 $ 0.79
============ ============ ============ ============
Diluted net income per share ..................... $ 0.18 $ 0.13 $ 0.62 $ 0.78
============ ============ ============ ============
Basic weighted average number
of shares outstanding ....................... 11,965,222 11,941,444 11,953,558 10,264,008
============ ============ ============ ============
Diluted weighted average number
of shares outstanding ....................... 12,179,361 12,114,467 12,171,307 10,379,010
============ ============ ============ ============
Pro forma data (see note 4)
Income before provision for taxes, as reported ... $ 2,462,360 $ 12,610,757 $ 9,101,704
Pro forma provision for income tax ............... 984,944 5,740,744 3,640,682
------------ ------------ ------------
Pro forma net income ............................. $ 1,477,416 $ 6,870,013 $ 5,461,022
============ ============ ============
Pro forma basic net income per share ............. $ 0.12 $ 0.57 $ 0.53
============ ============ ============
Pro forma diluted net income per share ........... $ 0.12 $ 0.56 $ 0.53
============ ============ ============
Pro forma basic weighted average
number of shares outstanding ................ 11,941,444 11,953,558 10,264,008
============ ============ ============
Pro forma diluted weighted average
number of shares outstanding ................ 12,114,467 12,171,307 10,379,010
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
PROFESSIONAL DETAILING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income from operations ................................ $ 7,548,267 $ 8,132,692
Adjustments to reconcile net income to net cash
provided by operating activities, net of
acquisitions:
Depreciation ....................................... 703,468 488,648
Deferred compensation .............................. 33,948 33,949
Deferred taxes, net ................................ 150,459 --
Amortization of goodwill ........................... 32,442 --
Other changes in assets and liabilities:
(Increase) in contract payments receivable ......... (3,069,618) (2,497,783)
Decrease in unbilled costs ......................... 463,094 3,040,081
(Increase) in deferred training .................... (762,935) (1,104,882)
(Increase) in other current assets ................. (105,885) (623,617)
(Increase) in other long-term assets ............... (340,895) --
Increase in trade accounts payable ................. 2,466,405 719,522
Increase (decrease) in accounts payable to affiliate (56,236) 216,166
Increase in accrued liabilities .................... 1,978,735 4,323,378
(Decrease) in unearned contract revenue ............ (3,379,838) (1,071,981)
Increase (decrease) in other current liabilities ... (314,995) 1,118,018
Increase (decrease) in other long-term liabilities . 112,713 (75,212)
------------ ------------
Net cash provided by operating activities ................. 5,459,129 12,698,979
------------ ------------
Cash Flows Provided by (Used In) Investing Activities
Sale of short-term investments ....................... 972,856 --
Purchase of short-term investments ................... -- (1,027,580)
Purchase of property and equipment ................... (775,895) (1,973,642)
Cash paid for acquisition ............................ (4,100,000) --
------------ ------------
Net cash (used in) investing activities ................... (3,903,039) (3,001,222)
------------ ------------
Cash Flows Provided by (Used In) Financing Activities
Payments on note payable ............................. -- (68,365)
Distribution to S corporation stockholders ........... (670,000) (6,186,325)
Net proceeds from the issuance of common stock ....... -- 46,524,324
Repayment of loans from stockholders ................. -- (1,284,633)
Net proceeds from the exercise of
common stock options ............................... 390,192 --
Loans to stockholders, net ........................... -- (1,346,662)
------------ ------------
Net cash provided by (used in) financing activities ....... (279,808) 37,638,339
------------ ------------
Net increase in cash and cash equivalents ................. 1,276,282 47,336,096
Cash and cash equivalents - beginning ..................... 56,989,233 7,762,298
------------ ------------
Cash and cash equivalents - ending ........................ $ 58,265,515 $ 55,098,394
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
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. 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, 1998 (the "Annual Report") as filed with the Securities and
Exchange Commission. The unaudited interim financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited interim financial statements include all
adjustments (consisting only of normal recurring adjustments) which, in the
judgement of management, are necessary for a fair presentation of such financial
statements. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. Certain prior period amounts
have been reclassified to conform with the current presentation.
