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, 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 August 9, 1999 the Registrant had a total of 11,962,161 shares of Common
Stock, $.01 par value, outstanding.
<PAGE>
INDEX
PROFESSIONAL DETAILING, INC.
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements
Balance Sheets
June 30, 1999 and December 31, 1998............................... 3
Statements of Operations -- Three and
Six Months Ended June 30, 1999 and 1998........................... 4
Statements of Cash Flows -- Six
Months Ended June 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 .............. 17
Item 5. Other Information ................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K ................................. 17
SIGNATURES ............................................................... 18
2
<PAGE>
PROFESSIONAL DETAILING, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................ $ 66,653,960 $ 56,989,233
Marketable securities ............................ 1,522,058 2,422,111
Contract payments receivable ..................... 13,352,790 8,426,029
Unbilled costs and accrued profits on contracts in
progress ...................................... 2,699,559 3,578,341
Deferred training ................................ 2,257,539 1,222,103
Other current assets ............................. 1,014,296 771,136
Deferred tax asset ............................... 336,400 368,400
------------ ------------
Total current assets ......................... 87,836,602 73,777,353
Net property, plant & equipment .................. 3,177,353 3,070,397
Other long-term assets ........................... 883,501 542,605
------------ ------------
Total assets ..................................... $ 91,897,456 $ 77,390,355
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................. $ 2,793,398 $ 1,311,648
Payable to affiliates, net ....................... 361,741 56,236
Accrued incentives ............................... 7,759,058 7,590,954
Accrued salaries and wages ....................... 3,813,978 2,614,878
Unearned contract revenue ........................ 14,840,224 9,627,035
Other accrued expenses ........................... 6,457,672 5,528,701
------------ ------------
Total current liabilities .................... $ 36,026,071 $ 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 ................................ $ 36,552,698 $ 27,024,907
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding
June 30, 1999 - 11,957,672 and
December 31, 1998 - 11,946,444 ................ 119,577 119,464
Additional paid-in capital ....................... 47,008,843 46,829,308
Retained earnings ................................ 9,578,932 4,896,066
Accumulated other comprehensive income ........... 99,325 5,161
Deferred compensation ............................ (33,925) (56,557)
Loan to officer .................................. (1,427,994) (1,427,994)
------------ ------------
Total shareholders' equity ................... 55,344,758 50,365,448
------------ ------------
Total liabilities & shareholders' equity ......... $ 91,897,456 $ 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 Six Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ........................................... $43,780,317 $27,131,556 $85,524,705 $54,664,126
Program expenses, (including related party
amounts of $750,825 and $482,518 for
the quarters ended June 30, 1999 and 1998,
and $1,455,287 and $1,015,948 for the six
months ended June 30, 1999 and 1998) ........... 32,280,657 19,478,129 62,156,930 36,736,161
----------- ----------- ----------- -----------
Gross profit ...................................... 11,499,660 7,653,427 23,367,775 17,927,965
Compensation expense .............................. 5,430,658 4,670,256 11,196,084 9,339,815
Other general, selling, and administrative expenses 1,969,540 1,383,475 3,818,667 2,551,803
Acquisition and related expenses .................. 1,334,847 -- 1,334,847 --
----------- ----------- ----------- -----------
Total general, selling and administrative expenses 8,735,045 6,053,731 16,349,598 11,891,618
----------- ----------- ----------- -----------
Operating income .................................. 2,764,615 1,599,696 7,018,177 6,036,347
Other income, net ................................. 802,130 495,717 1,603,526 602,997
----------- ----------- ----------- -----------
Income before provision for income taxes .......... 3,566,745 2,095,413 8,621,703 6,639,344
Provision for income taxes ........................ 1,535,457 35,201 3,268,836 35,201
----------- ----------- ----------- -----------
Net income ........................................ $ 2,031,288 $ 2,060,212 $ 5,352,867 $ 6,604,143
=========== =========== =========== ===========
Basic net income per share ........................ $ 0.17 $ 0.20 $ 0.45 $ 0.70
=========== =========== =========== ===========
Diluted net income per share ...................... $ 0.17 $ 0.20 $ 0.44 $ 0.69
