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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-24249
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, NJ 07458-1937
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (201) 258-8450
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 24, 1999 was approximately $109,300,000.
The number of shares outstanding of the registrant's Common Stock, $.01
par value, as of February 24, 1999 was 10,689,562 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PROFESSIONAL DETAILING, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
Page
----
PART I ............................................................... 3
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 10
Item 3. Legal Proceedings.............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
PART II ............................................................... 12
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .................................................... 12
Item 6. Selected Financial Data........................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 22
Item 8. Financial Statements and Supplementary Data.................... 22
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................... 22
PART III .................................................................23
Item 10. Directors and Executive Officers of the Registrant............. 23
Item 11. Executive Compensation......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management. ................................................ 28
Item 13. Certain Relationships and Related Transactions................. 28
PART IV ............................................................... 30
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 30
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a statement 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 herein under the headings "Business,"
"Certain Factors That May Affect Future Growth" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
2
PART 1
ITEM 1. BUSINESS
Professional Detailing, Inc. is a leading provider of comprehensive
customized sales solutions on an outsourced basis to the United States
pharmaceutical industry. The Company believes it has achieved this leadership
position based on its 11 years of industry experience and its relationships with
many of the pharmaceutical industry's largest companies. Since inception, the
Company has designed customized product detailing programs for approximately 28
clients, including Pfizer Inc., Astra Pharmaceuticals, L.P., Glaxo Wellcome
Inc., Rhone-Poulenc Rorer Pharmaceuticals, L.P. and Johnson & Johnson. These
programs have been designed to promote more than 75 different products,
including such leading prescription medications as Prilosec(Registered),
Wellbutrin(Registered) and Cardura(Registered), as well as a number of OTC
products such as Bayer(Registered) Aspirin, Pepcid AC(Registered) and Monistat
5(Registered), to hospitals, pharmacies and physicians in approximately 20
different specialties. The Company's primary objective is to enhance its
leadership position in the growing contract sales organization ("CSO") industry
and to become the premier supplier of comprehensive sales solutions to the
pharmaceutical industry and other segments of the healthcare market.
The Company is engaged by its clients on a contractual basis to design and
implement product detailing programs for both prescription and OTC
pharmaceutical products. Such programs typically include three phases: design,
execution and assessment. In the program design phase, the Company works with
the client to understand needs, define objectives, select targets and determine
appropriate staffing. Program execution involves recruiting, hiring, training
and managing a sales force, which performs detail calls promoting the particular
client's pharmaceutical products. Assessment, the last phase of the program,
involves measurement of sales force performance and program success relative to
the goals and objectives outlined in the program design phase.
The Company has demonstrated strong internal growth generated by securing
new business from leading pharmaceutical companies and renewing and expanding
programs with existing clients. The Company believes that it is one of the
largest CSOs operating in the United States measured both by revenue and total
number of sales representatives used in programs. The number of sales
representatives (both full-time and part-time) employed by the Company has
increased from 134 as of December 31, 1994 to 1,385 as of December 31, 1998.
Over that same period, the Company's mix between part-time and full-time
representatives shifted from 100% part-time to 17% part-time. The Company has
also experienced a consistently high renewal rate among its clients.
The Company believes that because of the benefits of outsourcing,
pharmaceutical companies have made a strategic decision to continue to outsource
a significant portion of their sales and marketing activities. The Company
further believes that the trend toward the increased use of CSOs by
pharmaceutical companies will continue due to the following industry dynamics:
(i) pharmaceutical companies will continue to expand their product portfolios
and as a result will need to add sales force capacity, (ii) pharmaceutical
companies will continue to face margin pressures and will seek to maintain
flexibility by converting fixed costs to variable costs, and (iii) the
availability of qualified CSOs will provide an incentive to pharmaceutical
companies to continue to outsource this function.
The Company believes that it is well positioned to benefit from these
growth opportunities. Through its 11 years of providing service to the United
States pharmaceutical industry, the Company has demonstrated that it is a
high-quality, results-oriented provider of detailing services. In addition, the
Company maintains a highly qualified sales force as a result of a rigorous
recruiting process and training programs that are comparable to those of the
pharmaceutical companies. The Company also believes that one of its biggest
competitive advantages is its ability to provide customized solutions to its
clients. Finally, as one of the largest CSOs, the Company has achieved the size
and demonstrated the ability to perform large detailing programs and execute
several programs simultaneously.
In order to leverage its competitive advantages, PDI's growth strategy
emphasizes: (i) enhancing its leadership position in the growing CSO market by
maintaining its historic focus on high-quality contract sales services and by
continuing to build and invest in the Company's core competencies and
operations; (ii) expanding both its relationship with existing clients and its
selling efforts to capture new clients; (iii) offering additional promotional,
marketing and educational services and further developing its existing detailing
services; (iv) entering new geographic markets; and (v) investigating and
pursuing appropriate acquisitions of detailing or detailing-related companies.
3
Product Detailing
The Company believes that product detailing is a highly effective means of
influencing the prescribing patterns of the targeted prescribers and, therefore,
it is the most commonly employed strategy to promote pharmaceutical products.
Product detailing involves face-to-face meetings between a sales representative
and a targeted prescriber. The target of a product detail is usually a physician
identified because of his or her specialty or prescribing patterns. However,
other legally authorized prescribers -- such as nurse practitioners, physician
assistants or pharmacists -- may also be targets for detailing. Detailing
generally occurs in physician offices and hospitals, although conventions and
trade association meetings may also provide an appropriate forum. The sales
representative is required to possess a high level of product knowledge, as well
as other technical and therapeutic expertise. The interaction itself involves a
technical review of the product's legally authorized indications and usage, role
in disease treatment, mechanism of action, side effects, dosing, drug
interactions, cost and availability (i.e., the "details"). The sales
representative and the targeted prescriber will also typically discuss the types
of patients best suited for the particular product and how and when such
patients will best benefit from the product's use. Competitive products and
their relative strengths and weaknesses in contrast to the product being
detailed may also be discussed.
Product detailing takes place in the context of a personal sales call
during which a sales representative typically will detail one to three products.
The amount of time devoted to each product detailed during a call depends upon
that product's detail position ("slot") within the call. A call may last as long
as eight to ten minutes or may be as short as one to two minutes, depending upon
a number of factors, principally the target prescriber's availability. Product
detailing typically takes place in selling cycles of four to eight weeks, during
which period the sales representative will attempt to call each targeted
prescriber in his or her geographic territory at least once. A single program
may have three to 12 cycles. The repeat interactions between the sales
representative and the targeted prescriber are intended to establish trust
between the sales representative and the targeted prescriber, influence the
prescribing pattern of the targeted prescriber, obtain market share for new
products, maintain market share for existing products and build barriers to
entry against competing products.
Company's Competitive Advantages
The Company believes that a significant market opportunity exists for CSOs
that can provide high-quality sales solutions across a variety of sales,
marketing and therapeutic applications and that have demonstrated a willingness
and ability to respond to the particular needs of clients.
Reputation for quality. Virtually every program designed by the Company
has met or exceeded the goals established at the beginning of the program. The
Company believes that these results have earned it a reputation in the industry
as a high-quality, results-oriented provider of detailing services. The
Company's success is illustrated by its long-standing relationship with such
"blue chip" clients as Pfizer, Astra Pharmaceuticals, Glaxo Wellcome and Johnson
& Johnson.
High-quality sales force. The Company's overall commitment to quality is
evidenced by its recruiting, hiring and training processes. The Company believes
that its recruiting and hiring process is one of the most comprehensive,
challenging, rigorous, selective and professional processes in the industry and
that its training programs are comparable to those designed by pharmaceutical
companies to train their internal sales forces. The Company offers its sales
representatives a compensation package that it believes is competitive with
compensation packages that the major pharmaceutical companies offer to their own
sales forces. Many of the Company's competitors use independent contractors as
sales representatives who are compensated based on the number of calls or on an
hourly basis. All of the Company's personnel, including sales representatives,
managers and recruiting coordinators, are employees rather than independent
contractors. The Company believes that its treatment of its sales
representatives as employees and its compensation system are important factors
in its ability to attract and retain talented sales personnel. The Company has
found that a base salary and incentive bonus compensation package is best suited
for a results-oriented program and for achieving program objectives, while a per
call or hourly compensation structure emphasizes the number of details rather
than the quality of the detailing effort.
Ability to design customized solutions. The Company believes that its
ability to innovate and to provide a dedicated, vertically integrated sales
force custom-designed to meet the specific needs of a client is a principal
competitive advantage. Such customization includes the size, profile (i.e.,
part-time versus full-time), experience, training, geographic deployment and
allocation of the sales force against the targeted prescribers and the number of
calls for each targeted prescriber, the particular compensation package for the
sales force and field and database
4
management support, such as in-house territory mapping, physician satisfaction
surveys, call reporting services and regulatory compliance services. In
particular, the Company believes that its ability to provide full-time,
part-time or a combination of full-time and part-time sales representatives,
constitutes a competitive advantage. Finally, the Company's management and data
information systems enable it to provide its clients with information and
services most of its competitors cannot, and thus reduces the time and expense
its clients would otherwise have to devote to a product detailing program.
Size and infrastructure. The Company believes that its size,
organizational structure and overall resources enable it to implement multiple
programs simultaneously and to implement large programs that smaller CSOs may be
precluded from executing. The Company has made substantial investments in all of
its personnel and management information systems in order to be able to
successfully implement a variety of large and small programs simultaneously.
Clients and Contracts
Clients
The Company believes that its relationships with its clients, which
include many of the largest pharmaceutical companies in the United States, are
among its most important strategic assets and competitive advantages. The
Company has enjoyed long-standing relationships with many of these clients, and
a high percentage of its clients either renew their programs or enter into new
contracts with the Company for new programs. The Company believes that the
quality and stability of its client base promotes the consistency of its core
business and that the scope and complexity of its clients' marketing needs
present opportunities for expansion into new areas. There can be no assurance,
however, that the Company's clients will continue to renew or expand their
relationship with the Company.
Contracts
Given the customized nature of the Company's business, it utilizes a
variety of contract structures with its clients. Generally, contracts provide
for a fee to be paid based on the Company delivering a specified package of
services. Contracts typically include performance benchmarks, such as a minimum
number of sales representatives or a minimum number of calls. The Company
typically receives a portion of its fee upon commencement of the program to
offset the costs of initiating such program. In addition, contracts typically
provide that the Company is entitled to a fee for each sales representative
hired by the client during or at the conclusion of a program. In certain
instances, the Company may be entitled to additional compensation based upon the
success of the program and/or subject to penalties for failing to meet stated
performance benchmarks.
The Company's contracts generally are for terms of six months to two years
and are subject to renewal upon expiration. However, the Company's contracts are
terminable by the client for any reason upon 30 to 90 days notice. The Company's
contracts typically provide for termination payments by the client upon a
termination without cause. While the cancellation of certain of the Company's
contracts by a client without cause may result in the imposition of penalties on
such client, such penalties may not act as an adequate deterrent to the
termination of any such contracts. In addition, there can be no assurance that
such penalties will offset the revenue which could have been earned under such
contract or the costs which the Company may incur as a result of such
termination. The loss or termination of a large contract or the loss of multiple
contracts could adversely affect the Company's future revenue and profitability.
Contracts may also be terminated for cause if the Company fails to meet stated
performance benchmarks. To date, no programs have been terminated for cause.
The Company's contracts typically contain cross-indemnification provisions
between the Company and its client. The client will usually indemnify the
Company against product liability and related claims arising from the sale of
the product and the Company indemnifies the clients with respect to the errors
and omissions of the Company's sales representatives in the course of their
detailing activities. To date, the Company has not asserted, nor has there been
asserted against the Company, any claim for indemnification pursuant to a
contract.
5
Marketing and Business Development
Most of the Company's revenue is derived from renewals and extensions of
existing programs and new programs with existing clients. The Company derives
new business from responses to "requests for proposals" from pharmaceutical
companies that the Company believes are the result of its promotional and
advertising efforts. Recently, the Company has increasingly engaged in proactive
efforts to generate more business from new and prospective clients. The Company
has implemented a sales process that is designed to leverage its
results-oriented image through case studies, references, return on investment
models and comprehensive proposals. The Company also has implemented an enhanced
marketing and new business development process for the purpose of improving its
ability to secure more contracts both within the pharmaceutical industry and in
other healthcare markets. This new business development process relies on the
use of a dedicated sales and marketing team.
Competition
The primary competitive factor affecting contract sales services is the
ability to quickly hire, train, deploy and manage qualified sales
representatives to implement simultaneously several large product detailing
programs. The Company also competes with other CSOs on the basis of such factors
as its reputation, quality of its services, experience of management,
performance record, customer satisfaction, ability to respond to specific client
needs, integration skills and price. The Company believes it competes favorably
with respect to each of these factors.
The Company primarily competes with in-house sales and marketing
departments of pharmaceutical companies, other CSOs and other third party
providers to the pharmaceutical industry, many of which possess substantially
greater capital, personnel and other resources than the Company. In addition to
the in-house sales forces of pharmaceutical companies, the Company's current
major competitors include CSOs such as Innovex Limited, a subsidiary of
Quintiles Transnational Corp., and the various sales and marketing affiliates of
Snyder Communications, Inc. As a result of competitive pressures, various sales
and marketing organizations providing services to the pharmaceutical industry
are consolidating and are becoming targets of global organizations. This trend
is likely to produce increased competition among CSOs for both clients and
acquisition candidates and increased competitive pressures on smaller providers.
If the trend in the pharmaceutical industry towards consolidation continues,
pharmaceutical companies may have excess in-house sales force capacity and may,
as a result, reduce or eliminate their use of CSOs. There are relatively few
barriers to entry into the CSO industry and there can be no assurance that, as
the CSO industry continues to evolve, additional competitors with greater
resources than the Company will not enter the industry or that the Company's
customers will not choose to conduct more of their sales services internally,
with other CSOs or with organizations that can provide a broader range of sales
and marketing services. Although the Company intends to monitor industry trends
and respond accordingly, there can be no assurance that the Company will be able
to anticipate and successfully respond to such trends. Increased competition may
lead to price and other forms of competition that may have a material adverse
effect on the Company's business and results of operations.
