UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(AMENDMENT NO. 1)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
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 0-30318
VENTIV HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2181734
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
200 Cottontail Lane
Vantage Court North
Somerset, New Jersey 08873
(Address of principal executive office and zip code)
(800) 416-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $0.001 22,992,397 shares outstanding as of
August 9, 2002.
VENTIV HEALTH, INC.
QUARTERLY REPORT ON
FORM 10-Q/A
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 (unaudited)...................................... 1
Condensed Consolidated Statements of Earnings for the three- and six-month
periods ended June 30, 2002 and 2001 (unaudited) ...................... 2
Condensed Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2002 and 2001 (unaudited) ...................... 3
Notes to Condensed Consolidated Financial Statements ..................... 4-10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 11-18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ......... 18-19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................. 19
ITEM 4. Submission of Matters to a Vote of Security Holders ................ 20
ITEM 6. Exhibits and Reports on Form 8-K ................................... 20
SIGNATURES .................................................................... 21
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current assets:
Cash and equivalents ........................................................... $ 27,297 $ 35,427
Restricted cash ........ ....................................................... 17,374 1,025
Accounts receivable, net of allowances for doubtful accounts of $1,007
and $988 at June 30, 2002 and December 31, 2001, respectively ................. 35,429 38,481
Unbilled services .............................................................. 10,844 42,480
Prepaid expenses and other current assets ...................................... 2,666 1,047
Current deferred tax asset ..................................................... 536 1,099
Assets of discontinued and held for sale operations............................. 38,055 55,612
-------- --------
Total current assets ................................................... 132,201 175,171
Property and equipment, net ........................................................ 17,708 30,542
Goodwill and other intangible assets, net .......................................... 20,791 20,813
Deferred taxes and other non-current assets......................................... 9,414 9,043
-------- --------
Total assets ........................................................... $180,114 $235,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit ................................................ $ 15,000 $ 35,000
Current portion of capital lease obligations .................................... 4,615 8,516
Accrued payroll, accounts payable and accrued expenses .......................... 24,643 34,922
Current income tax liabilities .................................................. 936 2,533
Client advances and unearned revenue ............................................ 11,973 16,429
Liabilities of discontinued and held for sale operations ........................ 21,619 30,064
-------- --------
Total current liabilities .............................................. 78,786 127,464
Capital lease obligations .......................................................... 8,140 16,947
Other non-current liabilities ...................................................... 170 137
-------- --------
Total liabilities ...................................................... 87,096 144,548
-------- --------
Commitments and contingencies ...................................................... -- --
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued
and outstanding at June 30, 2002 and December 31, 2001 ....................... -- --
Common stock, $.001 par value, 50,000,000 shares authorized;
22,992,397 shares issued at June 30, 2002 and December 31, 2001 .............. 23 23
Additional paid-in-capital ...................................................... 157,879 157,864
Deferred compensation ........................................................... (935) (1,275)
Accumulated other comprehensive losses .......................................... (2,718) (4,063)
Accumulated deficit ............................................................. (61,231) (61,528)
-------- --------
Total stockholders' equity ............................................. 93,018 91,021
-------- --------
Total liabilities and stockholders' equity ............................. $180,114 $235,569
======== ========
See accompanying notes to condensed consolidated financial statements
1
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
Revenues ........................................................... $48,769 $72,254 $118,637 $146,853
Operating expenses:
Costs of services ............................................. 39,825 59,854 100,841 122,205
Selling, general and administrative expenses .................. 6,662 8,349 13,312 16,681
------- ------- -------- --------
Operating earnings ................................................. 2,282 4,051 4,484 7,967
Interest expense ................................................... (217) (953) (811) (1,926)
Investment income .................................................. 95 50 180 195
Loss on investment in equity of non-affiliate ...................... -- -- -- (500)
------- ------- -------- --------
Earnings from continuing operations before income taxes ............ 2,160 3,148 3,853 5,736
Provision for income taxes ......................................... (901) (1,484) (1,464) (2,476)
------- ------- -------- --------
Net earnings from continuing operations ............................ $ 1,259 $ 1,664 $ 2,389 $ 3,260
------- ------- -------- --------
Earnings from discontinued and held for sale operations:
Earnings (losses) from discontinued operations, net of taxes... (1,955) 521 (2,679) 295
Losses on disposals of discontinued operations, net of taxes... (4,813) -- (4,813) --
Tax benefits related to the disposal of a discontinued
operation ................................................... 5,400 -- 5,400 --
------- ------- -------- --------
Net earnings (losses) from discontinued and held for sale
operations........................................................ (1,368) 521 (2,092) 295
------- ------- -------- --------
Net earnings (losses) .............................................. ($ 109) $ 2,185 $ 297 $ 3,555
======= ======= ======== ========
Earnings (losses) per share (see Note 3):
Continuing operations:
Basic ......................................................... $ 0.06 $ 0.07 $ 0.10 $ 0.14
======= ======= ======== ========
Diluted ....................................................... $ 0.06 $ 0.07 $ 0.10 $ 0.14
======= ======= ======== ========
Discontinued and held for sale operations:
Basic ......................................................... ($ 0.06) $ 0.03 ($ 0.09) $ 0.02
======= ======= ======== ========
Diluted ....................................................... ($ 0.06) $ 0.02 ($ 0.09) $ 0.01
======= ======= ======== ========
Net earnings (losses):
Basic ......................................................... $ -- $ 0.10 $ 0.01 $ 0.16
======= ======= ======== ========
Diluted ....................................................... $ -- $ 0.09 $ 0.01 $ 0.15
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements
2
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months
Ended June 30,
--------------
2002 2001
---- ----
(unaudited)
Cash flows from operating activities:
Net earnings .......................................................................... $ 297 $ 3,555
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Net (losses) earnings from discontinued and held for sale operations ............. 2,092 (295)
Depreciation ..................................................................... 5,004 4,867
Amortization ..................................................................... 22 911
Deferred taxes ................................................................... (415) 2,378
Losses on disposals of capital assets ............................................ 1 165
Non-cash expense for write-off of deferred financing costs ....................... 314 -