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding ........................ 11,949,007 10,129,136 11,947,725 9,425,290
=========== =========== =========== ===========
Diluted weighted average number
of shares outstanding ........................ 12,155,960 10,240,699 12,167,280 9,511,282
=========== =========== =========== ===========
Pro forma data (see note 4)
Income before provision for taxes ................. $ 3,566,745 $ 2,095,413 $ 8,621,703 $ 6,639,344
Pro forma provision for income tax ................ 1,960,637 838,165 3,982,620 2,655,738
----------- ----------- ----------- -----------
Pro forma net income .............................. $ 1,606,108 $ 1,257,248 $ 4,639,083 $ 3,983,606
=========== =========== =========== ===========
Pro forma basic net income per share .............. $ 0.13 $ 0.12 $ 0.39 $ 0.42
=========== =========== =========== ===========
Pro forma diluted net income per share ............ $ 0.13 $ 0.12 $ 0.38 $ 0.42
=========== =========== =========== ===========
Pro forma basic weighted average
number of shares outstanding ................. 11,949,007 10,129,136 11,947,725 9,425,290
=========== =========== =========== ===========
Pro forma diluted weighted average
number of shares outstanding ................. 12,155,960 10,240,699 12,167,280 9,511,282
=========== =========== =========== ===========
</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>
Six Months Ended
June 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income from operations ................................. $ 5,352,867 $ 6,604,143
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation ........................................ 453,887 340,494
Deferred compensation ............................... 22,632 22,633
Deferred taxes, net ................................. (121,264) 58,952
Other changes in assets and liabilities:
(Increase) decrease in contract payments receivable . (4,926,761) (6,795,295)
(Increase) decrease in unbilled costs ............... 878,782 2,831,474
(Increase) decrease in deferred training ............ (1,035,436) (1,285,577)
(Increase) decrease in other current assets ......... (243,160) (865,430)
(Increase) decrease in other long-term assets ....... (69,174) --
Increase (decrease) in accounts payable ............. 1,481,750 803,830
Increase (decrease) in accounts payable to affiliate 305,505 199,403
Increase (decrease) in accrued liabilities .......... 2,018,888 1,506,957
Increase (decrease) in unearned contract revenue .... 5,213,189 4,247,707
Increase (decrease) in other current liabilities .... -- --
------------ ------------
Net cash provided by operating activities .................. 9,331,705 7,669,291
------------ ------------
Cash Flows Provided by (Used In) Investing Activities
Sale of short-term investments ........................ 1,000,000 --
Purchase of short-term investments .................... (5,783) (11,165)
Purchase of property and equipment .................... (560,843) (1,776,315)
------------ ------------
Net cash provided by (used in) investing activities ........ 433,374 (1,787,480)
------------ ------------
Cash Flows Provided by (Used In) Financing Activities
Payments on note payable .............................. -- (1,352,998)
Distribution to S Corporation shareholders ............ (280,000) (6,186,325)
Net proceeds from the issuance of common stock ........ -- 46,538,139
Net proceeds from the exercise of common stock options 179,648 --
Loans to shareholders, net ............................ -- (1,012,166)
------------ ------------
Net cash provided by (used in) financing activities ........ (100,352) 37,986,650
------------ ------------
Net increase in cash and cash equivalents .................. 9,664,727 43,868,461
Cash and cash equivalents - beginning ...................... 56,989,233 7,762,298
------------ ------------
Cash and cash equivalents - ending ......................... $ 66,653,960 $ 51,630,759
============ ============
</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. (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 six month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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 IPO 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.
3. Acquisition of TVG, Inc.
On May 12, 1999, the Company and TVG, Inc. ("TVG") signed a definitive
agreement pursuant to which the Company acquired 100% of the capital stock of
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.
TVG is a provider marketing research and marketing consulting services as
well as medical education and communication services to the pharmaceutical
industry.
The Company recorded $1,334,847 in nonrecurring acquisition and related
expenses during the three months ended June 30, 1999. These costs consist
primarily of investment
6
<PAGE>
banking, legal and accounting fees. As an S Corporation, TVG declared $670,000
in distributions to its S Corporation shareholders, $280,000 of which has been
paid as of June 30, 1999.