Government and Industry Regulation
The healthcare industry is subject to extensive regulation. Various laws,
regulations and guidelines promulgated by government, industry and professional
bodies affect, among other matters, the provision, licensing, labeling,
marketing, promotion, sale and reimbursement of healthcare services and
products, including pharmaceutical products. It is also possible that additional
or amended laws, regulations or guidelines could be adopted in the future.
The pharmaceutical industry is subject to extensive federal regulation and
oversight by the United States Food and Drug Administration ("FDA"). For
instance, the Federal Food, Drug and Cosmetic Act, as supplemented by various
other statutes, regulates, among other matters, the approval, labeling,
advertising, promotion, sale and distribution of drugs, including the practice
of providing product samples to physicians. Under this statute, the FDA asserts
its authority to regulate all promotional activities involving prescription
drugs. In addition, the sale or distribution of pharmaceuticals may also be
subject to the Federal Trade Commission Act ("FTCA"). Finally, the Prescription
Drug Marketing Act ("PDMA") regulates the ability of pharmaceutical companies to
provide physicians with free samples of their products. Essentially, the PDMA
requires extensive record keeping and labeling of such samples for tracing
purposes. Accordingly, the business of the Company and its clients, to the
extent such business involves promotion and marketing of
6
pharmaceutical products, are subject to the extensive regulation governing the
pharmaceutical industry, and there can be no assurance that the Company will not
be subject to increased regulatory scrutiny in the future.
In addition, some of the services that the Company may provide in the
future are affected by various guidelines promulgated by industry and
professional organizations. For example, certain ethical guidelines promulgated
by the American Medical Association ("AMA") govern, among other matters, the
receipt by physicians of gifts from health-related entities. These guidelines
govern the honoraria, and other items of pecuniary value, which AMA member
physicians may receive, directly or indirectly, from pharmaceutical companies.
Similar guidelines and policies have been adopted by other professional and
industry organizations, such as PhRMA.
The healthcare industry is subject to federal and state laws pertaining to
healthcare fraud and abuse. In particular, certain federal and state laws
prohibit manufacturers, suppliers and providers from offering or giving or
receiving kickbacks or other remuneration in connection with ordering or
recommending purchase or rental of healthcare items and services. The federal
anti-kickback statute provides both civil and criminal penalties for, among
other things, offering or paying any remuneration to induce someone to refer
patients to, or to purchase, lease, or order (or arrange for or recommend the
purchase, lease, or order of), any item or service for which payment may be made
by Medicare or certain federally-funded state healthcare programs (e.g.,
Medicaid). This statute also prohibits soliciting or receiving any remuneration
in exchange for engaging in any of these activities. The prohibition applies
whether the remuneration is provided directly or indirectly, overtly or
covertly, in cash or in kind. Violations of the law can result in numerous
sanctions, including criminal fines, imprisonment, and exclusion from
participation in the Medicare and Medicaid programs.
Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the
purchase or rental of medical equipment and supplies. State laws vary in scope
and have been infrequently interpreted by courts and regulatory agencies, but
may apply to all healthcare items or services, regardless of whether Medicare or
Medicaid funds are involved.
In addition, the Company is subject to the rules and regulations
promulgated by the Equal Employment Opportunity Commission and similar state
entities which govern its recruiting and hiring practices and its relationship
with its employees.
The failure of the Company or its clients to comply with, or any change
in, the applicable regulatory requirements or professional organization or
industry guidelines could, among other things, limit or prohibit the Company or
its clients from conducting certain business activities, subject the Company or
its clients to adverse publicity, increase the costs of regulatory compliance or
subject the Company or its clients to monetary fines or other penalties. Any
such actions could have a material adverse affect on the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
The following factors may affect the future growth of the Company and
should be considered by any prospective purchaser of the Company's securities:
Dependence on the Pharmaceutical Industry
Substantially all of the Company's revenue to date has been generated from
providing product detailing services to pharmaceutical companies. Accordingly,
the Company's business, financial condition and results of operations are highly
dependent on sales and marketing expenditures by pharmaceutical companies for
the sale and distribution of pharmaceutical products. The Company has benefited
to date from the growing trend of pharmaceutical companies to outsource sales
and marketing programs to CSOs. There can be no assurance that this trend in
outsourcing will continue. The Company could be materially and adversely
affected by unfavorable developments in the pharmaceutical industry generally or
any reduction in expenditures for, or future outsourcing of, promotional,
marketing and sales activities by pharmaceutical companies or a shift in
marketing focus away from product detailing. Promotional, marketing and sales
expenditures by pharmaceutical companies have in the past been, and could in the
future be, negatively impacted by, among other things, governmental reform or
private market initiatives intended to reduce the cost of pharmaceutical
products or by governmental, medical association or pharmaceutical industry
initiatives designed to regulate the manner in which pharmaceutical companies
promote their products. Furthermore, the trend in the pharmaceutical industry
toward consolidation, by merger or otherwise, may result in a reduction in the
use of CSOs. A significant change in the direction of the outsourcing trend
generally, or a trend in
7
the pharmaceutical industry not to use, or to reduce the use of, outsourced
marketing services, such as those provided by the Company, would have a material
adverse effect on the Company.
Customer Concentration
The Company's revenue and profitability are highly dependent on its
relationships with several large pharmaceutical companies. In 1998, the
Company's three largest clients accounted for approximately 85% of its revenue.
The Company is likely to continue to experience a high degree of concentration
of business. Such concentration may become greater as a result of consolidation
within the pharmaceutical industry. The loss or significant reduction of
business from any significant customer could have a material adverse effect on
the Company's business and results of operations.
Risks Associated with the Nature of Contracts
The Company's contracts are generally for terms of six months to two years
and are subject to renewal upon expiration. In addition, a single contract may
account for a significant portion of the Company's total revenue. The Company's
contracts may be terminated by the client at any time for any reason. Also,
contracts typically contain significant penalties if the Company fails to meet
stated performance benchmarks. While the cancellation of certain of the
Company's contracts by a client without cause may result in the imposition of
penalties on such client, such penalties may not act as an adequate deterrent to
the termination of such contracts. In addition, there can be no assurance that
such penalties will offset the revenue which could have been earned under such
contract or the costs which the Company may incur as a result of such
termination. Furthermore, all of the Company's sales representatives are
employees rather than independent contractors. Accordingly, upon the termination
of a particular contract, unless the Company can immediately transfer the sales
force to a new program, it either must continue to compensate those employees,
without realizing any related revenue, or terminate their employment. If the
Company terminates their employment, it may incur significant expenses relating
to such termination, including the cost of recruiting and hiring replacement
sales personnel. Finally, substantially all of the Company's contracts are fixed
fee arrangements. Accordingly, if the Company underestimates the costs
associated with the services to be provided pursuant to a particular contract,
or if there are unanticipated increases in the Company's operating or
administrative expenses, the margins on a particular contract and the overall
profitability of the Company may be adversely affected. The failure to obtain
new contracts to replace expiring contracts, the cancellation or delay of an
existing contract, the failure to satisfy the minimum performance standards set
forth in a contract, the inability of the Company to transfer a sales force to a
new program upon the termination of a program, or the underestimation of costs
associated with a particular contract could have a material adverse effect on
the Company's business and results of operations.
Management of Growth
The Company has recently experienced rapid growth in the number of its
employees, the size of its programs and the scope of its operations. The
Company's ability to manage such growth effectively will depend upon its ability
to enhance its management team and its ability to attract and retain skilled
employees. The Company's success will also depend on the ability of its officers
and key employees to continue to implement and improve its operational,
management information and financial control systems, and to expand, train and
manage its workforce. Failure to manage growth effectively could have a material
adverse effect on the Company's business and results of operations.
Possible Healthcare Reform; Impact of Managed Healthcare Programs
Healthcare reform measures have been considered by Congress and other
Federal and state bodies during recent years. The intent of the proposals
generally has been to reduce healthcare costs and the growth of total healthcare
expenditures and expand healthcare coverage for the uninsured. Although
comprehensive healthcare reform has been considered, only limited proposals have
been enacted. Comprehensive healthcare reform may be considered again and
efforts to enact reform bills are likely to continue. Implementation of
government healthcare reform may adversely affect promotional and marketing
expenditures by pharmaceutical companies, which could decrease the business
opportunities available to the Company. The Company is unable to predict the
likelihood of such legislation or similar legislation being enacted into law or
the effects that any such legislation would have on its business, results of
operations and financial condition.
8
The primary trend in the United States healthcare industry is toward cost
containment. In recent years, managed care providers have been able to exercise
greater influence through managed treatment and hospitalization patterns, a
shift from reimbursement on a cost basis to per capita limits for patient
treatment and the use of formularies (lists of preapproved products that a
physician may prescribe). The increasing use of managed care, centralized
purchasing decisions, consolidations among and integration of healthcare
providers are continuing to affect purchasing and usage patterns in the
healthcare system. Decisions regarding the use of pharmaceutical products are
increasingly being consolidated into group purchasing organizations, regional
integrated delivery systems and similar organizations and are becoming more
economically focused, with decision makers taking into account the cost of the
product and whether a product reduces the cost of treatment. There can be no
assurance the Company will not be adversely affected by cost containment
measures. Government or private initiatives to further contain pharmaceutical
pricing could have a material adverse effect on the pharmaceutical industry, and
thus on the Company.
Government Regulation
The healthcare industry is subject to extensive regulation. Various laws,
regulations and guidelines promulgated by government, industry and professional
bodies affect, among other matters, the provision, licensing, labeling,
marketing, promotion, sale and distribution of healthcare services and products,
including pharmaceutical products. It is possible that additional laws,
regulations and guidelines or changes in current laws, regulations or guidelines
may be adopted in the future. The failure of the Company or its clients to
comply with such laws, regulations and guidelines, or any change in applicable
laws, regulations and guidelines could, among other things, limit or prohibit
certain business activities of the Company or its clients, subject the Company
or its clients to adverse publicity, increase the cost of regulatory compliance
or subject the Company or its clients to monetary fines or other penalties. Such
actions could have a material adverse effect on the Company's business, results
of operations, and financial condition.
Fraud and Abuse Laws
The healthcare industry is subject to various Federal and state laws
pertaining to healthcare fraud and abuse including prohibitions on the payment
or acceptance of kickbacks or other remuneration in return for the purchase or
lease of products which are paid for by Medicare or Medicaid. Sanctions for
violating these laws include criminal penalties and civil sanctions, including
fines and penalties, and possible exclusion from Medicare, Medicaid and other
Federal healthcare programs. Although the Company believes its business
arrangements are outside the scope of such Federal and state fraud and abuse
laws, there can be no assurance that the Company's practices will not be
challenged under these laws in the future or that such a challenge would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
Competition; Industry Consolidation
The Company primarily competes with in-house sales and marketing
departments of pharmaceutical companies, other CSOs and other third party
providers to the pharmaceutical industry, many of which possess substantially
greater capital, personnel and other resources than the Company. In addition to
the in-house sales forces of pharmaceutical companies, the Company's current
major competitors include CSOs such as Innovex Limited, a subsidiary of
Quintiles Transnational Corp., and the various sales and marketing affiliates of
Snyder Communications, Inc. As a result of competitive pressures, various sales
and marketing organizations providing services to the pharmaceutical industry
are consolidating and are becoming targets of global organizations. This trend
is likely to produce increased competition among CSOs for both clients and
acquisition candidates and increased competitive pressures on smaller providers.
If the trend in the pharmaceutical industry towards consolidation continues,
pharmaceutical companies may have excess in-house sales force capacity and may,
as a result, reduce or eliminate their use of CSOs. There are relatively few
barriers to entry into the CSO industry and there can be no assurance that, as
the CSO industry continues to evolve, additional competitors with greater
resources than the Company will not enter the industry or that the Company's
customers will not choose to conduct more of their sales services internally,
with other CSOs or with organizations that can provide a broader range of sales
and marketing services. Although the Company intends to monitor industry trends
and respond accordingly, there can be no assurance that the Company will be able
to anticipate and successfully respond to such trends. Increased
9
competition may lead to price and other forms of competition that may have a
material adverse effect on the Company's business and results of operations.
Potential Liability
The Company is engaged in the business of detailing pharmaceutical
products. Such activities could expose the Company to risk of liability for
personal injury or death to persons using such products, although the Company
does not commercially market or sell the products to end-users. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability through measures such as contractual indemnification provisions with
clients (the scope of which may vary from client to client, and the performances
of which are not secured) and reliance on insurance maintained by clients. The
Company, however, could also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity. The Company could be materially and adversely affected if it
were required to pay damages or incur defense costs in connection with a claim
that is outside the scope of the indemnification agreements; if the indemnity,
although applicable, is not performed in accordance with its terms; or if the
Company's liability exceeds the amount of applicable insurance or indemnity. The
Company currently does not carry product liability insurance and is not insured
against the errors and omissions of its employees.
Dependence on Key Personnel
The Company depends on a number of key executives, including Charles T.
Saldarini, its President and Chief Executive Officer, and Steven K. Budd, its
Chief Operating Officer. The loss of the services of any of the Company's key
executives could have a material adverse effect on the Company's business,
financial condition and results of operations.
Acquisition Risks
As part of its business strategy, the Company will evaluate new
acquisition opportunities. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products or services of
the acquired companies, the expenses incurred in connection with the acquisition
and subsequent assimilation of operations and products or services, the
diversion of management's attention from other business concerns and the
potential loss of key employees of the acquired company. Acquisitions of
companies outside the United States also may involve the additional risks of
assimilating differences in international business practices and overcoming
language differences as well as the risks inherent in conducting international
business, including exposure to currency fluctuations, difficulties in complying
with a variety of foreign laws, unexpected changes in regulatory requirements,
difficulties in staffing and managing foreign operations and potentially adverse
tax consequences. There can be no assurance that the Company will successfully
identify, complete or integrate any future acquisitions, or that acquisitions,
if completed, will contribute favorably to the Company's operations and future
financial condition.