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. In 1998, the Company distributed $5.8 million
to its two pre-IPO stockholders, representing stockholders' equity of the
Company as of March 31, 1998 plus the earnings of the Company from April 1, 1998
to May 18, 1998.
3. Acquisitions
On May 12, 1999, the Company acquired 100% of the capital stock of TVG,
Inc. ("TVG") in a merger transaction. In connection with the transaction, the
Company issued 1,256,882 shares of its common stock in exchange for the
outstanding shares of TVG. The acquisition has been accounted for as a pooling
of interests and, accordingly, all prior periods presented in the accompanying
consolidated financial statements have been restated to include the accounts and
operations of TVG. Prior to the merger, TVG declared $670,000 in distributions
to its S corporation stockholders, all of which has been paid as of September
30, 1999. This was recorded as a reduction of stockholders' equity. TVG is a
provider of marketing research and consulting services as well as professional
education and communication services to the pharmaceutical industry.
6
<PAGE>
Net sales and net income of the separate companies for the periods
preceding the acquisition were as follows:
Net Net
Sales Income
----------- -----------
Three months ended March 31, 1999:
PDI $36,013,617 $ 2,696,097
TVG 5,730,771 625,482
----------- -----------
Combined $41,744,388 $ 3,321,579
----------- -----------
Three months ended March 31, 1998:
PDI $23,450,219 $ 4,980,442
TVG 4,082,351 (436,511)
----------- -----------
Combined $27,532,570 $ 4,543,931
----------- -----------
In August 1999, the Company, through its wholly-owned subsidiary,
ProtoCall, Inc. ("ProtoCall"), acquired substantially all of the operating
assets of ProtoCall, LLC, a leading provider of syndicated contract sales
services to the United States pharmaceutical industry. The purchase price was
$4.5 million (of which $4.1 million was paid at closing) plus up to an
additional $3.0 million in contingent payments payable during 2000 if ProtoCall
achieves defined performance benchmarks. This acquisition was accounted for as a
purchase. In connection with this transaction, the Company recorded $3.9 million
in goodwill which will be amortized over a period of 10 years.
The Company recorded $1,741,102 in nonrecurring acquisition and related
expenses during the nine months ended September 30, 1999. These costs consist
primarily of investment banking, legal and accounting fees.
4. Pro Forma Information
Prior to its IPO in May 1998, PDI was an S corporation and not subject to
Federal income tax. Prior to its acquisition by PDI in May 1999, TVG was an S
corporation and not subject to Federal income tax. During such periods the net
income of the Company had been reported by and taxed directly to the pre-IPO
shareholders (in the case of PDI) and to the pre-acquisition shareholders (in
the case of TVG), rather than the Company. Accordingly, for informational
purposes, the accompanying statements of operations for the nine months ended
September 30, 1999 and the three and nine months ended September 30, 1998
include a pro forma adjustment for the income taxes which would have been
recorded had the Company been a C corporation for the periods presented based on
the tax laws in effect during the respective periods. The pro forma adjustment
for income taxes is based upon the statutory rates in effect for C corporations
during the nine months ended September 30, 1999 and the three and nine months
ended September 30, 1998 and does not include the one-time tax provisions and
benefits related to recognition of deferred tax assets and liabilities recorded
upon termination of PDI's S corporation status in May 1998 and termination of
TVG's S corporation status in May 1999. The pro forma adjustment for income
taxes for the nine months ended September 30, 1999 also reflects the
non-deductibility of certain acquisition related costs.
7
<PAGE>
5. New Accounting Pronouncements
The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in June 1998. This statement is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. 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.
6. Basic and Diluted Net Income Per Share
Basic and diluted net income 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, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average number of shares outstanding - basic 11,965,222 11,941,444 11,953,558 10,264,008
Dilutive effect of stock options 214,139 173,023 217,749 115,002
---------- ---------- ---------- ----------
Average number of shares outstanding - diluted 12,179,361 12,114,467 12,171,307 10,379,010
========== ========== ========== ==========
</TABLE>
7. Investments
The Company has investments of $1.5 million which are classified as
available-for-sale securities and recorded at fair market value. The unrealized
after tax gain on these investments at September 30, 1999 of $55,825 was
included as a separate component of stockholders' equity as "Accumulated other
comprehensive income."
8. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 2,195,400 $ 1,528,549 $ 7,548,267 $ 8,132,692
Other comprehensive income, before tax:
Unrealized holding gain (loss) on
available-for-sale securities
arising during period (72,499) (340,546) 84,440 (175,005)
----------- ----------- ----------- -----------
Other comprehensive income, before tax 2,122,901 1,188,003 7,632,707 7,957,687
Income tax (expense) benefit related to
items of other comprehensive income 29,000 136,218 (33,776) 70,002
----------- ----------- ----------- -----------
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Other comprehensive income, net of tax $ 2,151,901 $ 1,324,221 $ 7,598,931 $ 8,027,689
=========== =========== =========== ===========
</TABLE>
9. Segment Information
As a result of its acquisition of TVG, the Company is now subject to
certain provisions of Statement of Financial Accounting Standards No. 131,
"Financial Reporting for Segments of a Business Enterprise."
PDI is organized primarily on the basis of its three principal service
offerings which include customized contract sales services, marketing research
and consulting services, and professional education and communication services.
Marketing research and consulting services and professional education and
communication services have been combined to form the "All other" category.
The accounting policies of the segments are the same as those described in
the "Nature of Business and Significant Accounting Policies" footnote to the
Company's financial statements which are included in the Company's Annual Report
on Form 10-K. Segment data includes a charge allocating all corporate
headquarters costs to each of the operating segments. PDI evaluates the
performance of its segments and allocates resources to them based on earnings
before interest and taxes ("EBIT"). The Company does not utilize information
about assets for its operating segments and, accordingly, no asset information
is presented in the table below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Contract sales services $ 38,644,548 $ 24,608,978 $111,820,015 $ 70,187,994
All Other 5,904,487 4,231,417 18,253,725 13,316,527
------------ ------------ ------------ ------------
Total $ 44,549,035 $ 28,840,395 $130,073,740 $ 83,504,521
============ ============ ============ ============
EBIT
Contract sales services $ 2,714,557 $ 1,604,729 $ 9,540,448 $ 7,763,810
All Other 779,509 50,612 2,306,642 (72,122)
------------ ------------ ------------ ------------
Total $ 3,494,066 $ 1,655,341 $ 11,847,090 $ 7,691,688
============ ============ ============ ============
Reconciliation of EBIT to income
before provision for income taxes
Total EBIT for operating groups $ 3,494,066 $ 1,655,341 $ 11,847,090 $ 7,691,688
Acquisition costs 406,255 -- 1,741,102 --
Interest Income 901,243 807,019 2,504,769 1,410,016
------------ ------------ ------------ ------------
Income before provision
for income taxes $ 3,989,054 $ 2,462,360 $ 12,610,757 $ 9,101,704
============ ============ ============ ============
Capital Expenditures
Contract sales services $ 178,891 $ 171,648 $ 686,511 $ 1,746,361
All Other 36,161 25,679 89,384 227,281
------------ ------------ ------------ ------------
Total $ 215,052 $ 197,327 $ 775,895 $ 1,973,642
============ ============ ============ ============
Depreciation Expense
Contract sales services $ 149,188 $ 94,837 $ 409,317 $ 210,534
All Other 100,393 53,317 294,151 278,114
------------ ------------ ------------ ------------
Total $ 249,581 $ 148,154 $ 703,468 $ 488,648
============ ============ ============ ============
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Various statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgements about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by forward-looking statements include, but are
not limited to, the factors set forth in "Certain Factors That May Affect Future
Growth," under Part I, Item 1, of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 as filed with the Securities and Exchange
Commission.