Non-cash expense for restricted stock vesting .................................... 340 370
Non-cash expense for valuation allowance on note receivable ..................... 778 -
Non-cash expense for loss on investment in equity of non-affiliate ............... - 500
Net changes in assets and liabilities:
Restricted cash ................................................................. 201 (40)
Accounts receivable, net ......................................................... 2,938 (10,950)
Unbilled services ............................................................... 31,636 (15,679)
Prepaid expenses and other non-current assets ................................... (1,619) (1,390)
Accrued payroll, accounts payable and accrued expenses .......................... (12,779) 1,826
Current tax liability ........................................................... 4,128 (290)
Client advances and unearned revenue ............................................ (4,456) (51)
Other ........................................................................... 1,468 432
------- -------
Net cash provided by (used in) operating activities .................................. 29,950 (13,691)
------- -------
Cash flows from investing activities:
Capital expenditures ............................................................ (1,387) (2,094)
Deposit of proceeds from short term advance under line of credit ................ 15,000 -
Proceeds from disposals of discontinued operations .............................. 4,295 -
Funding of product commercialization expenditures ............................... (825) -
------ ------
Net cash provided by (used in) investing activities .................................. 17,083 (2,094)
------ ------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit ................................... (35,000) 11,000
Short-term advance under line of credit ......................................... (15,000) -
Repayments of capital lease obligations ......................................... (3,492) (3,676)
Collateralization of obligations under standby letter of credit ................. (1,550) -
Financing costs for new credit facility ......................................... (467) -
Proceeds from the exercise of stock options ..................................... - 1,890
------- -------
Net cash (used in) provided by financing activities ..................................... (55,509) 9,214
------- -------
Net cash (used in) provided by discontinued and held for sale operations ................ (1,014) 5,591
Effect of exchange rate changes on cash and equivalents ................................. 1,360 (2,652)
------- --------
Net decrease in cash and equivalents .................................................... (8,130) (3,632)
Cash and equivalents, beginning of period ............................................... 35,427 16,387
-------- --------
Cash and equivalents, end of period ..................................................... $ 27,297 $ 12,755
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................................... $ 869 $ 1,472
Cash paid for income taxes ...................................................... $ 377 $ 593
Supplemental disclosures of non-cash activities:
Vehicles acquired under capital lease arrangements .............................. $ 1,379 $ 4,959
See accompanying notes to condensed consolidated financial statements
3
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization, Business and Basis of Presentation:
Ventiv Health, Inc. ("Ventiv" or "the Company") is a leading provider of
comprehensive outsourced marketing and sales solutions for the pharmaceutical,
biotechnology and life sciences industries. The Company offers a broad range of
integrated services, in a context of consultative partnership that identifies
strategic goals and applies targeted, tailored solutions. The portfolio of
offerings includes: consulting, analytics and forecasting; market research and
intelligence; strategic and tactical planning; telemarketing and other marketing
support services; product/brand management; recruitment and training services;
and sales execution. Ventiv's businesses provide a broad range of innovative
strategic and tactical solutions to their clients, which include many of the
world's leading pharmaceutical, biotechnology and life sciences companies.
The accompanying unaudited condensed consolidated financial statements
present the financial position, results of operations and cash flows of the
Company and its subsidiaries (the "condensed consolidated financial
statements"). These condensed consolidated financial statements have been
prepared pursuant to the interim rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America ("GAAP") have
been omitted. The Company believes that the disclosures made herein are adequate
such that the information presented is not misleading. These condensed
consolidated financial statements reflect all adjustments (consisting of only
normal recurring adjustments and the effect of discontinued and held for sale
operations as detailed in these notes to the condensed consolidated financial
statements) that, in the opinion of management, are necessary to fairly present
the Company's financial position as of June 30, 2002 and December 31, 2001, the
results of operations of the Company for the three- and six-month periods ended
June 30, 2002 and 2001, and cash flows of the Company for the six-month periods
ended June 30, 2002 and 2001. The Condensed Consolidated Balance Sheet as of
December 31, 2001 has been derived from the audited consolidated balance sheet
included in the Company's Annual Report on Form 10-K, as filed on April 1,2002.
Operating results for the three- and six-month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. Certain balances as of December 31, 2001 have been
reclassified to conform to the June 30, 2002 balance sheet presentation,
primarily to give effect to the discontinued and held for sale operations (See
Note 10).
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in the Company's Annual Reports on Form 10-K and Form 10-K/A for
the year ended December 31, 2001, as filed with the Securities and Exchange
Commission on April 1, 2002 and April 30, 2002, respectively. Such audited
financials did not reflect the classification of certain businesses as
discontinued or held for sale operations (See Note 10).
2. Accounting Standards, New Accounting Pronouncements and Related Accounting
Policies
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets" ("SFAS 142"). This statement requires that goodwill and
intangible assets deemed to have an indefinite life not be amortized. Instead of
amortizing goodwill and intangible assets deemed to have an indefinite life, the
statement requires a test for impairment to be performed annually, or
immediately if conditions indicate that an impairment might exist. This
statement became effective for fiscal years beginning after December 15, 2001,
and permitted early adoption for fiscal years beginning after March 15, 2001.
The Company adopted SFAS 142 effective January 1, 2002, and, as a result, the
Company will no longer amortize the net goodwill effective January 1, 2002.
Goodwill related to those businesses now comprising the Company's continuing
operations (see Notes 10 and 11) was reflected in the Company's consolidated
balance sheets as of June 30, 2002 and December 31, 2001 at a carrying amount of
approximately $20.6 million. Selling, general & administrative expense for the
three and six months ended June 30, 2001 includes goodwill amortization of
approximately $0.5 million and $0.9 million, respectively. The remaining
unamortized goodwill balance relates solely to the businesses currently
comprising the Company's Contract Sales and Services operating segment (see
Note 11).
Management has completed its initial analysis under SFAS 142 and concluded
that no current goodwill impairment charges were necessary as of June 30, 2002.
If, in future valuations, the carrying amount of goodwill is found to exceed its
fair value, an impairment loss will be recognized in an amount equal to that
excess. Once an impairment loss is recognized, the adjusted carrying amount of
goodwill will become the new accounting basis of goodwill.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Company is evaluating the impact of the adoption of SFAS No. 146, which is
effective for the Company as of January 1, 2003, but does not believe it will
have a material impact on the Company's financial position or results of
operations.