Net sales and net income of the separate companies for the periods
preceding the acquisition were:
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
----------- -----------
4. Pro Forma Information
Prior to its IPO in May of 1998, PDI was an S Corporation and not subject
to Federal income tax. Prior to its acquisition by PDI in May of 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 income for the three and six months
ended June 30, 1999 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
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 three month and six month periods ended
June 30, 1999 and 1998 and does not include the one-time tax provisions related
to recognition of deferred tax assets and liabilities recorded upon termination
of PDI's S Corporation status in May of 1998 and termination of TVG's S
Corporation status in May of 1999. The pro forma adjustment for income taxes for
the three and six months ended June 30, 1999 also reflects the non-deductibility
of certain acquisition related costs.
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, 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.
7
<PAGE>
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 six-month periods ended
June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average shares outstanding - basic 11,949,007 10,129,136 11,947,725 9,425,290
Dilutive effect of stock options 206,953 111,563 219,555 85,992
----------- ----------- ----------- -----------
Average shares outstanding - diluted 12,155,960 10,240,699 12,167,280 9,511,282
=========== =========== =========== ===========
</TABLE>
7. Investments
The Company has investments of $1.5 million which are classified as
available-for-sale securities which are recorded at fair market value. The
unrealized after tax gain at June 30, 1999 of $99,325 was included as a separate
component of stockholders' equity as accumulated other comprehensive income.
8. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,031,288 $ 2,060,212 $ 5,352,867 $ 6,604,143
Other comprehensive income, before tax:
Unrealized holding gain (loss) on
available-for-sale securities
arising during period 91,255 (10,378) 165,541 106,230
----------- ----------- ----------- -----------
Other comprehensive income, before tax 2,122,543 2,049,834 5,518,408 6,710,373
Income tax (expense) benefit related to
items of other comprehensive income (36,502) 4,151 (66,216) (42,492)
----------- ----------- ----------- -----------
Other comprehensive income, net of tax $ 2,086,041 $ 2,053,985 $ 5,452,192 $ 6,667,881
=========== =========== =========== ===========
</TABLE>
9. Segment Information
As a result of the Company's acquisition of TVG, PDI is now subject to
certain provisions of Statement of Financial Accounting Standard # 131,
Financial Reporting for Segments of a Business Enterprise.
8
<PAGE>
PDI is organized primarily on the basis of its three principal service
offerings which include customized contract sales services, marketing research
and marketing consulting services and medical education and communication
services. Marketing research and marketing consulting services and medical
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 "Summary of 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>
For the Three Months For the Six Months
Ended June 30 Ended June 30
1999 1998 1999 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenue
Contract sales services $ 37,164,122 $ 22,128,797 $ 73,175,467 $ 45,579,016
All other 6,616,195 5,002,759 12,349,238 9,085,110
--------------------------- ---------------------------
Total $ 43,780,317 $ 27,131,556 $ 85,524,705 $ 54,664,126
=========================== ===========================
EBIT
Contract sales services $ 3,108,628 $ 1,229,714 $ 6,825,904 $ 6,158,139
All other 990,834 369,982 1,527,120 (121,792)
--------------------------- ---------------------------
Total $ 4,099,462 $ 1,599,696 $ 8,353,024 $ 6,036,347
=========================== ===========================
Reconciliation of EBIT to income
before provision for income taxes
Total EBIT for operating groups $ 4,099,462 $ 1,599,696 $ 8,353,024 $ 6,036,347
Acquisition costs 1,334,847 -- 1,334,847 --
Interest income 802,130 495,717 1,603,526 602,997
--------------------------- ---------------------------
Income before provision
for income taxes $ 3,566,745 $ 2,095,413 $ 8,621,703 $ 6,639,344
=========================== ===========================
Capital expenditures
Contract sales sevices $ 203,334 $ 807,339 $ 507,620 $ 1,574,713
All other 26,870 166,064 53,223 201,602
--------------------------- ---------------------------
Total $ 230,204 $ 973,403 $ 560,843 $ 1,776,315
=========================== ===========================
Depreciation expense
Contract sales services $ 133,852 $ 69,018 $ 260,129 $ 115,697
All other 98,508 116,229 193,758 224,797
--------------------------- ---------------------------
Total $ 232,360 $ 185,247 $ 453,887 $ 340,494
=========================== ===========================
</TABLE>
9
<PAGE>
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, 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 "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
Professional Detailing, Inc. (the "Company" or "PDI") is a leading
provider of comprehensive customized marketing and sales solutions on an
outsourced basis to the United States pharmaceutical industry. A primary Company
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's marketing research, medical education
and communication components help to surround the sales representative with
resources, training and technology that maintain and enhance its competitive
advantage. 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 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 expenses, were
approximately $46.5 million.