ITEM 2. PROPERTIES
Facilities and Employees
The Company's corporate headquarters are located in Upper Saddle River,
New Jersey, in approximately 27,000 square feet of space occupied under a lease
which expires in the fourth quarter of 2003 with an option to extend for an
additional five years.
As of December 31, 1998, the Company had approximately 1,620 employees.
The Company has approximately 86 employees working at its headquarters in Upper
Saddle River, New Jersey, 1,385 sales representatives and 149 field sales
managers. The Company is not party to a collective bargaining agreement with a
labor union and considers its relations with its employees to be good.
10
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition or results of operations of the Company, and the
Company is not aware of any material threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") is quoted on the Nasdaq
National Market System (the "NASDAQ/NM") under the symbol "PDII". The following
table sets forth the high and low bid prices of the Common Stock by quarter as
reported on the NASDAQ/NM for the period from May 20, 1998, the date trading
commenced in the Common Stock, through December 31, 1998. Quotations represent
interdealer prices without an adjustment for retail markups, markdowns or
commissions and may not represent actual transactions.
Period High Low
------ ---- ---
May 20, 1998 through June 30, 1998 ............. 26.875 16.000
Third Quarter ended September 30, 1998 ......... 28.000 17.000
Fourth Quarter ended December 31, 1998 ......... 28.250 21.188
The Company believes that, as of February 24, 1999, it has approximately
1,800 beneficial stockholders.
Dividend Policy
The Company does not expect to declare or pay any dividends in the
foreseeable future. Instead, the Company intends to retain all earnings, if any,
in order to expand its operations. The payment of dividends, if any, in the
future is within the discretion of the Company's Board of Directors and will
depend upon the Company's earnings, if any, its capital requirements and
financial condition and other relevant factors. Under the terms of the Company's
Credit Facility, the Company is prohibited from paying dividends or making other
cash distributions.
Changes in Securities and Use of Proceeds
In May 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 $46.4 million.
(1) Effective date of Registration Statement: May 19, 1998 (File No.
333-46321).
(2) The Offering commenced on May 19, 1998 and was consummated on May
22, 1998.
(4)(i) All securities registered in the Offering were sold.
(4)(ii) The managing underwriters of the Offering were Morgan Stanley Dean
Witter, William Blair & Company and Hambrecht & Quist.
(4)(iii) Common Stock, $.01 par value
(4)(iv) Amount registered and sold: 3,220,000 shares
Aggregate purchase price: $51,520,000
All shares were sold for the account of the Issuer.
(4)(v) $3,606,400 in underwriting discounts and commissions were paid to
the underwriters. $1,490,758 of other expenses were incurred,
including estimated expenses.
(4)(vi) $46,422,842 of net Offering proceeds to the Issuer.
(4)(vii) Use of Proceeds:
$46,423,000 temporary investments with maturities of up to six
months as of December 31, 1998.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the five years ended
December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from the
Company's Financial Statements and the notes thereto. Balance sheets at December
31, 1997 and 1998 and the statements of income, of shareholders' equity and of
cash flows for the three years ended December 31, 1996, 1997 and 1998 and notes
thereto appear elsewhere in this report on Form 10-K and have been audited by
PricewaterhouseCoopers L.L.P., independent accountants. The selected financial
data set forth below should be read in conjunction with, and are qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's audited Financial Statements and
related notes appearing elsewhere in this report on Form 10-K.
Statement of Operations Data:
Year Ended December 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share and statistical data)
Revenue ........................................... $ 8,108 $ 18,497 $ 33,013 $ 54,674 $101,081
Program expenses .................................. 5,642 15,527 27,118 44,392 77,995
-------- -------- -------- -------- --------
Gross profit ...................................... 2,466 2,970 5,895 10,282 23,086
Compensation expense .............................. 1,673 2,124 3,191 5,121 9,440
Bonus to majority shareholder(1)(2) ............... 200 425 1,500 2,243 --
Stock grant expense(2)(3) ......................... -- -- -- 4,470 --
Other general, selling and administrative expenses 826 1,159 1,650 2,755 4,513
-------- -------- -------- -------- --------
Total general, selling and administrative expenses 2,699 3,708 6,341 14,589 13,953
-------- -------- -------- -------- --------
Operating income (loss)(2) ....................... (233) (738) (446) (4,307) 9,133
Other income, net ................................. 16 70 98 155 2,050
-------- -------- -------- -------- --------
Income (loss) before provision for (benefit from)
income taxes .................................. (217) (668) (348) (4,152) 11,183
Pro forma provision for (benefit from) income
taxes(4) ...................................... (74) (14) -- -- 4,473
-------- -------- -------- -------- --------
Pro forma net income (loss)(4) ................... $ (143) $ (654) $ (348) $ (4,152) $ 6,710
======== ======== ======== ======== ========
Pro forma basic net income (loss) per share(4)(5) . $ (0.02) $ (0.09) $ (0.05) $ (0.56) $ 0.71
======== ======== ======== ======== ========
Pro forma diluted net income (loss) per share(4)(5) $ (0.02) $ (0.09) $ (0.05) $ (0.56) $ 0.70
======== ======== ======== ======== ========
Pro forma basic weighted average number of shares
outstanding(5) ............................... 7,465 7,465 7,465 7,465 9,427
======== ======== ======== ======== ========
Pro forma diluted weighted average number of shares
outstanding(5) ............................... 7,465 7,465 7,465 7,465 9,557
======== ======== ======== ======== ========
Other Operating Data:
Number of detail programs ......................... 9 10 13 15 20
Number of clients ................................. 7 7 8 12 13
Average size of detail program .................... $ 901 $ 1,850 $ 2,539 $ 3,645 $ 5,054
Number of sales representatives at end of period:
Full-time ..................................... -- -- 33 529 1,143
Part-time ..................................... 134 419 691 401 242
======== ======== ======== ======== ========
Total ............................................. 134 419 724 930 1,385
======== ======== ======== ======== ========
Balance Sheet Data:
As of December 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Cash and cash equivalents ......................... $ 611 $ 240 $ 2,403 $ 5,760 $ 56,192
Working capital ................................... (184) (906) (1,421) (1,622) 44,928
Total assets ...................................... 6,719 5,622 7,707 12,445 69,940
Total long-term debt .............................. -- -- -- -- --
Shareholders' equity (deficit) .................... (11) (678) (1,026) (1,075) 47,605
- ----------
(1) Prior to the IPO, the Company had been treated as an S Corporation
under subchapter S of the Internal Revenue Code and under the
corresponding provisions of the tax laws of the State of New Jersey.
Historically, as an S Corporation, the Company made annual bonus payments
to its majority shareholder based on the Company's estimated profitability
and working capital requirements. The Company does not expect to pay
bonuses to its majority shareholder in future periods.
Footnotes Cont'd:
13
(2) There were no bonus to majority shareholder and stock grant expense
charges in 1998 and the Company does not expect to incur such charges in
future periods. Exclusive of these non-recurring charges, the Company's
operating income (loss) for the years ended December 31, 1997, 1996, 1995
and 1994 would have been $2,406,000, $1,054,000, ($313,000) and ($33,000)
respectively. See footnote 1 above.
(3) On January 1, 1997, the Company issued shares of its Common Stock to
Charles T. Saldarini, its current President and Chief Executive Officer.
For financial accounting purposes, a non-recurring, non-cash compensation
expense was recorded in the quarter ended March 31, 1997. See note 13 to
the Company's audited Financial Statements.
(4) Prior to the IPO, the Company was an S Corporation and had not been
subject to Federal or New Jersey corporate income taxes, other than a New
Jersey state corporate income tax of approximately 2%. Pro forma provision
for (benefit from) income taxes, basic and diluted net income (loss) and
basic and diluted net income (loss) per share for all periods presented
reflect a provision for or benefit from income taxes as if the Company had
been taxed as a C Corporation for all periods. The pro forma effective tax
rate for the period ended December 31, 1998 is 40%. The Company expects
its effective tax rate to approximate 40% in future periods. See note 15
to the Company's audited Financial Statements.
(5) See note 3 to the Company's audited Financial Statements included in
this Report on Form 10-K for a description of the computation of pro forma
basic and diluted net income (loss) per share and basic and diluted
weighted average number of shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause the
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements.
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product enhancements,
or estimates or predictions of actions by customers, suppliers, competitors or
regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
the Company and its business.
This report also identifies important factors which could cause actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the factors discussed under
the heading "Certain Factors That May Affect Future Growth" beginning at page 7
of this report.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Company's
Financial Statements and the notes thereto appearing elsewhere in this report.
Overview
The Company is a leading provider of comprehensive customized sales
solutions on an outsourced basis to the United States pharmaceutical industry.
The Company believes it has achieved this leadership position based on its 11
years of industry experience and its relationships with many of the
pharmaceutical industry's largest companies. Since inception, the Company has
designed customized product detailing programs for approximately 28 clients,
including Pfizer Inc., Astra Pharmaceuticals, L.P., Glaxo Wellcome Inc.,
Rhone-Poulenc Rorer Pharmaceuticals, L.P. and Johnson & Johnson. Such programs
have been designed to promote more than 75 different products, including such
leading prescription medications as Prilosec(Registered), Wellbutrin(Registered)
and Cardura(Registered), as well as a number of well-known OTC products such as
Bayer(Registered) Aspirin, Pepcid AC(Registered) and
14
Monistat 5(Registered), to hospitals, pharmacies and physicians in approximately
20 different specialties. The Company's primary objective is to enhance its
leadership position in the growing CSO industry and to become the premier
supplier of comprehensive sales solutions to the pharmaceutical industry and
other segments of the healthcare market.
The Company has demonstrated strong internal growth generated by securing
new business from leading pharmaceutical companies and by renewing and expanding
programs with existing clients. The Company 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. Revenue increased from $8.1 million
in 1994 to $101.1 million in 1998, a compound annual growth rate of
approximately 88.0%. Gross profit increased from $2.5 million in 1994 to $23.1
million in 1998, a compound annual growth rate of 74.3%. In addition, the number
of sales representatives (part-time and full-time) employed by the Company
increased from 134 as of December 31, 1994 to 1,385 as of December 31, 1998.
Over that same period, the Company's mix between part-time and full-time
representatives shifted from 100% part-time to 17% part-time.
Historically, the Company has derived a significant portion of program
revenue from a limited number of major clients. In 1995, 1996 and 1997, the
Company's four largest clients accounted for approximately 85%, 84% and 78% of
its revenue, respectively. In 1998, the Company's three largest clients
accounted for approximately 85% of its revenue. Concentrations of business in
the CSO industry are not uncommon and the Company believes that pharmaceutical
companies will continue to outsource larger projects as the CSO industry grows
and continues to demonstrate an ability to successfully implement large
programs. Accordingly, the Company is likely to continue to experience
significant client concentration in future periods.
The Company is engaged by its clients to design and implement product
detailing programs for both prescription and OTC pharmaceutical products. Given
the customized nature of its business, the Company utilizes a variety of
contract structures with its clients. Generally, contracts provide for a fee to
be paid based on the Company delivering a specified package of services.
Contracts typically include performance benchmarks, such as a minimum number of
sales representatives or a minimum number of calls. Under certain contracts, the
Company may be entitled to additional compensation based upon the success of the
program and/or subject to penalties for failing to meet stated performance
benchmarks. In addition, contracts typically provide that the Company is
entitled to a fee for each sales representative hired by the client during or at
the conclusion of a program.
Revenue is earned primarily by performing services under contracts and is
recognized as the services are performed and the right to receive payment for
such services is assured. Program expenses consist primarily of the costs
associated with the execution of a detailing program. Such expenses include
personnel costs and the initial direct costs associated with staffing a program.
Personnel costs, which constitute the largest portion of program expenses,
include all labor related costs, such as salaries, bonuses, fringe benefits and
payroll taxes for the sales representatives and managers who are directly
responsible for the rendering of services in connection with a particular
program. Initial direct program costs are those costs associated with initiating
a program, such as recruiting, hiring and training the sales representatives who
staff a particular program. All personnel costs and initial direct program
costs, other than training costs, are expensed as incurred. Training costs
include the costs of training the sales representatives and managers on a
particular program so that they are qualified to properly render the services
specified in the related contract. Training costs are deferred and amortized on
a straight-line basis over the shorter of (i) the life of the contract to which
they relate or (ii) 12 months. Finally, bonus and other performance incentives
as well as termination payments are recognized as revenue in the period earned
and when payment of the bonus, incentive or other payment is assured. Revenue is
recognized net of any potential penalties until the performance criteria
eliminating the penalties are met.
As a result of the revenue recognition and program expense policies
described above, the Company may incur significant initial direct program costs
prior to recognizing revenue under a particular contract. While, pursuant to its
contracts, the Company typically receives a payment upon commencement of a
program, this may not always be possible. The Company will continue to seek to
receive a portion of its fee upon commencement of a program and, wherever
possible, provide that such initial payment is compensation for the recruiting,
hiring or training services associated with staffing such program. This will
permit the Company to record such initial payment as revenue in the same period
in which the costs of such services are expensed. The inability of the Company
to specifically provide in its contracts that it is being compensated for
recruiting, hiring or training services could adversely impact the Company's
operating results for periods in which the costs associated with such services
are incurred.
15
General, selling and administrative expense include compensation expense,
bonus to majority shareholder, stock grant expense and other general, selling
and administrative expenses. Compensation expense consists primarily of salaries
and related fringe benefits for senior management and other administrative,
marketing, finance, information technology and human resources personnel who are
not directly involved with the execution of a particular program, as well as
expenses related to employee training. Bonus to majority shareholder for 1996
and 1997 reflects the cash bonus paid to the Company's majority shareholder and
Chairman of the Board, John P. Dugan. No such bonus was paid to Mr. Dugan in
1998 and none is anticipated in any future periods. Stock grant expense for 1997
reflects the non-cash, non-recurring charges related to the grant of 1,119,684
shares of Common Stock to the Company's President and Chief Executive Officer,
Charles T. Saldarini. Finally, other general, selling and administrative
expenses include corporate overhead such as facilities costs, depreciation and
amortization expenses and professional services fees. General, selling and
administrative expenses (excluding bonus to majority shareholder and stock grant
expense) as a percentage of revenue have generally declined as the Company has
spread its overhead expenses across its expanding revenue base. The Company
anticipates that general, selling and administrative expenses will continue to
decline as a percentage of revenue as its business grows, although such expenses
are expected to increase on an absolute basis.