4
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Earnings Per Share:
The following table presents a reconciliation of the numerators and
denominators of basic and diluted Earnings Per Share ("EPS") for the three- and
six-month periods ended June 30, 2002 and 2001:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
(in thousands, except per share data)
Basic EPS Computation:
Net earnings ........................................ $ (109) $ 2,185 $ 297 $ 3,555
Weighted average common shares issued and outstanding 22,825 22,591 22,824 22,533
------- ------- ------- -------
Basic EPS ........................................... $ -- $ 0.10 $ 0.01 $ 0.16
======= ------- ------- -------
Diluted EPS Computation:
Net earnings ........................................ $ (109) $ 2,185 $ 297 $ 3,555
Adjustments to net earnings ......................... -- -- -- --
------- ------- ------- -------
Adjusted net earnings ............................... $ (109) $ 2,185 $ 297 $ 3,555
======= ======= ======= =======
Diluted common shares outstanding:
Weighted average common shares outstanding .......... 22,825 22,591 22,824 22,533
Stock options ....................................... 5 831 3 817
Restricted stock awards ............................. -- 190 -- 187
------- ------- ------- -------
Total diluted common shares issued and outstanding .. 22,830 23,612 22,827 23,537
======= ====== ====== ======
Diluted EPS ......................................... $ -- $ 0.09 $ 0.01 $ 0.15
======= ======= ======= =======
4. Significant Clients:
During the six-month period ended June 30, 2002, three clients, Bayer
Corporation ("Bayer"), Reliant Pharmaceuticals, Inc. ("Reliant") and Endo
Pharmaceuticals Holdings, Inc. ("Endo") accounted for approximately 20.5%, 18.2%
and 12.4% respectively, of the Company's total revenue. For the six-month period
ended June 30, 2001, two clients, Reliant and Bristol-Myers Squibb, Inc.
("BMS"), accounted for 30.4% and 18.9%, respectively, of the Company's total
revenue.
As of June 30, 2002 the Company had two clients, Reliant and Endo, which
accounted for 34.7% and 16.2%, respectively, of billed accounts receivable.
Also, Endo accounted for 40.5% of unbilled receivables at June 30, 2002. As of
June 30, 2001, the Company had two clients, Reliant and Bayer which accounted
for 56.7% and 14.7%, respectively, of billed accounts receivable. The Company
had four clients, Reliant, BMS, Bayer and Endo, that accounted for 32.0%, 21.6%,
14.8% and 10.0%, respectively, of unbilled receivables at June 30, 2001.
In February 2002, Ventiv was notified by Reliant of its intent to convert
the field sales force working under the Ventiv-Reliant contract from full-time
Ventiv employment to full-time Reliant employment effective April 1, 2002. The
Ventiv-Reliant contract, which commenced on August 1, 2000, provided Reliant
with the option to convert all or a portion of the field sales force to Reliant
at any time. As a consequence of the conversion, Ventiv has not received
revenues for contract sales services under this agreement subsequent to March
31, 2002.
Effective May 15, 2002, the Company's contract sales agreement with Bayer
was amended and restated to provide for (i) a new fixed fee structure for
services rendered from May 15, 2002 to the end of the promotion term, and (ii)
an extension of the promotion term end date from May 31, 2003 to December 31,
2003, with an option beginning May 31, 2003 for Bayer to reduce the size of the
Company's sales force and related compensation. Under the original terms of the
Bayer agreement and through May 14, 2002, the Company received certain fees that
covered a substantial portion, but not all of the Company's costs of services
relating to this engagement. In the fourth quarter of 2001, the Company recorded
a reserve of approximately $6.1 million for estimated cumulative losses under
this contract through May 14, 2002, under the assumption that Ventiv would elect
not to continue under the original contract on a loss basis beyond May 14, 2002,
which was the first date that Ventiv could exercise its right to terminate the
contract. As a result of the amendment and restatement of the agreement
effective May 15, 2002, the Company reduced its cumulative loss estimate by $2.4
million, which positively impacted the Company's profit margin during the second
quarter of 2002.
5
5. Restricted Cash:
The Company often receives cash advances from its clients as funding for
specific projects and engagements. These funds are deposited into segregated
bank accounts and used solely for purposes relating to the designated projects.
Although these funds are not held subject to formal escrow agreements, the
Company considers these funds to be restricted and has classified these balances
accordingly. Cash held in such segregated bank accounts totaled approximately
$0.8 million and $1.0 million as of June 30, 2002 and December 31, 2001,
respectively.
On February 19, 2002, the Company pledged approximately $1.5 million of
cash as collateral on an outstanding standby letter of credit, issued in support
of a fleet leasing arrangement for the Company's U.K. operation. The beneficiary
has not drawn on this letter of credit. As this cash has been pledged as
collateral, it was restricted from use for general purposes and was classified
accordingly in the Condensed Consolidated Balance Sheet as of June 30, 2002.
On May 24, 2002 the Company received $15.0 million as an initial advance
under its new secured line of credit with Foothill Capital Corporation
("Foothill"), in accordance with the credit agreement. It is the intent of the
Company and Foothill that this initial advance will be repaid with accrued
interest on August 24, 2002 and will not be available to the Company for any
purpose. Accordingly, this cash has been classified as restricted and the
related borrowing is not considered a draw against the Company's borrowing
availability under the line of credit.
6. Note Receivable:
On April 26, 2002, the Company was notified by Cellegy Pharmaceuticals,
Inc. ("Cellegy") of its withdrawal of the New Drug Application for Cellegesic(R)
with the U.S. Food & Drug Administration ("FDA"). Cellegy decided to withdraw
the application after meetings with the FDA indicated that additional
information would be required before the FDA would grant marketing clearance of
Cellegesic(R) in the United States. The Company, through its Ventiv
Integration Solutions ("VIS") business and another wholly-owned subsidiary, had
entered into a contract with Cellegy to provide funding and services in support
of the commercialization of the Cellegesic(R) product. Following Cellegy's
announcement, management provided a valuation allowance of $0.8 million or 50%
of the amounts due to be advanced as of that date. Cellegy has curtailed
expenditures relating to this commercialization effort, and funding has been
suspended pending the outcome of further discussions between Cellegy and the
FDA.