10
<PAGE>
On May 12, 1999, the Company and TVG signed a definitive agreement
pursuant to which the Company acquired 100% of the capital stock of 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. The acquisition of TVG expands the scope of high quality services that
PDI provides 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.
Prior to its IPO, the Company was an S Corporation for Federal income tax
purposes. Until its acquisition by PDI on May 12, 1999, TVG was an S Corporation
and not subject to Federal income tax. Accordingly, 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, had TVG been a C
Corporation for the quarter and six months ended June 30, 1999 utilizing an
effective tax rate of 40%, net income and diluted net income per share excluding
transaction costs would have been $2.9 million and $0.24 and $5.9 million and
$0.49, respectively.
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,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue ......................... 100.0% 100.0% 100.0% 100.0%
Program expenses ................ 73.7 71.8 72.7 67.2
---- ---- ---- ----
Gross profit .................... 26.3 28.2 27.3 32.8
Compensation expense ............ 12.4 17.2 13.1 17.1
Other general, selling, &
administrative expenses .... 4.5 5.1 4.4 4.7
Acquisition and related costs ... 3.1 -- 1.6 --
---- ---- ---- ----
Total general, selling &
administrative expenses .... 20.0 22.3 19.1 21.8
---- ---- ---- ----
Operating income ................ 6.3 5.9 8.2 11.0
Other income, net ............... 1.8 1.8 1.9 1.1
---- ---- ---- ----
Income before provision for taxes 8.1 7.7 10.1 12.1
Provision for income taxes ...... 3.5 0.1 3.8 0.1
---- ---- ---- ----
Net income ...................... 4.6% 7.6% 6.3% 12.0%
==== ==== ==== ====
11
<PAGE>
Quarter Ended June 30, 1999 Compared to Quarter Ended Ju ne 30, 1998
Revenue. Revenue for the quarter ended June 30, 1999 was $43.8 million, an
increase of approximately 61.4% over revenue of $27.1 million for the quarter
ended June 30, 1998. The increase in revenue for the quarter ended June 30, 1999
was generated primarily from an expansion of the Company's client base and the
continued renewal and expansion of contracts from existing clients.
Program expenses. Program expenses for the quarter ended June 30, 1999
were $32.3 million, an increase 65.7% over program expenses of $19.5 million for
the quarter ended June 30, 1998. As a percentage of revenue, program expenses
increased to 73.7% in the second quarter of 1999 from 71.8% in the second
quarter of 1998. This increase was primarily attributable to higher than
anticipated initial costs in connection with certain new service offerings by
TVG.
Compensation expense. Compensation expense for the quarter ended June 30,
1999 was $5.4 million compared to $4.7 million for the quarter ended June 30,
1998. As a percentage of revenue, compensation expense decreased to 12.4% in the
second quarter of 1999 from 17.2% in the comparable 1998 period. This percentage
decrease reflects the continued general, selling and administrative expense
leverage that the Company has realized through its expansion. The Company will
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 June 30, 1999 were $2.0
million, compared to $1.4 million for the quarter ended June 30, 1998. As a
percentage of revenue, other general, selling and administrative expenses
decreased to 4.5% in the second quarter of 1999 from 5.1% in the comparable 1998
period. This percentage decline reflects the spreading of other general, selling
and administrative expenses over a larger base of revenue.