Prior to May 1998 when it consummated the IPO, the Company had been
treated as an S Corporation for Federal income tax purposes since January 1,
1991 and for New Jersey state income tax purposes since January 1, 1994.
Accordingly, the Company's income had been taxed directly at the shareholder
level rather than at the corporate level. Concurrent with the IPO, the Company's
S Corporation election terminated and the Company became subject to corporate
income taxation as a C Corporation. For each of the periods in which the Company
was an S Corporation, the statement of income data in the "Selected Financial
Data" table reflects a provision for income taxes on a pro forma basis as if the
Company had been taxed as a C Corporation during such periods.
16
Results of Operations
The following table sets forth for the periods indicated, certain
statement of operations data as a percentage of revenue. The trends illustrated
in this table may not be indicative of future results.
Year Ended December 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Revenue ........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Program expenses .................................. 69.6 83.9 82.2 81.2 77.2
-------- -------- -------- -------- --------
Gross profit ...................................... 30.4 16.1 17.8 18.8 22.8
Compensation expense .............................. 20.6 11.5 9.7 9.4 9.3
Bonus to majority shareholder ..................... 2.5 2.3 4.5 4.1 --
Stock grant expense ............................... 0.0 0.0 0.0 8.2 --
Other general, selling and administrative
expenses ....................................... 10.2 6.3 5.0 5.0 4.5
-------- -------- -------- -------- --------
Total general, selling and administrative
expenses ....................................... 33.3 20.1 19.2 26.7 13.8
-------- -------- -------- -------- --------
Operating income (loss) ........................... (2.9) (4.0) (1.4) (7.9) 9.0
Other income, net ................................. 0.2 0.4 0.3 0.3 2.0
-------- -------- -------- -------- --------
Income (loss) before provision for (benefit
from) income taxes ............................. (2.7) (3.6) (1.1) (7.6) 11.0
Pro forma provision for (benefit from) income
taxes .......................................... (0.9) (0.1) 0.0 0.0 4.4
-------- -------- -------- -------- --------
Pro forma net income (loss) ....................... (1.8)% (3.5)% (1.1)% (7.6)% 6.6%
======== ======== ======== ======== ========
Years Ended December 31, 1998 and 1997
Revenue. Revenue for 1998 was $101.1 million, an increase of 84.9% over
revenue of $54.7 million for 1997. Revenue for 1998 was generated from 20
programs for 13 clients while revenue for 1997 was generated from 15 programs
for 12 clients.
Program expenses. Program expenses for 1998 were $78.0 million, an
increase of 75.7% over program expenses of $44.4 million for 1997. As a
percentage of revenue, program expenses decreased to 77.2% for 1998 from 81.2%
for 1997. A significant portion of this decrease is attributable to the fact
that certain costs associated with the initiation of programs scheduled to begin
the first quarter of 1998 were expensed as incurred in the fourth quarter of
1997 while revenue from such programs could not be recognized until the Company
began performing services in connection with such programs in the first quarter
of 1998. Additionally, the Company benefited from providing ancillary services
to certain clients at more favorable margins, and achieving greater efficiencies
on several other programs than the Company typically experiences.
Compensation expense. Compensation expense for 1998 was $9.4 million
compared to $5.1 million for 1997. As a percentage of revenue, compensation
expense decreased to 9.3% for 1998 from 9.4% for 1997.
Bonus to majority shareholder. In 1997, the Company paid a bonus of $2.2
million to its majority shareholder. No such bonus was paid in 1998.
Stock grant expense. There were no stock grants which generated
compensation expense in 1998. During 1997, the Company incurred a non-recurring,
non-cash charge of $4.5 million related to stock granted to Charles T.
Saldarini, the Company's President and Chief Executive Officer.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses were $4.5 million for 1998, an increase of 63.8%
from other general, selling and administrative expenses of $2.8 million for
1997. As a percentage of revenue, other general, selling and administrative
expenses decreased to 4.5% for 1998 from 5.0% for 1997. Such reduction is due,
in part, to the fact that certain services for which the Company had previously
used outside consultants were brought in-house.
Operating income/loss. Operating income for 1998 was $9.1 million compared
to an operating loss for 1997 of $4.3 million. Before bonus to majority
shareholder and stock grant expense, both of which were non-recurring expenses,
the operating loss for 1997 was $2.4 million. As a percentage of revenue,
operating income for 1998 was 9.0%.
17
Other income, net. Other income, primarily net interest income, for 1998
was $2.0 million, compared to other income of $155,000 for 1997. The increase
was primarily due to investment of the net proceeds of the IPO.
Pro forma net income/loss. Pro forma net income for 1998 was $6.7 million
compared to a pro forma net loss of $4.2 million for 1997. Pro forma net
income/loss for both periods assumes the Company was taxed for Federal and state
income tax purposes as a C Corporation. The pro forma effective tax rate for
1998 is 40%. The Company expects its effective tax rate to approximate 40% in
future periods.
Years Ended December 31, 1997 and 1996
Revenue. Revenue for 1997 was $54.7 million, an increase of 65.6% over
1996 revenue of $33.0 million. Revenue in 1997 was generated from 15 programs
for 12 clients while 1996 revenue was generated from 13 programs for eight
clients. Average program size increased to $3.6 million in 1997 from $2.5
million in 1996. Approximately $48.4 million, or 88.6%, of 1997 revenue, was
derived from seven clients; those seven clients generated $30.9 million, or
approximately 93.7%, of 1996 revenue.
Program expenses. Program expenses for 1997 were $44.4 million, an
increase of 63.7% over program expenses of $27.1 million for 1996. As a
percentage of revenue, program expenses decreased to 81.2% for 1997 from 82.2%
for 1996. This decrease was primarily attributable to the Company continuing to
realize efficiencies as a result of the investments in infrastructure and
process improvements which were implemented in 1995 and 1996.
Compensation expense. Compensation expense for 1997 was $5.1 million
compared to $3.2 million for 1996. This increase was due to an increase in the
number of management and administrative personnel in 1997 over the 1996 number
necessitated by the expansion of the Company's business. As a percentage of
revenue, compensation expense was 9.4% for 1997 compared to 9.7% for 1996.
Bonus to majority shareholder. Bonus to majority shareholder for 1997 was
$2.2 million compared to $1.5 million for 1996.
Stock grant expense. In the first quarter of 1997, the Company incurred a
non-recurring, non-cash charge of $4.5 million related to stock issued to
Charles T. Saldarini, the Company's President and Chief Executive Officer.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses were $2.8 million for 1997, an increase of 66.9%
over other general, selling and administrative expenses of $1.7 million for
1996. As a percentage of revenue, other general, selling and administrative
expenses were 5.0% for 1997 and 1996.
Operating loss. Loss from operations for 1997 was $4.3 million compared to
$446,000 for 1996. Before bonus to majority shareholder and stock grant expense,
operating income for 1997 was $2.4 million or 4.4% of revenue, compared to $1.1
million, or 3.2% of revenue, for 1996.
Other income, net. Other income, primarily net interest income, for 1997
was $155,000, an increase of 58.2% over other income of $98,000 for 1996, due to
the greater availability of funds for investment.
Pro forma net loss. Pro forma net loss for 1997 was $4.2 million compared
to a pro forma net loss of $347,000 for 1996. Pro forma net loss for both
periods assumes the Company was taxed for Federal and state income tax purposes
as a C Corporation, with no tax benefits assumed for the net operating losses in
1997 and 1996.
Years Ended December 31, 1996 and 1995
Revenue. Revenue for 1996 was $33.0 million, an increase of 78.5% over 1995
revenue of $18.5 million. Revenue in 1996 was generated from 13 programs for
eight clients while 1995 revenue was generated from 10 programs for seven
clients. Average program size increased to $2.5 million in 1996 from $1.9
million in 1995. Substantially all of 1996 revenue, or 98.3%, was derived from
clients that accounted for $17.9 million, or 97.0%, of 1995 revenue.
18
Program expenses. Program expenses for 1996 were $27.1 million, an
increase of 74.7% over program expenses of $15.5 million for 1995. As a
percentage of revenue, however, program expenses decreased to 82.2% in 1996 from
83.9% in 1995. This decrease was primarily attributable to the Company beginning
to realize operating efficiencies as a result of the investments in
infrastructure and process improvement begun in 1995.
Compensation expense. Compensation expense in 1996 was $3.2 million
compared to $2.1 million in 1995. This increase was attributable to an increase
in the number of management and administrative personnel employed by the Company
in 1996 as compared to 1995 necessitated by the expansion of the Company's
business. As a percentage of revenue, compensation expense was 9.7% for 1996
compared to 11.5% for 1995.
Bonus to majority shareholder. Bonus to majority shareholder for 1996 was
$1.5 million compared to $425,000 for 1995.
Stock grant expense. There were no compensatory stock grants in 1996 or
1995.
Other general, selling and administrative expenses. Other general, selling
and administrative expenses were $1.7 million in 1996 compared to $1.2 million
in 1995, an increase of 42.4%. As a percentage of revenue, other general,
selling and administrative expenses were 5.0% in 1996 compared to 6.3% in 1995.
This percentage decline reflects the spreading of other selling, general and
administrative expenses across a larger revenue base.
Operating loss. Operating loss decreased to $446,000 in 1996 from $738,000
in 1995. Before bonus to majority shareholder, operating income in 1996 was $1.1
million compared to an operating loss of $313,000 in 1995.
Other income, net. Other income, primarily net interest income, was
$98,000 in 1996, an increase of 40.1% over other income of $70,000 in 1995, due
to the greater availability of funds for investment.
Pro forma net loss. Pro forma net loss for the year ended December 31,
1996 was $347,000 compared to $653,000 for the prior year. Pro forma net loss
for both periods assumes the Company was taxed for Federal and state income tax
purposes as a C Corporation, with no tax benefits assumed for the net operating
loss in 1996 or 1995.
Liquidity and Capital Resources
In May 1998, the Company completed the IPO. Net proceeds to the Company
from the IPO, after expenses, were approximately $46.4 million. Prior to the IPO
the Company's principal source of funds had been cash flow from operations.
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $56.2 million and working capital of $45.0 million compared to
cash and cash equivalents of approximately $5.8 million and negative working
capital of $1.6 million at December 31, 1997. Immediately prior to the IPO, the
Company declared a final distribution to its existing shareholders of $5.9
million. The amount of the distribution reflected shareholders' equity at March
31, 1998 of $3.9 million and the earnings of the Company from April 1, 1998 to
May 18, 1998.
For the period ended December 31, 1998, the Company generated $14.4
million of net cash from operating activities as compared to $3.4 million during
the comparable 1997 period. The increase in cash provided from operating
activities mainly results from $9.5 million in net income from operations. The
remaining $4.9 million resulted from changes in other assets and liabilities,
particularly the increase in accrued liabilities of $5.1 million, of which $3.9
million related to performance incentives.
For the periods ended December 31, 1998 and 1997, net cash used in
investing activities was $3.0 million and $94,000, respectively. The primary use
of such cash in the 1998 period was investment in computer and networking
equipment and in furniture and fixtures for the Company's new corporate
headquarters. The Company also purchased $1.0 million in short-term investments.
Net cash provided by financing activities for the period ended December
31, 1998 was $39.1 million. Net proceeds from the offering of $46.4 million,
after expenses, were partially offset by a $5.9 million final distribution to
its existing shareholders immediately prior to the IPO. For the comparable 1997
period, net cash provided by
19
financing activities was $79,000 as a result of a $100,000 equipment loan
provided by a commercial financial institution, net of repayments. The balance
of this loan was repaid in 1998.
The Company has a $500,000 line of credit (the "Credit Line") from a
commercial bank under which interest only is payable monthly on the outstanding
balance at a floating rate equal to 1% above the prime rate of interest as
published from time to time by The Wall Street Journal. The Company has also
obtained a commitment from the bank for a $10 million line of credit. This line
would be for a term of one year and would bear interest payable monthly at a
floating rate equal to 2.0% above LIBOR. The Credit Line is secured by a lien on
all of the assets of the Company. The note evidencing the Credit Line and the
related security agreement contain covenants, representations and other
provisions customarily found in commercial loan documentation.
The Company spent approximately $2.0 million for capital expenditures in
1998, which was funded entirely through cash generated from operations. During
1997, the Company's capital expenditures were $290,000.
Where the Company bills clients for services before they have been
completed, billed amounts are recorded as unearned contract revenue, and are
recorded as income when earned. When services are performed in advance of
billing, the value of such services is recorded as unbilled costs and accrued
profits. As of December 31, 1998 and 1997, the Company had $7.3 million and $6.6
million, respectively, of unearned contract revenue and $4.5 million and $3.7
million, respectively, of unbilled costs and accrued profits. Substantially all
deferred and unbilled costs and accrued profits are earned or billed, as the
case may be, within 12 months of the end of the respective period.
The Company believes that cash flows from operations and existing cash
balances will be sufficient to meet its working capital and capital expenditure
requirements for the foreseeable future.
Quarterly Results
The Company's results of operations have been, and are expected to be,
subject to quarterly revenue fluctuations. Such fluctuations result from a
number of factors including, among other things, the timing of commencement,
completion or cancellation of major programs. Revenue, generally, is recognized
as services are performed while program costs, other than training costs, are
expensed as incurred. As a result, the Company may incur substantial expenses
associated with staffing a new program during the first two to three months of a
contract, without recognizing any revenue under such contract. This could have
an adverse impact on the Company's operating results for the quarters in which
such expenses are incurred. In the future, revenue may fluctuate as a result of
such factors and a number of additional factors, including delays or costs
associated with acquisitions, government regulatory initiatives and conditions
in the healthcare industry generally. The Company believes that because of such
fluctuations, quarterly comparisons of its financial results cannot be relied
upon as an indication of future performance.