7. Stock Incentive Plan:
On May 1, 2002, the Company filed a Schedule TO with the U.S. Securities
and Exchange Commission, relating to the commencement of an offer to exchange
stock options held by employees and consultants under the Company's 1999 Stock
Incentive Plan (the "Stock Plan"). At the election of the holders, unexercised
options may be surrendered for new option awards to be issued on or about
December 2, 2002, at a price equal to the greater of $4 or the then current
market value of the Company's common stock as listed on the NASDAQ. The
replacement options will be granted only to holders who elect to participate in
the exchange offer and are employees or are consultants to the Company on the
date the replacement options are issued. The Company has initiated this offer in
order to provide better performance incentives for its key employees and
consultants, in an effort to increase retention of these individuals. Options to
purchase up to approximately 2.4 million shares were eligible for exchange, of
which 1.3 million were tendered.
8. Comprehensive Earnings:
SFAS No. 130, "Reporting Comprehensive Income", became effective in 1998.
This statement established standards for reporting comprehensive income in
financial statements. Comprehensive income reports the effect on net income of
transactions that are related to equity of the Company, but that have not been
transacted directly with the Company's shareholders. This statement only
modifies disclosures, including financial statement disclosures, and does not
result in other changes to the reported results of operations or financial
position of the Company.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
(in thousands)
Net earnings .................................................... $ (109) $2,185 $ 297 $3,555
Other comprehensive earnings (losses), net of tax:
Foreign currency translation adjustments ................... 1,655 (1,754) 1,345 (2,652)
------- ------ ------ ------
Comprehensive earnings .......................................... $ 1,546 $ 431 $1,642 $ 903
======= ====== ====== ======
6
9. Capital Lease Obligations:
During 2000, the Company entered into a master lease agreement to provide a
fleet of automobiles for sales representatives of its Contract Sales and
Services business unit. Based on the terms of the agreement, management
concluded that the leases were capital in nature based on the criteria
established by Statement of Financial Accounting Standards No. 13, "Accounting
for Leases". The Company capitalized leased vehicles and recorded the related
lease obligations totaling approximately $1.4 million and $5.0 million during
the six-month periods ended June 30, 2002 and 2001, respectively.
10. Discontinued and Held for Sale Operations:
Based on historical performance and as outcomes of strategic initiatives to
better focus the Company on its core capabilities and operating segments, in
September 2001 and April 2002, respectively, the Company's Board of Directors
approved plans to divest the net assets of its Stamford, Connecticut and
Alpharetta, Georgia-based business units within the Company's Communications
operating segment. The Company completed the sale of its Stamford,
Connecticut-based business unit on May 7, 2002 and the Alpharetta, Georgia-based
business unit on June 3, 2002. The losses recognized on the sales of these two
business units have been classified, net of taxes, in "losses on disposals of
discontinued operations" in the accompanying statements of earnings for the
three- and six-month periods ended June 30, 2002 and 2001, respectively.
Based on the results of management's ongoing strategic assessment of the
business, in June 2002, the Company's Board of Directors authorized management
to evaluate the potential sale of the business units comprising its European
Contract Sales operating segment. In connection with this process and
evaluation, the Company is in advanced discussions and negotiations with respect
to the potential sale of certain business units within its European Contract
Sales operating segment. Any such transactions would be subject to legal and
financial due diligence, regulatory review and approval (if necessary) and final
negotiation of terms and conditions. Based on the Company's current status, the
assets and liabilities of its European operating segment have been classified as
held for sale in the accompanying condensed consolidated financial statements.
Operating results for the three- and six-month periods ended June 30, 2002
and 2001 from the two divested entities, as well as the European Contract Sales
operating segment, have been reflected in the results from discontinued and held
for sale operations section of the accompanying statements of earnings. All
assets and liabilities specifically related to divested business units and the
European operating segment have been classified as held for sale in the
accompanying consolidated balance sheets as of June 30, 2002 and December 31,
2001.
Below is a summary of the results of these operations:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited)
(in thousands)
Results from discontinued operations:
Revenue ......................................... $ 25,997 $ 30,940 $ 53,807 $ 61,190
======== ======== ======== ========
(Losses) earnings before income taxes ........... $ (3,186) $ 683 $ (4,093) $ 499
Benefit from (provision for) income taxes ....... 6,631 (162) 6,814 (204)
-------- -------- -------- --------
Net earnings from discontinued operations ....... 3,445 521 2,721 295
-------- -------- -------- --------
Losses on disposals of discontinued operations:
Losses on disposals of discontinued operations .. $ (3,375) ----- $ (3,375) -----
Provision for income taxes ...................... (1,438) ----- (1,438) -----
-------- -------- -------- --------
Net losses on disposals of discontinued
operations (4,813) ----- (4,813) -----
-------- -------- -------- --------
Net results from discontinued operations ............. ($ 1,368) $ 521 ($ 2,092) $ 295
======== ======== ======== ========
Effective May 7, 2002, the Company entered into a definitive purchase and sale
agreement, completing the sale of substantially all of the net assets of its
Stamford, Connecticut-based business unit to Discovery East, LLC, a
majority-owned subsidiary of Bcom3 Group, Inc.'s Medicus business unit, a
leading provider of medical education and communications services. In
consideration for the sale, the Company received approximately $3.4 million in
cash together with a note receivable in the amount of $550,000, due on February
3, 2003 and guaranteed by Bcom3 Group, Inc. In addition, the Company completed
the sale of substantially all of the net assets of its Alpharetta, Georgia-based
business unit to a management group of that business unit on June 3, 2002. The
Company received $0.9 million of cash at closing for the sale of this business
unit and will be entitled to contingent payments in each year commencing with
2003 based on a percentage of EBITDA for the business unit up to a maximum of
$0.5 million for all such contingent payments. Total losses on the
7
disposals of these businesses of $4.8 million, net of tax, were recorded in the
second quarter of 2002. These losses included a charge of $7.5 million for the
writedown of goodwill related to the Alpharetta, Georgia-based business unit.
Operating results from the European Contract Sales operating segment
currently held for sale, as well as the operations of the Stamford, Connecticut
and Alpharetta, Georgia-based business units up to the dates of their
divestitures have been included in losses from discontinued operations for all
periods presented. Results from discontinued and held for sale operations were a
loss of $2.0 million and earnings of $0.5 million, net of tax, for the
three-month periods ending June 30, 2002 and 2001, respectively. In addition,
the Company recorded an estimated $5.4 million tax benefit for carryback
deductions relating to the disposal of the Stamford, Connecticut-based business
unit. In connection with the sale and wind-down of their operation, the Company
recorded a $2.5 million charge for remaining real estate obligations associated
with that business. Results from discontinued operations were a loss of $2.7
million and earnings of $0.3 million, net of tax, for the six-month periods
ending June 30, 2002 and 2001, respectively. The three and six-month operating
results also included the aforementioned $5.4 million tax benefit.