Acquisition and related costs. In the quarter ended June 30, 1999, the
Company incurred $1.3 million of non-recurring acquisition and related expenses
in connection with the TVG merger in May 1999. No such expenses were incurred in
the comparable 1998 period. As a percentage of revenue, acquisition and related
costs were 3.1% in the quarter ended June 30, 1999.
Operating income. Operating income for the quarter ended June 30, 1999 was
$2.8 million compared to operating income of $1.6 million for the quarter ended
June 30, 1998. As a percentage of revenue, operating income increased to 6.3%
for the second quarter of 1999 from 5.9% in the comparable 1998 period.
Excluding acquisition costs, operating income for the quarter ended June 30,
1999 was $4.1 million or 9.4% of revenue.
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,
1999 was $802,130 compared to other income of $495,717 for the quarter ended
June 30, 1998. The increase is primarily due to the investment of the net
proceeds of the IPO in May 1998, which have been available for all of the second
quarter of 1999.
Income tax provision. Income taxes of $1.5 million for the quarter ended
June 30, 1999 consisted of PDI's Federal and state corporate income taxes for
the full quarter ended June 30, 1999 and Federal and state corporate income
taxes on the portion of TVG's taxable income arising after termination of its S
Corporation status net of a tax benefit related to the recognition of the net
12
<PAGE>
deferred tax asset recorded by the Company upon termination of TVG's S
Corporation status. TVG was an S Corporation for Federal income tax purposes
until its acquisition by PDI on May 12, 1999. Income taxes for the quarter 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 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. Pro forma net income for the quarter ended June 30,
1999 was $1.6 million compared to a pro forma net income of $1.3 million for the
quarter ended June 30, 1998. Pro forma net income 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,
1999 was approximately 55.0% due to of the impact of $1.3 million of
non-deductible non-recurring expenses related to the TVG acquisition. Net income
and diluted net income per share excluding transaction costs were $2.9 million
and $0.24 respectively, for the quarter ended June 30, 1999.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Revenue. Revenue for the six months ended June 30, 1999 was $85.5 million,
an increase of approximately 56.5% over revenue of $54.7 million for the six
months ended June 30, 1998. The increase in revenue for the six months ended
June 30, 1999 was generated primarily from an expansion of the Company's client
base and the continued renewal and expansion of contracts from existing clients.
Program expenses. Program expenses for the six months ended June 30, 1999
were $62.2 million, an increase of 69.2% over program expenses of $36.7 million
for the six months ended June 30, 1998. As a percentage of revenue, program
expenses increased to 72.7% in the first half of 1999 from 67.2% in the first
half of 1998. Program expenses for the first half of 1999 were in line with
projections. Program expenses for the first half of 1998 benefited from 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.
Compensation expense. Compensation expense for the six months ended June
30, 1999 was $11.2 million compared to $9.3 million for the six months ended
June 30, 1998. As a percentage of revenue, compensation expense decreased to
13.1% in the first six months of 1999 from 17.1% in the comparable 1998 period.
This percentage decrease reflects the continued general, selling and
administrative expense leverage that the Company has realized through its
expansion. The Company will 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 six months ended June 30, 1999 were $3.8
million, compared to $2.6 million for the six months ended June 30, 1998. As a
percentage of revenue, other general, selling and administrative expenses
decreased to 4.5% in the first half of 1999 from 4.7% in the comparable 1998
period. This percentage decline reflects the spreading of other general, selling
and administrative expenses over a larger base of revenue.
13
<PAGE>
Acquisition and related expenses. In the six months ended June 30, 1999,
the Company incurred $1.3 million of non-recurring acquisition and related
expenses in connection with the TVG merger in May of 1999. No such expenses were
incurred in the comparable 1998 period. As a percentage of revenue, acquisition
and related expenses were 1.6% in the first half of 1999.
Operating income. Operating income for the six months ended June 30, 1999
was $7.0 million compared to operating income of $6.0 million for the six months
ended June 30, 1998. As a percentage of revenue, operating income for the first
half of 1999 decreased to 8.2% from 11.0% for the comparable 1998 period.