GENERAL
We are a leading and rapidly growing contract sales organization ("CSO")
providing product detailing programs and other marketing and promotional
services to the United States pharmaceutical industry. Our primary objective is
to enhance our leadership position in the growing CSO industry and to become the
premier supplier of product detailing programs and other marketing and
promotional services to the pharmaceutical industry and other segments of the
healthcare market. We have demonstrated strong internal growth generated by
renewing and expanding programs with existing clients and by securing new
business from leading pharmaceutical companies.
We completed an initial public offering of 2,800,000 shares of our common
stock at $16.00 per share on May 19, 1998. Additionally, 420,000 shares of
common stock were purchased from us at $16.00 per share by the underwriters upon
exercise of an over-allotment option. The net proceeds to us from the sale of
those shares, after deducting underwriting discounts and expenses, were
approximately $46.5 million.
On May 12, 1999, we acquired 100% of the capital stock of TVG, Inc.
("TVG") in a merger transaction. In connection with that transaction, we issued
1,256,882 shares of our common stock in exchange for the outstanding shares of
TVG. The acquisition has been accounted for as a pooling of interests and,
accordingly, all prior periods presented in the accompanying
10
<PAGE>
consolidated financial statements have been restated to include the accounts and
operations of TVG. The acquisition of TVG expands the scope of high quality
services that we provide to the pharmaceutical industry. TVG's client base
includes 18 of the top 20 pharmaceutical companies. Through its Marketing
Research and Consulting Division, TVG provides brand marketing strategy, product
profiling, positioning, and message development services. Projects run across
the full range of product lifecycles, with an emphasis on the critical
pre-launch planning phase. Through its Education/Communications Division, TVG
provides a broad spectrum of promotional and educational communications
programs, including dinner meetings, symposia, teleconferences and on-site
hospital programs.
On August 31, 1999, we acquired, through our wholly-owned subsidiary
ProtoCall, Inc. ("ProtoCall"), substantially all of the operating assets of
ProtoCall, LLC, a leading provider of syndicated contract sales services to the
United States pharmaceutical industry. The purchase price was $4.5 million (of
which $4.1 million was paid at closing) plus up to an additional $3.0 million in
contingent payments payable during 2000 if ProtoCall achieves defined
performance benchmarks. This acquisition was accounted for as a purchase. The
acquisition of ProtoCall adds a syndicated sales force option to our product
offerings expanding the scope and flexibility of high quality services that we
can provide to our customers. In connection with this transaction, we recorded
$3.9 million in goodwill which will be amortized over a period of 10 years.
Prior to our IPO, we were an S corporation for Federal income tax
purposes. Until its acquisition by PDI on May 12, 1999, TVG was an S
corporation. Accordingly, during such periods our net income had been reported
by and taxed directly to the pre-IPO stockholders (in the case of PDI) and to
the pre-acquisition stockholders (in the case of TVG).
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ................................ 100.0 % 100.0 % 100.0 % 100.0 %
Program expenses ....................... 77.2 73.4 75.9 71.3
----- ----- ----- -----
Gross profit ........................... 22.8 26.6 24.1 28.7
Compensation expense ................... 10.3 14.6 10.5 14.2
Other general, selling, &
administrative expenses ........... 4.7 6.3 4.5 5.3
Acquisition and related expenses ....... 0.9 -- 1.3 --
----- ----- ----- -----
Total general, selling &
administrative expenses ........... 15.9 20.9 16.3 19.5
----- ----- ----- -----
Operating income ....................... 6.9 5.7 7.8 9.2
Other income, net ...................... 2.0 2.8 1.9 1.7
----- ----- ----- -----
Income before provision for income taxes 8.9 8.5 9.7 10.9
Provision for income taxes ............. 4.0 3.2 3.9 1.2
----- ----- ----- -----
Net income ............................. 4.9 % 5.3 % 5.8 % 9.7 %
===== ===== ===== =====
</TABLE>
11
<PAGE>
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Revenue. Revenue for the quarter ended September 30, 1999 was $44.5
million, an increase of 54.5% over revenue of $28.8 million for the quarter
ended September 30, 1998. This increase in revenue was generated primarily from
the continued renewal and expansion of product detailing programs from existing
clients and the expansion of our client base, including several new product
detailing programs that started during the third quarter of 1999.