8
VENTIV HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment Information:
During the fourth quarter of 2001, the Company evaluated its internal
reporting practices and identified reportable segments based on its current
management structure. The Company now segregates reportable segments, based on
products and services offered, into the following three operating segments:
Contract Sales and Services, Planning and Analytics, and Other (including Ventiv
Integrated Solutions and corporate operations). Management measures operating
performance of the business segments based on operating income before
restructuring and other non-recurring charges.
As detailed in Note 10 to these condensed consolidated financial
statements, the Company's European Contract Sales operating segment is now being
classified as held for sale. Further, the Company's Colorado-based marketing
support services business unit, Promotech Research Associates, Inc.
("Promotech"), previously considered and classified as part of the
Communications operating segment, has been operationally merged with its U.S.
Contract Sales business unit. Together, these businesses now constitute the
Company's Contract Sales and Services operating segment.
The following presents information about the reported segments:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
(in thousands) (in thousands)
Revenue:
Contract Sales and Services ........... $42,079 $65,752 $105,250 $134,068
Planning and Analytics ................ 6,462 6,502 12,655 12,785
Other ................................. 228 --- 732 ---
-------- -------- -------- --------
Total revenue .............. $48,769 $72,254 $118,637 $146,853
======= ======= ======== ========
Operating earnings:
Contract Sales and Services ........... $ 3,729 $ 6,084 $ 7,293 $ 11,883
Planning and Analytics ................ 1,057 716 2,389 1,432
Other ................................. (2,504) (2,749) (5,198) (5,348)
-------- -------- -------- --------
$ 2,282 $ 4,051 $ 4,484 $ 7,967
======== ======= ======== ========
June 30, December 31,
-------- ------------
2002 2001
---- ----
(in thousands)
(unaudited)
Total Assets:
Contract Sales and Services ........... $ 81,319 $101,535
Planning and Analytics ................ 18,555 21,939
Other ................................. 42,185 56,483
-------- --------
142,059 179,957
Assets held for sale .................. 38,055 55,612
-------- --------
Total assets .......................... $180,114 $235,569
======== ========
Below is a reconciliation of total segment operating earnings before
restructuring and other non-recurring charges to earnings from continuing
operations before income taxes:
9
VENTIV HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
(in thousands) (in thousands)
Operating earnings from segments ...... $ 2,282 $ 4,051 $ 4,484 $ 7,967
Interest expense ...................... (217) (953) (811) (1,926)
Investment income ..................... 95 50 180 195
Loss on investment in equity of
non-affiliates ...................... -- -- -- (500)
-------- -------- -------- --------
Earnings from continuing operations
before income taxes .............. $ 2,160 $ 3,148 $ 3,853 $ 5,736
======== ======== ======== ========
The Company's continuing operations are conducted principally in the United
States, primarily with U.S.-based clients and companies.
Note 12. Committments and Contingencies:
From time to time we are involved in litigation incidental to our business.
In our opinion, no pending or threatened litigation of which we are aware has
had or is expected to have a material adverse effect on our results of
operations, financial condition or liquidity.
In June 2001, Christian Levistre commenced an arbitration proceeding
against the Company before the International Chamber of Commerce arising from
the acquisition by the Company's predecessor of two healthcare marketing
businesses, one of which was wholly owned and one of which was partially owned
by Mr. Levistre. Mr. Levistre has asserted claims in the arbitration for (i)
payment of the remaining 10% of the sales price for the businesses, which amount
(originally consisting of shares of Snyder Communications, Inc. common stock)
was retained in escrow under the terms of the acquisition, as subsequently
amended by a settlement agreement between the parties, (ii) amounts arising from
the termination of his employment with Ventiv Health France under the terms of
the settlement agreement, (iii) payment of a price adjustment to the sale price
of the escrowed shares, (iv) financial prejudice arising from the decline in
value of the escrowed portion of the purchase price for the acquired businesses
and (v) improper resistance. The Company has asserted that Mr. Levistre violated
his contractual obligations under the relevant agreements and has requested the
retention of the escrowed securities and the stay of the arbitration proceedings
pending resolution of separate claims made by one of the Company's French
subsidiaries relating to unfair competition and related claims in the French
courts. The Company intends to defend the arbitration claims vigorously and
believes it has meritorious defenses.
10
VENTIV HEALTH, INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Ventiv Health, Inc. ("Ventiv" or "the Company") is a leading provider of
comprehensive outsourced marketing and sales solutions for the pharmaceutical,
biotechnology and life sciences industries. The Company offers a broad range of
integrated services, in a context of consultative partnership that identifies
strategic goals and applies targeted, tailored solutions. The portfolio of
offerings includes: consulting, analytics and forecasting; market research and
intelligence; strategic and tactical planning; telemarketing and other marketing
support services; product/brand management; recruitment and training services;
and sales execution. Ventiv's businesses provide a broad range of innovative
strategic and tactical solutions to their clients, including the majority of the
world's leading pharmaceutical, biotechnology and life sciences companies.
The following information should be read in conjunction with the condensed
consolidated financial statements, accompanying notes and other financial
information included in this Quarterly Report on Form 10-Q and in the Company's
most recent Annual Reports on Form 10-K and Form 10-K/A for the year ended
December 31, 2001.
Private Securities Litigation Reform Act of 1995--A Caution Concerning
Forward-Looking Statements
Any statement made in this Quarterly Report on Form 10-Q that deals with
information that is not historical, such as statements concerning our
anticipated financial results, are forward-looking statements. We wish to
caution readers not to place undo reliance on any of these forward-looking
statements, which speak only as of the date made. Such forward-looking
statements involve known and unknown risks that may cause the Company's
performance to differ materially from the results expressed in our periodic
reports and registration statements filed with the Securities and Exchange
Commission, our press releases or other public communications. Such risks
include, but are not limited to: changes in trends in the pharmaceutical
industry or in pharmaceutical outsourcing; our ability to compete successfully
with other services in the market; our ability to maintain large client
contracts or to enter into new contracts; uncertainties related to future
incentive payments and earnings under revenue sharing arrangements; and our
ability to operate and compete successfully in new lines of business.