Excluding acquisition and related expenses, operating income for the six months
ended June 30, 1999 was $8.4 million or 9.8% of revenue.
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, 1999 was $1.6 million, compared to other income of $0.6 million for the six
months ended June 30, 1998. The increase is primarily due to the investment of
the net proceeds of the IPO in May 1998, which have been available for all of
1999.
Income tax provision. Income taxes of $3.3 million for the six months
ended June 30, 1999 consisted of PDI's Federal and state corporate income taxes
for the full six months ended June 30, 1999 and Federal and state corporate
income taxes on the portion of TVG's taxable income arising after termination of
its S Corporation status net of a tax benefit related to the recognition of the
net deferred tax asset recorded by the Company upon termination of TVG's S
Corporation status. TVG was an S Corporation for Federal income tax purposes
until its acquisition by PDI on May 12, 1999. 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 Corporation, and a 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. Pro forma net income for the six months ended June
30, 1999 was $4.6 million as compared to pro forma net income of $4.0 million
for the six months ended June 30, 1998. Pro forma net income 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,
1999 is 46.2% primarily due to the impact of $1.3 million of non-deductible
non-recurring acquisition and related expenses in connection with the TVG
acquisition. The Company expects its effective tax rate to approximate 40% in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $66.7 million of cash and cash
equivalents and no bank indebtedness. As of June 30, 1999, working capital was
$51.8 million.
For the six months ended June 30, 1999, cash provided from operating
activities was $9.3 million an increase of $1.6 million over cash provided from
operating activities of $7.7 for the same period in 1998. The main component of
cash provided from operating activities for the six
14
<PAGE>
months ended June 30, 1999 was net income from operations of $5.4 million. 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. Such fluctuations resulted in $3.9
million of the remaining cash provided by operating activities; these
fluctuations may vary in size and direction each reporting period.
Cash provided by investing activities for the six months ended June 30,
1999 consisted of the sale of short-term investments of $1.0 million which was
partially offset by purchases of property and equipment of $0.6 million.
Cash used in financing activities for the six months ended June 30, 1999
consisted of $280,000 of distributions to the S Corporation shareholders of TVG
offset partially by $179,648 in proceeds from the exercise of common stock
options.
The Company 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. In accordance with the Company's plan for the use of the proceeds
from the IPO in May of 1998, the Company will continue to evaluate and review
acquisition candidates in the ordinary course of business.
YEAR 2000 COMPLIANCE
The Company has undertaken 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 June 30, 1999, substantially all phases related to the internal business
systems of the Company were complete.
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 June 30, 1999,
all key business partners have been identified and the Company has completed the
evaluation of their Y2K compliance efforts. The determination of alternatives
and contingency planning is expected to be completed during the third quarter.
15
<PAGE>
The Company does not expect to incur any additional material costs
relating to its internal business systems as all phases associated with
determining Y2K compliance of the internal business systems have been completed.
Costs associated with the determination of alternatives and contingency
planning, based on the Company's evaluation of Y2K compliance efforts of our key
business partners, will not be material.
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.
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.
(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.
16
<PAGE>
(4)(vii) Use of Proceeds:
$46,538,000 of temporary investments with maturities of three months
or less as of June 30, 1999.
Item 3 - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
On June 2, 1999 the Company held its 1999 annual meeting of stockholders.
The sole item of business on the agenda for the meeting was the re-election of
Jan Martens Vecsi as a Class III Director of the Company for a three-year term.
Ms. Vecsi was re-elected with 10,435,944 votes cast in favor and 28,500 votes
withheld. With the re-election of Ms. Vecsi at the Annual Meeting, the Board of
Directors of the Company continues to be comprised of John P. Dugan, Charles T.
Saldarini, Gerald J. Mossinghoff, John M. Pietruski and Jan Martens Vecsi.
Item 5 - Not Applicable
Item 6 - Reports on Form 8-K
A report on Form 8-K dated May 12, 1999 was filed by the Company pursuant
to Item 2 thereof with respect to the acquisition of TVG, Inc.
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.
August 12, 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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