Program expenses. Program expenses for the quarter ended September 30,
1999 were $34.4 million, an increase of 62.5% over program expenses of $21.2
million for the quarter ended September 30, 1998. As a percentage of revenue,
program expenses increased to 77.2% in the 1999 period from 73.4% in the
corresponding 1998 period. This increase is attributable to a number of factors.
First, we initiated a number of new product detailing programs in the third
quarter of 1999. Typically, profit margins during the initial phase of a program
are lower than at any other period during the life of the program. Second, our
fastest growing business segment is product detailing, which has lower profit
margins, in general, than our other business segments. Finally, during the
quarter, we made significant expenditures that we believe will increase the
effectiveness of our sales force. We expect these expenditures to continue into
the fourth quarter.
Compensation expense. Compensation expense for the quarter ended September
30, 1999 was $4.6 million compared to $4.2 million for the quarter ended
September 30, 1998. As a percentage of revenue, compensation expense decreased
to 10.3% in the third quarter of 1999 from 14.6% in the comparable 1998 period.
This decrease reflects the continued general, selling and administrative expense
leverage that we have realized through expansion. We plan to continue to invest
in the staffing and related resources needed to manage future growth.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses for the quarter ended September 30, 1999 were $2.1
million, compared to $1.8 million for the quarter ended September 30, 1998. As a
percentage of revenue, other general, selling and administrative expenses
decreased to 4.7% in the third quarter of 1999 from 6.3% in the comparable 1998
period. This percentage decline reflects the spreading of other general, selling
and administrative expenses over a larger base of revenue. We expect to lease an
additional 11,000 square feet of office space at our present location at an
approximate annual cost of $250,000 beginning in the fourth quarter and extend
our existing lease by one year so that the lease for all 38,500 square feet will
terminate at the end of November 2004.
Acquisition and related expenses. In the quarter ended September 30, 1999,
we incurred $0.4 million of non-recurring acquisition and related expenses. No
such expenses were incurred in the corresponding 1998 period.
Operating income. Operating income for the quarter ended September 30,
1999 was $3.1 million compared to operating income of $1.7 million for the
quarter ended September 30, 1998. As a percentage of revenue, operating income
increased to 6.9% for the 1999 period from 5.7% in the corresponding 1998
period. Excluding acquisition and related expenses, operating income for the
quarter ended September 30, 1999 was $3.5 million or 7.8% of revenue.
Other income, net. Other income consists primarily of interest income
earned on our cash and cash equivalents. Other income for the quarter ended
September 30, 1999 was $0.9 million compared to other income of $0.8 million for
the quarter ended September 30, 1998. The increase
12
<PAGE>
is primarily due to the investment of the net proceeds of the IPO in May 1998
and the increase in net cash provided by operations from the fourth quarter of
1998 through September 30, 1999.
Provision for income taxes. Income taxes of $1.8 million for the quarter
ended September 30, 1999 and $0.9 million for the quarter ended September 30,
1998 consisted of Federal and state corporate income taxes. TVG was an S
corporation for Federal income tax purposes until its acquisition by us on May
12, 1999 and therefore incurred no Federal income taxes prior to the
acquisition. We expect our effective tax rate to approximate 40% in future
periods.
Pro forma net income. The Company was a C corporation for the quarter
ended September 30, 1999 and therefore there is no pro forma information for
that period. Pro forma net income for the quarter ended September 30, 1998 of
$1.5 million assumes that the Company was taxed for Federal and state corporate
income tax purposes as a C corporation during that period.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Revenue. Revenue for the nine months ended September 30, 1999 was $130.1
million, an increase of approximately 55.8% over revenue of $83.5 million for
the nine months ended September 30, 1998. This increase in revenue for the nine
months ended September 30, 1999 was generated primarily from the continued
renewal and expansion of product detailing programs from existing clients and an
expansion of our client base.