Accounting Policies, Estimates and Risks
The Company's significant accounting policies are set forth in Note 2 to
the Consolidated Financial Statements included in its Annual Report on Form 10-K
for the year ended December 31, 2001. There have been no changes, updates or
revisions to the Company's significant accounting policies subsequent to the
filing of its prior year-end Form 10-K.
Overview
The Company provides integrated marketing services for its clients,
primarily pharmaceutical, biotechnology and life sciences companies. The Company
currently conducts its continuing operations in the United States ("U.S."),
serving U.S. companies and domestic affiliates of foreign corporations. The
Company is organized into operating segments based on products and services
offered. Ventiv's services are designed to develop, execute and monitor
strategic and tactical sales and marketing plans and programs for the promotion
of pharmaceutical biotechnology and other life sciences products. The Company is
currently organized into three business segments, based on products and services
offered, as follows: Contract Sales and Services, Planning and Analytics and
Other (which includes Ventiv Integrated Solutions ("VIS") and corporate
operations).
Recent Business Developments
In February 2002, the Company was notified by Reliant Pharmaceuticals, Inc.
("Reliant") of their intent to convert the field sales force working under the
Ventiv-Reliant contract from full-time Ventiv employment to full-time Reliant
employment effective April 1, 2002. The Ventiv-Reliant contract, which commenced
on August 1, 2000, provided Reliant with the option to convert all or a portion
of the field sales force to Reliant employment at any time. Revenues from this
client relationship represented 18.2% and 21.7% of the Company's revenues for
the six-month period ended June 30, 2002 and twelve-month period ended December
31, 2001, respectively. As a consequence of the conversion, Ventiv has not
received revenues for contract sales services under the Ventiv-Reliant contract
since March 31, 2002.
On April 26, 2002, the Company was notified by Cellegy Pharmaceuticals,
Inc. ("Cellegy") of its withdrawal of the New Drug Application for Cellegesic
(R) with the U.S. Food & Drug Administration ("FDA"). Cellegy decided to
withdraw the application after meetings with the FDA indicated that additional
information would be required before the FDA would grant
11
marketing clearance of Cellegesic(R) in the United States. The Company, through
VIS and another wholly-owned subsidiary, had entered into a contract with
Cellegy to provide funding and services in support of the commercialization of
the Cellegesic(R) product. Following Cellegy's announcement, management provided
a valuation allowance of $0.8 million or 50% of the amounts to be advanced and
approved for funding as of that date. Cellegy has curtailed expenditures
relating to this commercialization effort, and funding has been suspended
pending the outcome of further discussions between Cellegy and the FDA.
Effective May 15, 2002, the Company's contract sales agreement with Bayer
has been amended and restated to provide for (i) a new fixed fee structure for
services rendered from May 15, 2002 to the end of the promotion term, and (ii)
an extension of the promotion term end date from May 31, 2003 to December 31,
2003, with an option beginning May 31, 2003 for Bayer to reduce the size of the
Company's sales force and related compensation. Under the original terms of the
Bayer agreement and through May 14, 2002, the Company received certain fees that
covered a substantial portion, but not all of the Company's costs of services
relating to this engagement. See "Results of Operations" below.
Based on historical performance and as outcomes of a strategic initiative
to better focus the Company on its core capabilities and operating segments, in
September 2001 and April 2002, respectively, the Company's Board of Directors
approved plans to divest the net assets of its Stamford, Connecticut and
Alpharetta, Georgia-based business units of the Company's Communications
operating segment. The Company completed the sale of the Stamford,
Connecticut-based business unit on May 7, 2002, and the Alpharetta,
Georgia-based business unit on June 3, 2002.
Based on the results of management's ongoing strategic assessment of the
business, in June 2002, the Company's Board of Directors authorized management
to evaluate the potential sale of the business units comprising its European
Contract Sales operating segment. The Company is in advanced discussions and
negotiations with respect to the potential sale of certain business units within
its European Contract Sales operating segment in connection with this process
and evaluation. Any such transactions would be subject to legal and financial
due diligence, regulatory review and approval (if necessary) and final
negotiation of terms and conditions. Based on the Company's current status, the
assets and liabilities of its European Contract Sales operating segment have
been classified as held for sale in the accompanying condensed consolidated
financial statements.
The Company's Colorado-based marketing support services business unit,
Promotech Research Associates, Inc. ("Promotech"), previously considered and
classified as part of the Communications operating segment, has been
operationally merged with its U.S. Contract Sales business unit. Together, these
businesses now constitute the Company's Contract Sales and Services segment.
Results of Operations
The following sets forth, for the periods indicated, certain components of
Ventiv's condensed consolidated statements of earnings, including such data as a
percentage of revenues.
($'s in 000's) For the three months ended
June 30,
2002 2001
---- ----
(in thousands)
(unaudited)
Revenues $48,769 100.0 % $72,254 100.0 %
Operating expenses
Costs of services 39,825 81.7 % 59,854 82.8 %
Selling, general and administrative
expenses 6,662 13.7 % 8,349 11.6 %
------- ----- ------- -----
Operating earnings 2,282 4.7 % 4,051 5.6 %
Interest expense (217) (0.4) % (953) (1.3) %
Investment income 95 0.2 % 50 0.1 %
------- ----- ------- -----
Earnings from continuing operations
before income taxes 2,160 4.4 % 3,148 4.4 %
Provision for income taxes 901 1.8 % 1,484 2.1 %
------- ----- ------- -----
Net earnings from continuing operations 1,259 2.6 % 1,664 2.3 %
12
Earnings (losses) from discontinued and held for sale
operations:
Results of discontinued operations, net of taxes (1,955) (4.1)% 521 0.7 %
Losses on disposals of discontinued and
held for sale operations, net of taxes (4,813) (9.9)% -- -- %
Tax benefits related to disposal of 5,400 11.1 % -- -- %
discontinued operation
------- ----- ------- -----
Net earnings (losses) from discontinued and held for
sale operations (1,368) (2.8)% 521 0.7 %
------- ----- ------- -----
Net earnings (losses) ($109) (0.2)% $2,185 3.0 %
======= ===== ======= =====
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues: Revenues decreased by approximately $23.5 million, or 32.5%, to
$48.8 million in the three-month period ended June 30, 2002, from $72.3 million
in the three months ended June 30, 2001.