The following table sets forth quarterly operating results for the eight
quarters ended December 31, 1998.
Quarter Ended
--------------------------------------------------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Revenue ................... $ 9,980 $ 12,501 $ 15,737 $ 16,456 $ 23,450 $ 22,129 $ 24,609 $ 30,893
Program expenses .......... 8,587 10,458 11,510 13,837 15,960 17,833 19,162 25,039
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .............. 1,393 2,043 4,227 2,619 7,490 4,296 5,447 5,854
Compensation expense ...... 1,300 1,219 1,261 1,341 1,997 2,273 2,512 2,659
Bonus to majority
shareholder(1) ........ 561 561 561 560 -- -- -- --
Stock grant expense(2) .... 4,470 -- -- -- -- -- -- --
Other general, selling and
administrative expenses 680 638 744 693 602 859 1,389 1,662
-------- -------- -------- -------- -------- -------- -------- --------
Total general, selling and
administrative expenses 7,011 2,418 2,566 2,594 2,599 3,132 3,901 4,321
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ... (5,618) (375) 1,661 25 4,891 1,164 1,546 1,533
Other income .............. 11 38 61 45 90 464 789 706
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ......... $ (5,607) $ (337) $ 1,722 $ 70 4,981 1,628 2,335 2,239
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Prior to the IPO, the Company had been treated as an S Corporation
under subchapter S of the Internal Revenue Code and under the
corresponding provisions of the tax laws of the State of New Jersey.
Historically, as an S Corporation, the Company made annual bonus payments
to its majority shareholder based on the Company's estimated profitability
and working capital requirements. The Company does not expect to pay
bonuses to its majority shareholder in future periods.
20
Footnotes Cont'd:
(2) On January 1, 1997, the Company issued shares of its Common Stock to
Charles T. Saldarini, its current President and Chief Executive Officer.
For financial accounting purposes, a non-recurring, non-cash compensation
expense was recorded in the quarter ended March 31, 1997. See note 13 to
the Company's Audited Financial Statements.
Effect of New Accounting Pronouncements
The Financial Accounting Standards Board released in June 1998, Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This statement
addresses the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. As the
Company has not entered into transactions involving derivative instruments, the
Company does not believe that the adoption of this new statement will have a
material effect on the Company's financial statements.
In the second quarter of 1998, the Accounting Standard Executive Committee
of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities." This statement provides guidance on financial reporting of
start-up costs and organizational costs. This Statement of Position is effective
for financial statements for fiscal years beginning after December 15, 1998.
This Statement of Position requires start-up costs to be expensed as incurred.
The Company does not believe that the adoption of this Statement of Position
will have a material impact on the Company's financial statements.
Year 2000 Compliance
The Company is on schedule with 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. The Company's project to address the Y2K 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 December 31, 1998, the inventory, priority and assessment phases were
complete and the repair or replace phase was 90% complete. All phases are on
schedule to be completed by March 31, 1999.
The section of the project that deals with the business systems of key
business partners has three major phases: (i) identifying all key business
partners; (ii) evaluating the status of their Y2K compliance efforts; and (iii)
determining alternatives and contingency plan requirements. As of December 31,
1998, all key business partners have been identified and the Company is in the
process of determining their Y2K status. Contingency planning is expected to be
completed by June 30, 1999.
The total estimated additional cost of the required modifications for the
Company's internal business systems to achieve Y2K compliance is anticipated to
be in the range of $25,000 to $75,000.
Failure to make all internal business systems Y2K compliant could result
in an interruption in, or a failure of, some of the Company's business
activities or operations. In addition, Y2K disruptions in client operations
could result, among other things, in one or more clients missing scheduled
payments which could impact the Company's cash flow. Y2K disruptions in the
operations of key vendors could also impact the Company's ability to fulfill
some of its contractual obligations. If one or more of these situations occur,
the Company's financial position, results of operations or cash flows could be
materially and adversely affected.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and required financial statement schedules of the
Company are included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth the names, ages and principal position, of
the Directors, executive officers and key employees of the Company:
Name Age Position
- ---- --- --------
John P. Dugan............. 63 Chairman of the Board of Directors and
Director of Strategic Planning
Charles T. Saldarini...... 35 President, Chief Executive Officer and
Director
Bernard C. Boyle.......... 54 Chief Financial Officer, Executive Vice
President, Secretary and Treasurer
Steven K. Budd............ 42 Chief Operating Officer and Executive Vice
President
Robert Higgins............ 56 Executive Vice President - Client Programs
John M. Pietruski(1)...... 65 Director
Jan Martens Vecsi(1)...... 55 Director
Gerald J. Mossinghoff(1).. 63 Director
(1) Member of Audit and Compensation Committees
John P. Dugan is the founder and Chairman of the Board of Directors of the
Company and Director of Strategic Planning. He served as its President from
inception until January 1995 and as its Chief Executive Officer from inception
until November 1997. In 1972, Mr. Dugan founded Dugan Communications, a medical
advertising agency that later became known as Dugan Farley Communications
Associates Inc. ("DFC") and served as its President until 1990. In 1990 Mr.
Dugan acquired sole control of the Company, which was then a wholly-owned
subsidiary of DFC. Mr. Dugan was a founder and served as the President of the
Medical Advertising Agency Association from 1983 to 1984. Mr. Dugan also served
on the Board of Directors of the Pharmaceutical Advertising Council (now known
as the Healthcare Marketing Communications Council, Inc.) and was its President
from 1985 to 1986. Mr. Dugan received an M.B.A. from Boston University in 1964.
Charles T. Saldarini is the President and Chief Executive Officer of the
Company and a Director. Mr. Saldarini became President in January 1995 and Chief
Executive Officer in November 1997. Prior to January 1995 Mr. Saldarini was
Chief Operating Officer of the Company. Mr. Saldarini joined the Company in 1987
as a sales manager. Mr. Saldarini received an A.B. in political science from
Syracuse University in 1985.
Bernard C. Boyle has served as the Company's Executive Vice President and
Chief Financial Officer since March 1997 when he joined the Company. In 1990,
Mr. Boyle founded BCB Awareness, Inc., a firm that provided management advisory
services to the Company, among others, and served as its President until March
1997. During that period he was also a partner in Boyle & Palazzolo, Partners,
an accounting firm that also provided services to the Company. From 1982 through
1990 he served as Controller and then Chief Financial Officer and Treasurer of
William Douglas McAdams, Inc., an advertising agency. From 1966 through 1971,
Mr. Boyle was employed by the national accounting firm of Coopers & Lybrand
L.L.P. as supervisor/senior audit staff. Mr. Boyle received a B.B.A. in
Accounting from Manhattan College in 1965 and an M.B.A. in Corporate Finance
from New York University in 1972.
Steven K. Budd served the Company as a consultant from December 1995 to
April 1996 when he joined as Vice President, Account Group Sales. He became
Executive Vice President in July 1997 and Chief Operating Officer in January
1998. Prior to joining the Company, from April through December 1995, Mr. Budd
was an independent consultant. From January 1994 through April 1995, Mr. Budd
was employed by Innovex, Inc., a competing CSO, as a Director of New Business
Development. From 1989 through December 1993, Mr. Budd was employed by
Professional Detailing Network ("PDN"), a competing CSO, as a Vice President
with responsibility for building sales teams and developing marketing
strategies. Mr. Budd received a B.A. in History and Education from Susquehanna
University in 1978.
Robert R. Higgins joined the Company as a District Sales Manager in August
1996. He has served the Company in sales management as Associate Vice President,
Vice President, and most recently as Executive Vice President, Client Programs.
From 1965 to 1995, Mr. Higgins was employed by Burroughs Wellcome Co., where he
was responsible for building and managing sales teams and developing and
implementing marketing strategies. Mr.
23
Higgins received a B.S. in Biology from Kansas State University in 1964, and an
MBA from North Texas State University in 1971.
Gerald J. Mossinghoff became a director of the Company in May 1998. Mr.
Mossinghoff is a former Assistant Secretary of Commerce and Commissioner of
Patents and Trademarks of the Department of Commerce (1981 to 1985) and served
as President of Pharmaceutical Research and Manufacturers of America from 1985
to 1996. Since 1997 he has been Senior Counsel to the law firm of Oblon, Spivak,
McClelland, Maier and Newstadt of Arlington, Virginia. Mr. Mossinghoff has been
a visiting professor of Intellectual Property Law at the George Washington
University Law School since 1997 and Adjunct Professor of Law at George Mason
University School of Law since 1997. Mr. Mossinghoff served as United States
Ambassador to the Diplomatic Conference on the Revision of the Paris Convention
from 1982 to 1985 and as Chairman of the General Assembly of the United Nations
World Intellectual Property Organization from 1983 to 1985. He is also a former
Deputy General Counsel of the National Aeronautics and Space Administration
(1976 to 1981). Mr. Mossinghoff received an Electrical Engineering degree from
St. Louis University in 1957 and a Juris Doctor degree with Honors from the
George Washington University Law School in 1961. He is a member of the Order of
the Coif and is a Fellow in the National Academy of Public Administration. He is
the recipient of many honors, including NASA's Distinguished Service Medal and
the Secretary of Commerce Award for Distinguished Public Service.
John M. Pietruski became a director of the Company in May 1998. Since 1990
Mr. Pietruski has been the Chairman of the Board of Texas Biotechnology Corp., a
pharmaceutical research and development company. He is a retired Chairman of the
Board and Chief Executive Officer of Sterling Drug Inc. With Sterling Drug Inc.
from 1977 to his retirement in 1988, he also held the positions of Executive
Vice President, President and Chief Operating Officer. Mr. Pietruski is a member
of the Boards of Directors of Hershey Foods Corporation, GPU, Inc., and Lincoln
National Corporation. Mr. Pietruski graduated Phi Beta Kappa with a B.S. in
Business Administration with honors from Rutgers University in 1954 and
currently serves as a regent of Concordia College.
Jan Martens Vecsi became a director of the Company in May 1998. Ms. Vecsi
is the sister-in-law of John P. Dugan, the Chairman of the Board of the Company.
Ms. Vecsi was employed by Citibank, N.A. from 1967 through 1996 when she
retired. Starting in 1986 she served as the Senior Human Resources Officer and
Vice President of the Citibank Private Bank. Ms. Vecsi received a B.A. in
Psychology and Elementary Education from Immaculata College in 1965.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the shareholders will elect the
members of one of the three classes to a three-year term of office. Ms. Vecsi
serves in the class whose term expires in 1999; Messrs. Saldarini and Pietruski
serve in the class whose term expires in 2000; and Messrs. Dugan and Mossinghoff
serve in the class whose term expires in 2001.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee reviews the scope and results of the audit and
other services provided by the Company's independent accountants and internal
controls of the Company. The Compensation Committee is responsible for the
approval of compensation arrangements for officers of the Company and the review
of the Company's compensation plans and policies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with except for one Form
5 filing by Steven Budd reflecting one transaction.
24
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation. The following table presents certain information
concerning compensation paid or accrued for services rendered to the Company in
all capacities during the year ended December 31, 1998, for the Chief Executive
Officer and the other four executive officers of the Company whose aggregate
annual base salary and bonus for 1998 exceeded $100,000 (collectively, the
"Named Executive Officers").
Long-Term
Compensation
------------
Annual Compensation Shares of
------------------- Common
Other Stock
Annual Underlying
Name and Principal Position Salary Bonus Compensation Options
--------------------------- ------ ----- ------------ -------
John P. Dugan
Chairman of the Board...................... $125,000 -- $18,994 --
Charles T. Saldarini
President and Chief Executive Officer... $233,744 $275,000 $2,394 --
Steven K. Budd
Chief Operating Officer and
Executive Vice President................ $168,678 $178,000 $2,302 --
Bernard C. Boyle
Chief Financial Officer,
Executive Vice President,
Secretary and Treasurer................. $155,833 $165,000 $4,170 --
Robert R. Higgins
Executive Vice President................ $101,186 $45,000 $2,104 --
Option Grants. The following table sets forth certain information
regarding options granted by the Company to the Named Executive Officers during
1998.
Option Grants in Last Fiscal Year
Individual Grants
-----------------
Percent of
Total Potential Realizable Value at
Number of Options Assumed Annual Rates of Stock
Shares Granted to Price Appreciation for Option
Underlying Employees Exercise Term(2)
Options in Fiscal Price Expiration -------
Name Granted (#)(1) Year ($/share) Date 0% 5% 10%
---- -------------- ---- --------- ---- -- -- ---
John P. Dugan.................... -- -- -- -- -- -- --
Charles T. Saldarini............. -- -- -- -- -- -- --
Steven K. Budd................... -- -- -- -- -- -- --
Bernard C. Boyle................. -- -- -- -- -- -- --
Robert R. Higgins................ 7,500 2.0% $16.00 05/20/08 $0 $75,467 $191,249
(1) The options vest with respect to one-third of the shares of Common
Stock covered by the options on May 19, 1998 (the "Initial Vesting Date")
and one-third will vest on each of the first and second anniversary of the
Initial Vesting Date.
(2) Potential realizable values are net of exercise price but before
taxes, and are based on the assumption that the Common Stock of the
Company appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration date of the respective options.
These numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect the Company's projection or estimate of
future stock price growth. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holder's continued employment through the
vesting period. This table does not take into account any appreciation in
the price of the Common Stock from the date of grant to the date of this
Form 10-K.
25
Option Exercises and Year-End Option Values. The following table provides
information with respect to options exercised by the Named Executive
Officers during 1998 and the number and value of unexercised options held
by the Named Executive Officers as of December 31, 1998.