Program expenses. Program expenses for the nine months ended September 30,
1999 were $98.7 million, an increase of 65.7% over program expenses of $59.5
million for the nine months ended September 30, 1998. As a percentage of
revenue, program expenses increased to 75.9% for the 1999 period from 71.3% for
the corresponding 1998 period. We estimate that approximately $1.8 million of
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; this had
the effect of lowering program expenses from 73.4% to 71.3% for the nine months
ended September 30, 1998. Also, our fastest growing business segment is product
detailing, which has lower profit margins, in general, than our other business
segments.
Compensation expense. Compensation expense for the nine months ended
September 30, 1999 was $13.6 million compared to $11.9 million for the nine
months ended September 30, 1998. As a percentage of revenue, compensation
expense decreased to 10.5% for the 1999 period from 14.2% in the corresponding
1998 period. This percentage decrease reflects the continued general, selling
and administrative expense leverage that we have realized through our expansion.
We expect to continue to invest in the staffing and related resources needed to
manage future growth.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses for the nine months ended September 30, 1999 were
$5.9 million compared to $4.4 million for the nine months ended September 30,
1998. As a percentage of revenue, other general, selling and administrative
expenses decreased to 4.5% for the 1999 period from 5.3% in the corresponding
1998 period. This percentage decline reflects the spreading of other general,
selling and administrative expenses over a larger base of revenue. We expect to
lease an additional 11,000 square feet of office space at our present location
at an approximate
13
<PAGE>
annual cost of $250,000 beginning in the fourth quarter and extend our existing
lease by one year so that the lease for all 38,500 square feet will terminate at
the end of November 2004.
Acquisition and related expenses. In the nine months ended September 30,
1999, we incurred $1.7 million of non-recurring acquisition and related
expenses. No such expenses were incurred in the comparable 1998 period. As a
percentage of revenue, acquisition and related expenses were 1.3% for the nine
months ended September 30, 1999.
Operating income. Operating income for the nine months ended September 30,
1999 was $10.1 million compared to operating income of $7.7 million for the nine
months ended September 30, 1998. As a percentage of revenue, operating income
for the 1999 period decreased to 7.8% from 9.2% for the corresponding 1998
period. Excluding acquisition and related expenses, operating income for the
1999 period was $11.8 million or 9.1% of revenue.
Other income, net. Other income consists primarily of interest income
earned on our cash and cash equivalents. Other income for the nine months ended
September 30, 1999 was $2.5 million, compared to other income of $1.4 million
for the nine months ended September 30, 1998. The increase is primarily due to
the investment of the net proceeds of the IPO in May 1998, and the increase in
net cash provided by operations from the fourth quarter of 1998 through
September 30, 1999.
Provision for income taxes. Income taxes of $5.1 million for the nine
months ended September 30, 1999 reflects all applicable Federal and state
corporate income taxes except that it takes into account only the portion of
TVG's taxable income arising after the termination of its S corporation status
net of a tax benefit related to the recognition of the net deferred tax asset
recorded upon termination of its S corporation status. Income taxes of $1.0
million for the nine months ended September 30, 1998 consisted of Federal and
state corporate income taxes on the portion of our taxable income arising after
the termination of our S corporation status and a tax provision related to the
recognition of the net deferred tax liability recorded upon termination of our S
corporation status. We expect our effective tax rate to approximate 40% in
future periods.
Pro forma net income. Pro forma net income for the nine months ended
September 30, 1999 was $6.9 million as compared to pro forma net income of $5.5
million for the nine months ended September 30, 1998. Pro forma net income
assumes we were taxed for Federal and state income tax purposes as a C
corporation during both periods. The pro forma effective tax rate for the nine
months ended September 30, 1999 was 45.5% primarily as a result of the impact of
$1.7 million of non-deductible acquisition and related expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and cash equivalents of
approximately $58.3 million and working capital of $50.2 million compared to
cash and cash equivalents of approximately $57.0 million and working capital of
$47.0 million at December 31, 1998.
For the nine months ended September 30, 1999, net cash provided from
operating activities was $5.5 million, a decrease of $7.2 million from cash
provided from operating activities of $12.7 million for the same period in 1998.