Revenues in our Contract Sales and Services business unit were $42.1
million, a decrease of $23.8 million or 36.8% from $65.8 million in the same
period in 2001, and accounted for 86.3% of total Ventiv revenues for the three
months ended June 30, 2002. This decrease resulted primarily from the conversion
of the Reliant field force on March 31, 2002 from full-time Ventiv employees to
full-time Reliant employees and the completion of Ventiv's contract with
Bristol-Myers Squibb effective March 31. These reductions in revenues were
partially offset by increased revenues generated through continuing business
with Bayer as well as several other new and expanded contracts that were
consummated subsequent to the second quarter of 2001.
Our Planning and Analytics business, Health Products Research ("HPR"),
generated revenues of $6.5 million in each of the three-month periods ended June
30, 2002 and 2001. HPR revenues represented 13.3% of total Company revenues in
the second quarter of 2002. Increased business with Abbott Laboratories and
Astra Zeneca was offset by decreases with Bristol-Myers Squibb and Ortho McNeil.
Costs of Services: Costs of services decreased by approximately $20.1
million or 33.5%, to $39.8 million this fiscal quarter from $59.9 million in the
three-month period ending June 30, 2001. Costs of services decreased as a
percentage of revenues to 81.7% from 82.8% in the three-month periods ended June
30, 2002 and 2001, respectively.
Costs of services in the Contract Sales and Services business unit
decreased by approximately $20.4 million, or 36.6%, to $35.4 million in 2002
from $55.9 million in 2001. Costs of services were 84.2% of revenue in 2002
compared to 84.9% in 2001. The decrease is cost of sales is consistent with the
decrease in Contract Sales and Services revenue for the three months ended June
30, 2002 as compared to the same period in 2001.
In the fourth quarter of 2001, the Company recorded a reserve of
approximately $6.1 million for estimated cumulative losses under the original
Bayer agreement through May 14, 2002, under the assumption that Ventiv would
elect to not continue under the original contract on a loss basis beyond
May 14, 2002, which was the first date that Ventiv could exercise its right to
terminate the contract. As a result of the amendment and restatement of the
agreement effective May 15, 2002, the Company reduced its cumulative loss
estimate by $2.4 million, which positively impacted Ventiv's profit margins in
the second quarter of 2002.
HPR's costs of services were $4.1 million for 2002, an increase of $0.2
million or 5.2%, from $3.9 million in 2001. Costs of services represented 64.2%
of revenue in 2002 compared to 60.7% in 2001. The increase as a percent of
revenue was due primarily to a change in the mix of services sold.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses decreased by approximately $1.7 million, or
20.2%, to $6.7 million from $8.3 million in the three month periods ending June
30, 2002 and 2001, respectively. SG&A expenses increased as a percentage of
revenue to 13.7% for the three months ending June 30, 2002 from 11.6% for the
three months ending June 30, 2001. SG&A as a whole decreased by $0.4 million as
a result of the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective January 1, 2002
and various cost saving measures taken in the second half of 2001 to streamline
the Company's operations.
SG&A expenses in the Contract Sales and Services business unit decreased by
approximately $0.9 million or 23.6% to $2.9 million at June 30, 2002 from $3.8
million at June 30, 2001. This decrease is primarily due to restructuring
actions taken during the third quarter of 2001, together with aforementioned
$0.4 million decrease in amortization of goodwill pursuant to SFAS 142. All
remaining unamortized goodwill is attributable to the businesses comprising this
operating segment.
13
SG&A expenses at HPR decreased by approximately $0.6 million or 31.8% to
$1.3 million for the three-month period ended June 30, 2002 from $1.8 million
for the three-month period ended June 30, 2001. The decrease is due to a
reduction of cost in the compensation and benefits to employees, resulting from
turnover involving some higher-level management positions.
SG&A for the Other business segment was approximately $2.5 million for the
three months ending June 30, 2002, a decrease of approximately $0.2 million or
7.4% from $2.7 million for the three months ending June 30, 2001. The decrease
was driven by cost savings at corporate which resulted from the restructuring
actions taken in the third quarter of 2001. This decrease was partially offset
by the effect of a valuation allowance of $0.4 million recorded on the note
receivable relating to cumulative funding and funding commitments net of prior
reserves (through June 30, 2002) of the Cellegesic(R) product's
commercialization effort. Since Cellegy's announcement, management has provided
a valuation allowance of 50% of all amounts due to be funded under the
arrangement as of that date, which resulted in a reserve of approximately $0.4
million in the second quarter of 2002. Cellegy has curtailed expenditures
relating to this commercialization effort, and funding has been suspended
pending the outcome of further discussions between Cellegy and the FDA.
Interest Expense: Ventiv recorded $0.2 million and $1.0 million of interest
expense in the three-months ended June 30, 2002 and 2001, respectively. Interest
expense decreased in 2002 as a result of the Company's repayment of the $35.0
million outstanding under its prior line of credit and reflects the effect of
lower overall interest rates in 2002. The Company incurred $0.1 million and $0.2
million of interest expense related to payments made under the capital lease
arrangement for its U.S. Sales business unit's automobile fleet, in the
three-month periods ended June 30, 2002 and 2001, respectively.
Investment Income: Ventiv recorded approximately $0.1 million of investment
income in each of the three month periods ended June 30, 2002 and 2001.
Investment income is primarily driven by average amounts of cash and cash
equivalents available for investment and the prevailing short-term interest
rates during these periods.
Provision for Income Taxes: Ventiv recorded a provision for income taxes on
continuing operations using estimated effective tax rates of 41.7% and 47.1% for
the three-month periods ended June 30, 2002 and 2001, respectively. The
difference in the rate is primarily the result of a shift in the expected
distribution of earnings across the Company's various business units and legal
entities and reflects adjustments for a change in the estimated effective rate
for the year ending December 31, 2002 to 38%. Results of discontinued and held
for sale operations have been shown net of tax, reflecting a benefit from income
taxes in the second quarter of 2002 at an effective tax rate of 38.6% and a
provision for income taxes in the second quarter of 2001 at an effective tax
rate of 23.7%. An estimated provision for taxes on the losses on disposals of
discontinued operations, exclusive of the $7.5 million goodwill write-down (for
which there was no tax benefit as it was non-deductible for tax purposes), has
been recorded at a rate of 35.0%. In addition, the Company recorded an estimated
tax benefit of $5.4 million for carryback deductions related to the disposal of
the Stamford, Connecticut-based business unit in the second quarter of 2002.