Aggregated Option Exercise in Last Fiscal Year and Year-End Option Values
Number of Shares Underlying Value of Unexercised In-the-
Unexercised Options at Fiscal Money Options At Fiscal
Year-End (#) Year-End (2)
------------ ------------
Shares Acquired
Name on Exercise (#) Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------------- ----------- ------------- ----------- -------------
John P. Dugan.......... -- -- -- -- -- --
Charles T. Saldarini... -- -- -- -- -- --
Steven K. Budd......... -- -- 13,063 26,126 347,998 $695,997
Bernard C. Boyle....... 5,000 $108,875 4,331 18,661 115,378 $497,129
Robert R. Higgins...... -- -- -- -- -- --
(1) For the purposes of this calculation, value is based upon the difference
between the exercise price of the options, $1.61 per share, and the stock
price on the exercise date of $23.375 per share.
(2) For the purposes of this calculation, value is based upon the difference
between the exercise price of the options, $1.61 per share, and the stock
price at December 31, 1998 of $28.25 per share.
Employment Contracts
In January 1998, the Company entered into an agreement with John P. Dugan
providing for his appointment as Chairman of the Board and Director of Strategic
Planning. The Agreement provides for an annual salary of $125,000, no cash
bonuses and for participation in all executive benefit plans.
As of April 1, 1998, the Company entered into an employment agreement with
Charles T. Saldarini providing for his employment, as President and Chief
Executive Officer for a term expiring on February 28, 2003 subject to automatic
one-year renewals unless either party gives written notice 180 days prior to the
end of the then current term of the agreement. The agreement provides for an
annual base salary of $275,000 and for participation in all executive benefit
plans. The agreement also provides that Mr. Saldarini will be entitled to bonus
and incentive compensation awards as determined by the Company. Further, the
agreement provides, among other things, that, if his employment is terminated
without cause (as defined) or if Mr. Saldarini terminates his employment for
good reason (as defined), the Company will pay him an amount equal to the salary
which would have been payable to him over the unexpired current term of his
employment agreement.
As of March 1, 1998, the Company has also entered into employment
agreements with each of Messrs. Boyle and Budd, providing for their respective
employment, as Chief Financial Officer and Chief Operating Officer. Mr. Boyle's
agreement terminates on December 31, 2000 and Mr. Budd's agreement terminates on
March 31, 2001. Each agreement is subject to automatic one-year renewals unless
either party gives written notice 180 days prior to the end of the then current
term of the agreement. The agreements provide for an annual base salary of
$165,000 for Mr. Boyle and $178,605 for Mr. Budd and for their participation in
all executive benefit plans. The agreements also provide that Messrs. Boyle and
Budd are entitled to bonus and incentive compensation awards as determined by
the Company. Each agreement also provides, among other things, that, if
employment is terminated by the Company without cause (as defined) or by the
executive for good reason (as defined), the Company will pay the employee an
amount equal to the salary which would have been payable over the current
unexpired term of the employment agreement.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
None of the Directors serving on the Compensation Committee is an employee
of the Company. No Director or executive officer of the Company is a director or
executive officer of any other corporation that has a director or executive
officer who is also a Director of the Company.
1998 Stock Option Plan
In order to attract and retain persons necessary for the success of the
Company, in March 1998, the Board of Directors of the Company adopted its 1998
Stock Option Plan (the "Plan") reserving for issuance up to 750,000 shares of
its Common Stock, pursuant to which officers, directors and key employees of the
Company and
26
consultants to the Company are eligible to receive incentive and/or
non-qualified stock options. The Plan, which has a term of ten years from the
date of its adoption, is administered by the Compensation Committee of Board of
Directors. The selection of participants, allotment of shares, determination of
price and other conditions relating to the purchase of options is determined by
the Compensation Committee in its sole discretion. Incentive stock options
granted under the Plan are exercisable for a period of up to 10 years from the
date of grant at an exercise price which is not less than the fair market value
of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the Plan to a shareholder owning more than
10% of the outstanding Common Stock may not exceed five years and its exercise
price may not be less than 110% of the fair market value of the Common Stock on
the date of the grant.
At December 31, 1998, options for an aggregate of 424,849 shares were
outstanding under the Plan, including 39,189 held by Steven Budd, the Company's
Chief Operating Officer, 22,992 held by Bernard Boyle, the Company's Chief
Financial Officer and 7,500 held by each of Gerald J. Mossinghoff, John M.
Pietruski and Jan Martens Vecsi, the Company's non-employee Directors. In
addition, as of December 31, 1998, options to purchase 5,000 shares of Common
Stock had been exercised.
Compensation of Directors
Each non-employee Director receives an annual director's fee of $8,000,
payable quarterly in arrears, plus $1,000 for each meeting attended in person
and $150 for each meeting attended telephonically and reimbursement for travel
costs and other out-of-pocket expenses incurred in attending each Directors'
meeting. In addition, committee members receive $200 for each committee meeting
attended in person and $100 for each committee meeting attended telephonically.
Additionally, pursuant to the Plan, each non-employee Director, received options
to purchase 7,500 shares of Common Stock exercisable at the fair market value on
the date of grant. These options will vest one-third on the date of grant and
one-third at the end of each subsequent year of service on the Board. In
addition, each non-employee Director will receive options to purchase an
additional 3,750 shares of Common Stock on the date of the Company's annual
stockholders' meeting. Such options will have an exercise price equal to the
fair market value of the Common Stock on the date of grant and will vest
one-third upon grant and one-third on each of the first and second anniversary
of the date of grant.
401(k) Plan
The Company maintains a retirement plan (the "401(k) Plan") intended to
qualify under Sections 401(a) and 401(k) of the Code. The 401(k) Plan is a
defined contribution plan that covers employees of the Company at least 21 years
of age, who have been employed by the Company for at least one year. Employees
may contribute up to 15% of their annual wages (subject to an annual limit
prescribed by the Code) as pre-tax salary deferral contributions. Effective
January 1, 1997, the Company committed to make mandatory contributions to the
401(k) Plan to match employee contributions up to a maximum of 2% of each
participating employee's annual wages. The Company's contribution to the 401(k)
Plan for 1998 was approximately $310,248.
Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of directors' fiduciary duty
of care. The Company's Certificate of Incorporation limits the liability of
Directors of the Company to the Company or its shareholders to the fullest
extent permitted by Delaware law.
The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or Director of the Company who, by reason
of the fact that he or she is an officer or Director of the Company, is involved
in a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such officer or Director in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of the DGCL. Insofar as indemnification for liabilities under the
Securities Act may be provided to officers and Directors or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
27
There is no pending litigation or proceeding involving a Director,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of February 24, 1999 and
as adjusted to reflect the sale of the shares offered hereby, by (i) each person
known to the Company to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock, (ii) each Director of the Company, (iii)
each Named Executive Officer and (iv) all Directors, and Executive Officers of
the Company as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock owned by them.
Number of Shares Percentage of Shares
Name and Address(1) Beneficially Owned(2) Beneficially Owned(2)
- ------------------- --------------------- ---------------------
John P. Dugan............................... 6,344,878 59.4%
Charles T. Saldarini........................ 1,117,684 10.5%
Steven K. Budd.............................. 13,463(3) *
Bernard C. Boyle............................ 9,331(4) *
Robert Higgins.............................. 5,000 *
John M. Pietruski........................... 4,500(5) *
Jan Martens Vecsi........................... 2,500(6) *
Gerald J. Mossinghoff....................... 2,500(6) *
All Executive Officers and Directors
as a group (8 persons).................. 7,499,856(7) 70.2%
- ----------
* Less than 1%.
(1) The addresses of Messrs. Dugan and Saldarini are c/o the Company, 10
Mountainview Road, Upper Saddle River, New Jersey 07458.
(2) Pursuant to the rules of the Commission, shares of the Company's Common
Stock that a person has the right to acquire within 60 days of the date
hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes 13,063 shares issuable pursuant to options exercisable within 60
days of the date hereof.
(4) Includes 4,331 shares issuable pursuant to options exercisable within 60
days of the date hereof.
(5) Includes 2,500 shares issuable pursuant to options exercisable within 60
days of the date hereof.
(6) Represents shares issuable pursuant to options exercisable within 60 days
of the date hereof.
(7) Includes 24,894 shares issuable pursuant to options exercisable within 60
days of the date hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, Boomer & Son, Inc. ("B&S"), a corporation which, prior to
1998 was wholly-owned by John P. Dugan, the Company's Chairman of the Board,
provided advertisement production and placement services to the Company. At the
end of 1997 John P. Dugan transferred his interest in B&S to his son, Thomas
Dugan, and daughter-in-law, Kathleen Dugan. John P. Dugan is not actively
involved in B&S's business, however, John P. Dugan's son, Thomas Dugan, is
active in B&S. For the year ended December 31, 1998, the Company purchased
advertising in the amount of $1.8 million through B&S at stated advertising
rates set by the periodicals and publications in which advertisements were
placed. B&S received a commission from the publications for its placement
services. The Company believes that the amounts paid to B&S were no less
favorable than would be available in an arms-length negotiated transaction with
an unaffiliated entity. See note 8 to the Company's Audited Financial
Statements.
Peter Dugan, the son of John P. Dugan, the Company's Chairman of the
Board, is employed by the Company as Director of New Business Development. In
1998 the Company paid and accrued $103,000 in compensation for Peter Dugan.
28
In May 1998, in connection with its initial public offering, the Company
made a final cash distribution to its then existing shareholders of $5.9
million. This distribution reflected shareholders' equity of the Company as of
March 31, 1998 plus the earnings of the Company from April 1, 1998 to May 18,
1998. No such distributions will be made in future periods.
In April 1998 the Company loaned $1.4 million to its President and Chief
Executive Officer, Charles T. Saldarini. The proceeds of this loan were used by
Mr. Saldarini's to pay income taxes relating to his receipt of shares of Common
Stock pursuant to his stock grant from the Company in January 1997. Such loan is
for a term of three years, bears interest at a rate equal to 5.4% per annum
payable quarterly in arrears and is secured by a pledge of the shares of Common
Stock held by Mr. Saldarini.
In November 1998, the Company agreed to loan $250,000 to its Executive
Vice President and Chief Operating Officer, Steven Budd, in connection with Mr.
Budd's relocation and purchase of a primary residence. Such loan is for a term
of ten years, subject to acceleration upon termination of employment, bears
interest at the rate of 5.5% per annum, payable quarterly in arrears and is
secured by a pledge of Mr. Budd's rights under his stock option agreement and
any shares issuable thereunder. Of such loan, $100,000 was funded in November
1998 and the balance was funded in February 1999.
29
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits:
Exhibit
No. Description
--- -----------
3.1. Certificate of Incorporation of Professional Detailing, Inc.(1)
3.2. By-Laws of Professional Detailing, Inc.(1)
4.1. Specimen Certificate Representing the Common Stock(1)
10.1. Form of 1998 Stock Option Plan(1)
10.2. Office Lease between IB Brell, L.P. (Landlord) and Professional
Detailing, Inc. (Tenant) and amendment thereto(1)
10.3. Form of Employment Agreement between the Company and Charles T.
Saldarini(1)
10.4. Agreement between the Company and John P. Dugan(1)
10.5. Form of Employment Agreement between the Company and Steven K. Budd(1)
10.6. Form of Employment Agreement between the Company and Bernard C. Boyle(1)
10.7. Form of Loan Agreements between the Company and Charles Saldarini
10.8. Form of Loan Agreements between the Company and Steven Budd
21.1. Subsidiaries of the Registrant
23.1. Consent of PricewaterhouseCoopers L.L.P.
27. Financial Data Schedule
- ----------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No 333-46321), and incorporated herein by reference.
Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the Quarter
ended December 31, 1998.
Financial Statement Schedules:
None
30
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Upper Saddle River, State
of New Jersey, on the 26th day of February, 1999.
PROFESSIONAL DETAILING, INC.
By: /s/ Charles T. Saldarini
----------------------------
Charles T. Saldarini,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Form 10-K has been signed by the following persons in the capacities
indicated and on the 26th day of February, 1999.
Signature Title
--------- -----
/s/ John P. Dugan Chairman of the Board of Directors
- -----------------------------
John P. Dugan
President, Chief Executive Officer and
/s/ Charles T. Saldarini Director
- -----------------------------
Charles T. Saldarini
Chief Financial Officer (principal
/s/ Bernard C. Boyle accounting and financial officer)
- -----------------------------
Bernard C. Boyle
/s/ Gerald J. Mossinghoff Director
- -----------------------------
Gerald J. Mossinghoff
/s/ John M. Pietruski Director
- -----------------------------
John M. Pietruski
/s/ Jan Martens Vecsi Director
- -----------------------------
Jan Martens Vecsi
31
INDEX TO FINANCIAL STATEMENTS
Page
----
PROFESSIONAL DETAILING, INC.
Report of Independent Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Cash Flows F-5
Statements of Shareholders' Equity F-6
Notes to Financial Statements F-7
F-1
Report of Independent Accountants
To the Board of Directors and
Shareholders of Professional Detailing, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Professional Detailing, Inc. at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for the three years ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers L.L.P
Florham Park, New Jersey
February 8, 1999
F-2
PROFESSIONAL DETAILING, INC.