The main component of cash provided from operating activities for the nine
months ended September 30, 1999 was net income from operations
14
<PAGE>
of $7.5 million offset by a decrease of $3.0 million in "Other changes in assets
and liabilities." The balances in "Other changes in assets and liabilities" may
fluctuate depending on a number of factors, including the number and size of
programs, contract terms and other timing issues. These fluctuations may vary in
size and direction each reporting period. The main component of cash provided
from operating activities for the nine months ended September 30, 1998 was net
income from operations of $8.1 million and an increase of $4.0 million in "Other
changes in assets and liabilities."
For the nine months ended September 30, 1999, net cash used in investing
activities was $3.9 million, an increase of $0.9 million over net cash used in
investing activities of $3.0 for the same period in 1998. Net cash used in
investing activities for the nine months ended September 30, 1999 consisted of
$4.1 million paid in connection with the purchase of ProtoCall and $0.8 million
in purchases of property and equipment, offset by the sale of $1.0 million in
short-term investments. Net cash used in investing activities for the nine
months ended September 30, 1998 consisted of $2.0 million in purchases of
property and equipment and $1.0 million in the purchase of short-term
investments.
For the nine months ended September 30, 1999, net cash used in financing
activities was $0.3 million, reflecting $0.7 million of distributions to the TVG
S corporation stockholders, offset by $0.4 million in proceeds from the exercise
of common stock options. For the nine months ended September 30, 1998, net cash
provided by financing activities consisted of net proceeds of $46.5 million from
the IPO, offset partially by $6.2 million of distributions to the S corporation
stockholders. Additionally, a loan of $1.4 million was made to our President and
Chief Executive Officer and loans of $1.3 million from stockholders were repaid.
We believe that our cash and cash equivalents and future cash flows
generated from operations will be sufficient to meet our foreseeable operating
and capital requirements for the next twelve months. In accordance with our plan
for the use of the proceeds from the IPO in May 1998, we will continue to
evaluate and review acquisition candidates in the ordinary course of business.
YEAR 2000 COMPLIANCE
We have undertaken a project that addresses the Year 2000 ("Y2K") 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. Our
project to address the Y2K issue has been divided into two sections. One section
addresses our internal business systems. The other section addresses the
business systems of our key business partners. Key business partners are those
clients and vendors that have a material impact on our operations.
The portion of the project that deals with our internal business systems
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
15
<PAGE>
systems that cannot be repaired or replaced by January 1, 2000. As of September
30, 1999, substantially all phases related to our material internal business
systems were complete.
The section of the project that deals with the business systems of our 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,
1999, all key business partners have been identified and we have completed the
evaluation of their Y2K compliance efforts. The determination of alternatives
and contingency planning will be continually evaluated.
We have not incurred nor do we expect to incur any additional material
costs relating to our internal business systems as all phases associated with
determining Y2K compliance of our internal business systems have been completed.
Costs associated with the determination of alternatives and contingency
planning, based on our evaluation of Y2K compliance efforts of our key business
partners, are not expected to be material.
Failure to make all internal business systems Y2K compliant could result
in an interruption in, or a failure of, some of our business activities or
operations. In addition, Y2K disruptions in client operations could result in,
among other things, one or more clients missing scheduled payments which could
impact our cash flow. Y2K disruptions in the operations of key vendors could
also impact our ability to fulfill some of our contractual obligations. If one
or more of these situations occur, our financial position, results of operations
or cash flows could be materially adversely affected.
Part II - Other Information
Item 1 - Not Applicable
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.
16
<PAGE>
(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 of temporary investments with maturities of three months or
less as of September 30, 1999.
Item 3 - Not Applicable
Item 4 - Not Applicable
Item 5 - Not Applicable
Item 6 - Not Applicable
17
<PAGE>
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 9, 1999 PROFESSIONAL DETAILING, INC.
By: /s/ Charles T. Saldarini
-------------------------------
Charles T. Saldarini, President
and Chief Executive Officer
By: /s/ Bernard C. Boyle
-------------------------------
Bernard C. Boyle
Chief Financial and Accounting
Officer
18
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