BALANCE SHEETS
December 31,
------------
1997 1998
---- ----
Assets
Current assets:
Cash and cash equivalents .......................... $ 5,759,918 $ 56,191,563
Short-term investments ............................. -- 1,000,000
Contract payments receivable ....................... 2,073,356 4,474,091
Unbilled costs and accrued profits on contracts in
progress ........................................ 3,740,021 4,519,353
Receivable from affiliate, net ..................... 27,161 --
Other current assets ............................... 297,032 677,690
Deferred tax asset ................................. -- 368,400
------------ ------------
Total current assets ........................ 11,897,488 67,231,097
Net property, plant & equipment: ................... 547,377 2,166,283
Other long-term assets ............................. -- 542,606
------------ ------------
Total assets ....................................... $ 12,444,865 $ 69,939,986
============ ============
Liabilities and Shareholders' Equity
Accounts payable ................................... $ 473,832 $ 1,049,023
Payable to affiliate ............................... -- 56,236
Note payable ....................................... 68,365 --
Accrued incentives ................................. 2,806,839 6,750,648
Accrued salaries and wages ......................... 1,417,789 2,553,946
Unearned contract revenue .......................... 6,635,769 7,343,435
Other accrued expenses ............................. 2,117,330 4,550,017
------------ ------------
Total current liabilities ................... $ 13,519,924 $ 22,303,305
------------ ------------
Long-term liabilities:
Deferred tax liability ............................. -- 32,000
------------ ------------
Total long-term liabilities ................. -- 32,000
------------ ------------
Total liabilities .................................. $ 13,519,924 $ 22,335,305
------------ ------------
Commitments and contingencies (note 12)
Shareholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding, 1997 -
7,464,562; 1998 - 10,689,562 .................... 74,646 106,896
Additional paid-in capital ......................... 4,193,852 46,408,466
Retained (deficit) earnings ........................ (5,241,735) 2,573,870
Deferred compensation .............................. (101,822) (56,557)
Loan to officer .................................... -- (1,427,994)
------------ ------------
Total shareholders' (deficit) equity ............... (1,075,059) 47,604,681
------------ ------------
Total liabilities & shareholders' equity ........... $ 12,444,865 $ 69,939,986
============ ============
The accompanying notes are an integral part of these financial statements
F-3
PROFESSIONAL DETAILING, INC.
STATEMENTS OF OPERATIONS
For The Year Ended December 31,
-------------------------------
1996 1997 1998
---- ---- ----
Revenue ....................................................... $ 33,013,360 $ 54,673,986 $101,081,137
Program expenses (including related
party amounts of $671,810,
$1,564,606 and $1,753,018 for
the periods ended December 31, 1996,
1997 and 1998, respectively) .............................. 27,117,859 44,392,424 77,994,502
------------ ------------ ------------
Gross profit .................................................. 5,895,501 10,281,562 23,086,635
Compensation expense .......................................... 3,190,984 5,120,969 9,440,414
Bonus to majority shareholder ................................. 1,500,000 2,243,000 --
Stock grant expense ........................................... -- 4,470,000 --
Other general, selling & administrative expenses .............. 1,650,049 2,754,522 4,512,644
------------ ------------ ------------
Total general, selling & administrative expenses .............. 6,341,033 14,588,491 13,953,058
------------ ------------ ------------
Operating (loss) income ....................................... (445,532) (4,306,929) 9,133,577
Other income, net ............................................. 98,072 155,046 2,049,532
------------ ------------ ------------
(Loss) income before provision for taxes ...................... (347,460) (4,151,883) 11,183,109
Provision for income taxes .................................... -- -- 1,691,181
------------ ------------ ------------
Net (loss) income ............................................. $ (347,460) $ (4,151,883) $ 9,491,928
============ ============ ============
Basic net (loss) income per share ............................. $ (0.05) $ (0.56) $ 1.01
============ ============ ============
Diluted net (loss) income per share ........................... $ (0.05) $ (0.56) $ 0.99
============ ============ ============
Basic weighted average number of shares outstanding ........... 7,464,562 7,464,562 9,427,382
============ ============ ============
Diluted weighted average number of shares outstanding ......... 7,464,562 7,464,562 9,557,046
============ ============ ============
Pro forma data (unaudited) (see note 15):
(Loss) income before provision for taxes, as reported ......... (347,460) (4,151,883) 11,183,109
Pro forma provision for income tax ............................ -- -- 4,473,244
------------ ------------ ------------
Pro forma net (loss) income ................................... $ (347,460) $ (4,151,883) $ 6,709,865
============ ============ ============
Pro forma basic net (loss) income per share ................... $ (0.05) $ (0.56) $ 0.71
============ ============ ============
Pro forma diluted net (loss) income per share ................. $ (0.05) $ (0.56) $ 0.70
============ ============ ============
Pro forma basic weighted average number of shares outstanding . 7,464,562 7,464,562 9,427,382
============ ============ ============
Pro forma diluted weighted average number of shares outstanding 7,464,562 7,464,562 9,557,046
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-4
PROFESSIONAL DETAILING, INC.
STATEMENTS OF CASH FLOWS
For The Year Ended December 31,
-------------------------------
1996 1997 1998
---- ---- ----
Cash Flows From Operating Activities
Net (loss) income from operations ............................. $ (347,460) $ (4,151,883) $ 9,491,928
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ......................................... 104,531 137,852 338,164
Loss on disposal of equipment ........................ -- -- 87,517
Non-cash compensation expense -- stock grant to officer -- 4,050,000 --
Non-cash compensation expense - stock options ........ -- 42,030 45,265
Deferred taxes ....................................... -- -- (336,400)
Other changes in assets and liabilities:
(Increase) Decrease in contract payments receivable .. (188,033) 964,210 (2,400,735)
Decrease (Increase) in unbilled costs ................ 495,651 (1,983,438) (779,332)
Decrease (Increase) in other current assets .......... 22,253 (267,032) (377,658)
(Increase) Decrease in other long-term assets ........ -- -- (542,606)
Increase (Decrease) in trade accounts payable ........ 55,743 (135,063) 575,191
Increase (Decrease) in accrued liabilities ........... 2,522,659 422,920 5,079,966
(Decrease) Increase in unearned contract revenue ..... (506,902) 2,778,031 707,666
Increase (Decrease) in payable to affiliate .......... 284,877 (138,859) 56,236
(Decrease) Increase in other current liabilities ..... 360,107 1,653,576 2,432,687
------------ ------------ ------------
Net cash provided by operating activities ..................... 2,803,426 3,372,344 14,377,889
------------ ------------ ------------
Cash Flows Provided By (Used In) Investing Activities
Purchase of short-term investments ................... -- (1,000,000)
Purchase of equipment ................................ (271,503) (290,167) (2,044,587)
Advances to affiliate ................................ (369,204) -- --
Repayments of advances from affiliate ................ -- 196,025 24,161
------------ ------------ ------------
Net cash used in investing activities ......................... (640,707) (94,142) (3,020,426)
------------ ------------ ------------
Cash Flows Provided By (Used In) Financing Activities
Proceeds from issuance of note payable ............... -- 100,000 --
Payments on note payable ............................. -- (31,635) (68,365)
Distributions to S Corporation shareholders .......... -- -- (5,860,351)
Net proceeds from issuance of common stock ........... -- -- 46,430,892
Loan to shareholder .................................. -- 10,340 (1,427,994)
------------ ------------ ------------
Net cash provided by financing activities ..................... -- 78,705 39,074,182
------------ ------------ ------------
Net increase in cash and cash equivalents ..................... 2,162,719 3,356,907 50,431,645
Cash and cash equivalents -- beginning ........................ 240,292 2,403,011 5,759,918
------------ ------------ ------------
Cash and cash equivalents -- ending ........................... $ 2,403,011 $ 5,759,918 $ 56,191,563
============ ============ ============
Cash paid for interest ........................................ -- $ 7,179 $ 2,399
============ ============ ============
Cash paid for taxes ........................................... -- -- $ 1,698,815
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-5
PROFESSIONAL DETAILING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Outstanding Deferred Shareholder Paid in Retained
Shares Amount Compensation Loan Capital Earnings/(Deficit)
------ ------ ------------ ---- ------- ------------------
Balance -- December 31, 1995............. 7,464,562 $74,646 $ -- $(10,340) $ -- $(742,392)
Net loss for the year ended
December 31, 1996..................... -- -- -- -- -- (347,460)
--------- ------- --------- --------- --------- -----------
Balance -- December 31, 1996............. 7,464,562 74,646 -- (10,340) -- (1,089,852)
Stock grant.............................. -- -- -- -- 4,050,000 --
Deferred compensation-stock options...... -- -- (101,822) -- 143,852 --
Repayment of shareholder loan............ -- -- -- 10,340 -- --
Net loss for the year ended
December 31, 1997..................... -- -- -- -- -- (4,151,883)
--------- ------- --------- --------- --------- -----------
Balance -- December 31, 1997............. 7,464,562 74,646 (101,822) -- 4,193,852 (5,241,735)
Issuance of common stock................. 3,225,000 32,250 - -- 46,398,642 --
Shareholders' distribution............... -- -- -- -- (4,184,028) (1,676,323)
Amortization of deferred compensation
expense............................... -- -- 45,265 -- -- --
Loan to officer.......................... -- -- -- (1,427,994) -- --
Net income for the year ended December
31, 1998.............................. -- -- -- -- -- 9,491,928
---------- -------- --------- ------------ ----------- ----------
Balance -- December 31, 1998 ............ 10,689,562 $106,896 $(56,557) $(1,427,994) $46,408,466 $2,573,870
========== ======== ========= ============ =========== ==========
The accompanying notes are an integral part of these financial statements
F-6
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business
Professional Detailing, Inc. (the "Company") is a leading provider of
comprehensive customized sales solutions on an outsourced basis to the United
States pharmaceutical industry.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates. Significant estimates include accrued
incentives payable to employees.
Revenue Recognition
Revenue is earned primarily by performing services under contracts and is
recognized as the services are performed and the right to receive payment for
such services is assured. Program expenses consist primarily of the costs
associated with the execution of a detailing program. Such expenses include
personnel costs and the initial direct costs associated with staffing a program.
Personnel costs, which constitute the largest portion of program expenses,
include all labor related costs, such as salaries, bonuses, fringe benefits and
payroll taxes for the sales representatives and managers who are directly
responsible for the rendering of services in connection with a particular
program. Initial direct program costs are those costs associated with initiating
a program, such as recruiting, hiring and training the sales representatives who
staff a particular program. All personnel costs and initial direct program
costs, other than training costs, are expensed as incurred. Training costs
include the costs of training the sales representatives and managers on a
particular program so that they are qualified to properly render the services
specified in the related contract. Training costs are deferred and amortized on
a straight-line basis over the shorter of (i) the life of the contract to which
they relate or (ii) 12 months. Finally, bonus and other performance incentives
as well as termination payments are recognized as revenue in the period earned
and when payment of the bonus, incentive or other payment is assured. Revenue is
recognized net of any potential penalties until the performance criteria
eliminating the penalties are met.
The Company's contracts generally are for terms of six months to two years
and are subject to renewal upon expiration. In addition, a single contract may
account for a significant portion of the Company's total revenue. The Company's
contracts may be terminated by the client at any time for any reason. Also,
contracts typically contain significant penalties if the Company fails to meet
stated performance benchmarks. While the cancellation of certain of the
Company's contracts by a client without cause may result in the imposition of
penalties on such client, such penalties may not act as an adequate deterrent to
the termination of any such contracts. In addition, there can be no assurance
that such penalties will offset the revenue which could have been earned under
such contract or the costs which the Company may incur as a result of such
termination. The loss or termination of one or more contracts could have a
material adverse affect on the Company's business and results of operations. To
date, no programs have been terminated for cause.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, contract payments
receivable, accounts payable and other financial instruments approximate their
fair values principally because of the short-term maturities of these
instruments. At December 31, 1997, the fair value of the Company's note payable
is estimated based on the current rates offered to the Company for debt of
similar terms and maturities. Under this method, the fair value of the Company's
note payable was not significantly different than its book value at December 31,
1997.
F-7
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Nature of Business and Significant Accounting Policies--(Continued)
Unbilled Costs and Accrued Profits and Unearned Contract Revenue
In general, contractual provisions, including predetermined payment
schedules or submission of appropriate billing detail, establish the
prerequisites for billings. Unbilled costs and accrued profits arise when
services have been rendered and payment is assured but clients have not been
billed. These amounts are classified as a current asset. Normally, the clients
agree to pay the Company a portion of the fee due under a contract in advance of
performance of services because of large recruiting and employee development
costs associated with the beginning of a contract. The excess of amounts billed
over revenue recognized represents unearned contract revenue, which is
classified as a current liability.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts, highly
liquid investment instruments and Certificates of Deposit with a maturity of
three months or less at the date of purchase.
Short-term Investments
Short-term investments consist of investment instruments with a maturity
greater than three months but less than one year from the date of purchase.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The estimated useful
lives of asset classifications are seven years for furniture and fixtures and
five years for office equipment and computer equipment. Depreciation is computed
using the straight-line method, and the cost of leasehold improvements is
amortized over the shorter of the estimated service lives or the terms of the
related leases. Repairs and maintenance are charged to expense as incurred. Upon
disposition, the asset and related accumulated depreciation are relieved and any
gains or losses are reflected in operations.
Stock-Based Compensation
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" allows companies a choice of measuring employee
stock-based compensation expense based on the fair value method of accounting or
based upon the intrinsic value approach under APB Opinion No. 25. The Company
has elected to measure compensation expense based upon the intrinsic value
approach under APB Opinion No. 25.
Advertising
The Company recognizes advertising costs as incurred. The total amounts
charged to advertising expense were $87,104, $159,206 and $110,674 for the years
ended December 31, 1996, 1997 and 1998, respectively.
2. Initial Public Offering of Common Stock
In May, 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 $46.4 million. The Company made a distribution of $5.9
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.
F-8
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Initial Public Offering of Common Stock (Continued)
In connection with the IPO, the Company has reincorporated in Delaware. To
effect such reincorporation, on May 15, 1998, Professional Detailing, Inc., a
New Jersey corporation (the "New Jersey Entity") merged with and into
Professional Detailing, Inc., a Delaware corporation (the "Delaware Entity"). As
a result of the merger, the former shareholders of the New Jersey Entity owned
7,464,562 shares of the Delaware Entity's common stock which shares constituted
all of the issued and outstanding shares of common stock of the Delaware Entity
prior to the IPO. In addition, outstanding options to purchase common stock of
the New Jersey Entity converted into 67,181 options to purchase shares of common
stock of the Delaware Entity at $1.61 per share. The conversion of shares and
options related to the merger has been retroactively reflected in the Company's
financial statements.
3. Historical and Pro Forma Basic and Diluted Net Income/Loss Per Share
Historical and Pro forma basic and diluted net income/loss per share was
calculated based on the requirements of Statement of Financial Accounting
Standards ("SFAS") 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 year ended December 31, 1998 is as
follows:
Year Ended
December 31, 1998
-----------------
Basic weighted average number of common shares outstanding.... 9,427,382
Dilutive effect of stock options.............................. 129,664
---------
Diluted weighted average number of common shares outstanding.. 9,557,046
=========
At December 31, 1997, outstanding options to purchase 67,181 shares of
common stock with an exercise price of $1.61 per share have not been included in
the 1997 computation of historical and pro forma diluted net loss per share
because to do so would have been antidilutive.
4. Property, Plant and Equipment
Property, Plant and Equipment consists of the following:
December 31,
------------
1997 1998
---- ----
Furniture and fixtures ............................. $ 81,759 $ 698,620
Office equipment ................................... 217,796 257,501
Computer equipment ................................. 805,353 1,939,240
Leasehold improvements ............................. 18,693 120,359
---------- ----------
Total Property, Plant and Equipment ................ 1,123,601 3,015,720
Less accumulated depreciation and amortization ..... 576,224 849,437
---------- ----------
Property, Plant and Equipment, net ................. $ 547,377 $2,166,283
========== ==========
5. Operating Leases
The Company leases facilities and certain equipment under agreements
classified as operating leases. Lease expense under these agreements for the
twelve months ended December 31, 1996, 1997 and 1998 were $165,020, $182,353 and
$666,228, respectively. The Company entered into a new facilities lease in May
1998 for a term of 66 months with an option to extend for an additional five
years.
F-9
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Operating Leases (Continued)
The following is a schedule by year of the future minimum lease payments as
of December 31, 1998 required under these agreements:
1999.............................................................$1,695,568
2000............................................................. 1,678,273
2001............................................................. 1,677,698
2002............................................................. 1,495,406
2003............................................................. 555,336
Thereafter....................................................... 0
----------
Total............................................................$7,102,281
==========
6. Significant Customers
During 1996, 1997 and 1998, the Company had several significant customers
for which it provided services under specific contractual arrangements. The
following sets forth the revenue generated by customers who accounted for more
than 10% of the Company's revenue during each of the periods presented.
Years Ended December 31,
------------------------
Customers 1996 1997 1998
--------- ---- ---- ----
A $9,831,457 $13,507,000 $31,069,651
B * 13,026,665 30,462,960
C 5,364,235 10,548,472 24,303,187
D 5,360,264 * *
E 7,159,520 * *
* Less than 10% of revenue.
At December 31, 1997 and 1998, these customers represented 79.5% and
95.6%, respectively, of outstanding receivables and unbilled services. The loss
of any one of the foregoing customers could have a material adverse effect on
the Company's financial position, results of operations or cash flows.
7. Borrowings
The Company has a $500,000 line of credit from a bank under which interest
is payable monthly on the outstanding balance at a floating rate equal to 1%
above the prime rate. The Company has also obtained a commitment from the bank
for a $10 million line of credit. This line would be for a term of one year and
would bear interest payable monthly at a floating rate equal to 2.0% above
LIBOR.
As of December 31, 1998, the Company has not drawn on either line. Both
lines are collateralized by a lien on all of the assets of the Company. In
addition, if the Company were to draw on such lines, it could be subject to
certain restrictive financial covenants and other customary provisions found in
commercial loan documentation. Commitment fees associated with the lines are
immaterial.
8. Related Party Transactions
The Company purchased certain print advertising for initial recruitment of
representatives through a company that was wholly-owned by the family of the
Company's majority shareholder. Additionally, the Company also provided
administrative services to this affiliate through the first six months of 1998.
The net amounts charged to the Company for these purchases amounted to $671,810,
$1,564,606 and $1,753,018 for the years ended December 31, 1996, 1997 and 1998.
As of December 31, 1997 and 1998, the amounts payable to affiliate totaled
$146,018 and $56,236, respectively. The Company also made advances to this
affiliate. As of December 31, 1997 and 1998, the amounts due the Company as a
result of these advances were $173,179 and $0, respectively.
F-10
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
Prior to the IPO, the Company elected to be taxed under Subchapter S of
the Internal Revenue Code of 1986, as amended effective January 1, 1991 and
under the corresponding provisions if the laws of the State of New Jersey
effective January 1, 1994. Consequently, prior to the IPO, the Company was not
subject to Federal or New Jersey state income taxes, other than a New Jersey
corporate income tax amounting to $90,482 in 1998. On May 19, 1998 certain
events, including the IPO, automatically terminated the Company's S Corporation
status, thereby subjecting income to Federal and New Jersey state income taxes.
The provision for income taxes for the year ended December 31,1998 is
summarized as follows:
Current:
Federal $ 1,630,919
State 396,662
-----------
Total Current 2,027,581
Deferred (336,400)
-----------
Provision for income taxes $ 1,691,181
===========
For 1998 deferred income taxes reflected the net tax effect of temporary
differences between the carrying value of assets and liabilities recorded for
financial reporting purposes and the amounts used for income tax purposes. As of
December 31, 1998 the Company had a current deferred tax asset of $368,400,
primarily related to accrued expenses. In addition, the Company has a non
current deferred tax liability of $32,000, primarily related to accelerated
depreciation.
A reconciliation of the difference between the Federal statutory tax rates
and the Company's effective tax rate is as follows:
Federal statutory rate 34.0%
State income tax rate, net of
Federal benefit 4.0
Effect of S Corporation status
prior to IPO (23.6)
Other non-deductible expenses 0.7
----
Effective tax rate 15.1%
====
10. Loans to Shareholder/Officers
The Company loaned $1.4 million to its President and Chief Executive
Officer, Charles T. Saldarini in April 1998. The proceeds of this loan were used
by Mr. Saldarini to pay income taxes relating to his receipt of shares of Common
Stock. Such loan is for a term of three years, bears interest at a rate equal to
5.4% per annum payable quarterly in arrears and is secured by a pledge of the
shares of Common Stock held by Mr. Saldarini. A loan of $10,340 to the Company's
then sole shareholder at December 31, 1996 was repaid in 1997.
In November 1998, the Company agreed to lend $250,000 to an executive
officer. As of December 31, 1998, $100,000 of this amount has been loaned, and
has been recorded in other long-term assets on the balance sheet as of December
31, 1998. Such loan is payable on December 31, 2008, bears interest at a rate of
5.5% per annum, payable quarterly in arrears and is secured by a pledge of
certain options to purchase shares of Common Stock.
F-11
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Retirement Plans
In 1996, 1997 and 1998, the Company provided its employees with a
qualified profit sharing plan with 401(k) features. The Company made
contributions of $99,917, $172,310 and $310,248 to this plan for the years ended
December 31, 1996, 1997 and 1998, respectively.
Effective January 1, 1997, the Company has committed to make mandatory
contributions to the 401(k) plan. This commitment requires contributions from
the Company each year equal to 100% of the amount contributed by each employee
up to 2% of the employee's wages. Any additional contribution to the plan is at
the discretion of the Company.
12. Commitments and Contingencies
The Company is engaged in the business of detailing pharmaceutical
products. Such activities could expose the Company to risk of liability for
personal injury or death to persons using such products, although the Company
does not commercially market or sell the products to end users. While the
Company has not been subject to any claims or incurred any liabilities due to
such claims, there can be no assurance that substantial claims or liabilities
will not arise in the future. The Company seeks to reduce its potential
liability through measures such as contractual indemnification provisions with
clients (the scope of which may vary from client to client, and the performances
of which are not secured) and reliance on insurance maintained by clients. The
Company could, however, also be held liable for errors and omissions of its
employees in connection with the services it performs that are outside the scope
of any indemnity. The Company could be materially and adversely affected if it
were required to pay damages or incur defense costs in connection with a claim
that is outside the scope of the indemnification agreements; if the indemnity,
although applicable, is not performed in accordance with its terms; or if the
Company's liability exceeds the amount of applicable insurance or indemnity. The
Company currently does not carry product liability insurance and is not insured
against the errors and omissions of its employees.
From time to time the Company is involved in litigation incidental to its
business. The Company is not currently a party to any pending litigation which,
if decided adversely to the Company, would have a material adverse effect on the
business, financial condition or results of operations of the Company.
13. Stock Grant
In January of 1997, the Company issued 1,119,684 shares of its Common
Stock to its President and Chief Operating Officer. As a result, Mr. Saldarini
owned 15.0% of the Company's outstanding shares of common stock at that time
(taking into account the issuance of such shares). The Company has treated these
shares as outstanding for all periods.
This grant of stock was in consideration of services performed on behalf
of the Company. The value of the shares, as determined by Hempstead & Co.
Incorporated, independent valuation experts, was $4,050,000. Such valuation was
prepared utilizing standard valuation techniques used to value businesses
including discounted cash flow and comparable transactions. The Company has
recognized $4,470,000 in compensation and related expenses in the first quarter
of 1997. Such expenses include a reserve for taxes related to such grant.
F-12
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. Stock Option Plan
In March 1998, the Board of Directors of the Company adopted its 1998
Stock Option Plan (the "1998 Plan") which reserves for issuance up to 750,000
shares of its Common Stock, pursuant to which officers, directors and key
employees of the Company and consultants to the Company are eligible to receive
incentive and/or non-qualified stock options. The 1998 Plan, which has a term of
ten years from the date of its adoption, is administered by a committee
designated by the Board of Directors. The selection of participants, allotment
of shares, determination of price and other conditions relating to the purchase
of options is determined by the committee, in its sole discretion. Incentive
stock options granted under the Plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair market value of the Common Stock on the date of the grant, except that the
term of an incentive stock option granted under the Plan to a shareholder owning
more than 10% of the outstanding Common Stock may not exceed five years and its
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. Effective in January of 1997, the Company
adopted its 1997 Stock Option Plan (the "1997 Plan"). In March 1998, the 1997
Plan was incorporated into the 1998 Plan.
During 1997, there were two grants of stock options to officers of the
Company, one in January for 39,189 shares at an exercise price of $1.61 and one
in March for 27,992 shares at an exercise price of $1.61. In connection with the
grant of such options, the Company will amortize $143,852 of compensation
expense over the expected vesting period. The options vest as follows: one-third
became exercisable on the date of the IPO (the "Initial Exercise Date"), another
third shall become exercisable on the first anniversary of the Initial Exercise
Date and the final third become exercisable on the second anniversary of the
Initial Exercise Date. As of December 31, 1997 and 1998, total options
outstanding under the 1997 Plan were 67,181 and 62,181, of which 0 and 17,394,
respectively, were exercisable. In October of 1998, 5,000 of these options were
exercised. As of December 31, 1998 the weighted average exercise price of these
outstanding and exercisable options was $1.61. The average remaining contractual
life of these outstanding options was 7.0 years. Compensation expense of $42,030
and $45,265 was recognized for the years ended December 31, 1997 and 1998.
In May 1998, 345,168 options were granted to employees and outside
consultants, and 22,500 options were granted to outside directors under the 1998
Plan. The exercise price of these options was $16.00, the fair market value of
the Common Stock on the date of grant. One third of the employees' options will
vest and become exercisable on each of May 18, 1999, 2000 and 2001. The
directors' options vest and become exercisable one third on the date of grant,
and one third on each of May 19, 1999 and 2000. All stock options granted during
the second quarter of 1998 will expire in May 2008. Total options outstanding,
related to the 1998 grants, as of December 31, 1998 was 367,668 of which 7,500
were exercisable. At December 31, 1998, the weighted average exercise price of
these options outstanding and exercisable was $16.00. The weighted average
remaining contractual life of the outstanding options under the 1998 Plan was
9.4 years.
F-13
PROFESSIONAL DETAILING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. Stock Option Plan--(Continued)
Had compensation cost for the Company's stock option grants been
determined for awards consistent with the fair value approach of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation," which requires recognition of compensation cost ratably over the
vesting period of the underlying instruments, the Company's pro forma net (loss)
income and pro forma basic and diluted (loss) income per share would have been
adjusted to the amounts indicated below:
As of December 31,
------------------
1997 1998
---- ----
Pro forma net (loss ) income-- As reported ............. $ (4,151,883) $ 6,709,865
Pro forma net (loss ) income -- As adjusted ............ $ (4,202,165) $ 6,224,547
Pro forma basic (loss) income per share -- as reported . $ (0.56) $ 0.71
Pro forma basic (loss) income per share -- as adjusted . $ (0.56) $ 0.66
Pro forma diluted (loss) income per share -- as reported $ (0.56) $ 0.70
Pro forma diluted (loss) income per share -- as adjusted $ (0.56) $ 0.65
Compensation cost for the determination of Pro forma Net (loss) income --
As adjusted and related per share amounts were estimated using a the Black
Scholes option pricing model, and the following assumptions (i) risk free
interest rate 6.27% at December 31, 1997 and 5.62% at December 31, 1998, (ii)
expected life 5 years for December 31, 1997 and 1998, (iii) expected dividends -
0, for the years ended December 31, 1997 and 1998, (iv) volatility - 0 for 1997
and 60% for 1998. The weighted average fair value of options granted during 1998
and 1997 was $9.63 and $2.56, respectively.
15. Pro Forma Information (unaudited)
Pro Forma Provision For (Benefit From) Income Tax
The accompanying financial statements reflect a provision/benefit for
income taxes on a pro forma basis as if the Company were subject to Federal and
New Jersey state income taxes as a taxable corporate entity throughout the years
presented. The pro forma income tax provision is based upon the statutory rates
in effect for C Corporations during the periods presented, with no tax benefits
assumed for the net operating losses in 1997 and 1996.
16. New Accounting Pronouncements
The Financial Accounting Standards Board released in June 1998, Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This statement
addresses the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. As the
Company has not entered into transactions involving derivative instruments, the
Company does not believe that the adoption of this new statement will have a
material effect on the Company's financial statements.
In the second quarter of 1998, the Accounting Standard Executive Committee
of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities." This statement provides guidance on financial reporting of
start-up costs and organizational costs. This Statement of Position is effective
for financial statements for fiscal years beginning after December 15, 1998.
This Statement of Position requires start-up costs to be expensed as incurred.
The Company does not believe that the adoption of this Statement of Position
will have a material impact on the Company's financial statements.
F-14