Discontinued Operations: Effective May 7, 2002, the Company entered into a
definitive purchase and sale agreement, completing the sale of substantially all
of the net assets of its Stamford, Connecticut-based business unit to Discovery
East, LLC, a majority-owned subsidiary of Bcom3 Group, Inc.'s ("Bcom3") Medicus
business unit, a leading provider of medical education and communications
services. In consideration for the sale, the Company received approximately $3.4
million in cash together with a note receivable in the amount of $550,000, due
on February 3, 2003 and guaranteed by Bcom3 Group, Inc. In addition, the Company
completed the sale of substantially all of the net assets of its Alpharetta,
Georgia-based business unit to a management group of that business unit on June
3, 2002. The Company received $0.9 million of cash at closing for the sale of
this business unit and will be entitled to contingent payments in each year
commencing with 2003 based on a percentage of EBITDA for the business unit up to
a maximum of $0.5 million for all such contingent payments. Total losses on the
disposals of these businesses of $4.8 million, net of tax, were recorded in the
second quarter of 2002. These losses included a charge of $7.5 million for the
writedown of goodwill related to the Alpharetta, Georgia-based business unit.
Refer to the "Recent Business Developments" section above for further
information.
Operating results from the European Contract Sales operating segment
currently held for sale, as well as the operations of the Stamford, Connecticut
and Alpharetta, Georgia-based business units up to the dates of their
divestitures, have been included in losses from discontinued and held for sale
operations for all periods presented. Results from discontinued and held for
sale operations were a loss of $2.0 million and earnings of $0.5 million, net of
tax, for the three-month periods ending June 30, 2002 and 2001, respectively. In
addition, the Company recorded a $5.4 million tax benefit arising from the sale
of the Stamford, Connecticut-based business unit.
Net Earnings and Earnings Per Share ("EPS"): Ventiv's net earnings
decreased by approximately $2.3 million to a loss of $0.1 million, from earnings
of $2.2 million, in the three months ended June 30, 2002 and 2001, respectively.
Diluted earnings per share decreased to break-even for the three-month period
ending June 30, 2002 from earnings of $0.09 for the three-month period ending
June 30, 2001. Losses from the sale of the two aforementioned business units and
slightly lower average margins in certain business units resulted in the
decrease in net earnings, as more fully explained above.
14
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
($'s in 000's) For the six months ended
June 30,
2002 2001
---- ----
(in thousands)
(unaudited)
Revenues $118,637 100.0 % $146,853 100.0 %
Operating expenses
Costs of services 100,841 85.0 % 122,205 83.2 %
Selling, general and administrative 13,312 11.2 % 16,681 11.4 %
-------- ----- -------- -----
expenses
Operating earnings 4,484 3.8 % 7,967 5.4 %
Interest expense (811) (0.7)% (1,926) (1.3)%
Investment income 180 0.2 % 195 0.1 %
Loss on investment in equity of
non-affiliates -- -- % (500) (0.3)%
-------- ----- -------- -----
Earnings from continuing operations 3,853 3.2 % 5,736 3.9 %
before income taxes
Provision for income taxes 1,464 1.2 % 2,476 1.7 %
-------- ----- -------- -----
Net earnings from continuing operations 2,389 2.0 % 3,260 2.2 %
-------- ----- -------- -----
Results from discontinued and held for sale operations:
Results of operations, net of taxes (2,679) (2.3)% 295 0.2 %
Losses on disposals of discontinued
operations, net of taxes (4,813) (4.1)% -- - %
Tax benefits related to disposal of
discontinued operation 5,400 4.6 % -- - %
-------- ----- -------- -----
Net earnings (losses) from discontinued
and held for sale operations (2,092) (1.8)% 295 0.2 %
-------- ----- -------- -----
Net earnings $ 297 0.2 % $ 3,555 2.4 %
======== ===== ======== =====
Revenues: Revenues decreased by approximately $28.2 million, or 19.2%, to
$118.6 million in the six-month period ended June 30, 2002, from $146.9 million
in the six-month period ended June 30, 2001.
Revenues from the Contract Sales and Services business were $105.3 million,
a decrease of 21.5% from $134.1 in the first half of 2001, and accounted for
88.7% of Ventiv's total revenues for the six months ended June 30, 2002. This
revenue decrease was driven primarily by the conversion of the Reliant field
force in the second quarter of 2002, the conversion of the Novo Nordisk field
force in the second quarter of 2001 and the completion of the Bristol-Myers
Squibb contract as of March 31, 2002. These decreases were partially offset by
revenues from a full quarter of operations on the Bayer contract and new and
expanded contracts with several other clients. Contract Sales and Services'
revenues and operating income included incentive fees of approximately $0.1
million and $2.1 million for the six months ended June 30, 2002 and 2001,
respectively.
Health Products Research revenues represented 10.7% of total revenues for
the six-month period ended June 30, 2002. Revenues for this business unit were
approximately $12.7 million, a decrease of $0.1 million from the $12.8 million
recorded in the six-month period ended June 30, 2001. The slight decrease was a
result of a changing mix of clients during the first six months of 2002.
Costs of Services: Costs of services decreased by approximately $21.4
million, or 17.5%, to $100.8 million for the six-month period ended June 30,
2002 from $122.2 million in the six-month period ending June 30, 2001.
Contract Sales and Services reported costs of services of $92.4 million for
the six months ended June 30, 2002, a decrease of $22.0 million or 19.2% from
$114.4 million for the six months ended June 30, 2001. Costs of services as a
percentage of revenue increased to 87.8% for the first half of 2002 from 85.4%
for the first half of 2001, primarily due to the effect of incentive fees, which
accrue with no additional incremental costs to the Company, recognized in the
first six months of 2001. In the fourth quarter of 2001, the Company recorded a
reserve of approximately $6.1 million for estimated cumulative losses on the
original Bayer agreement through May 14, 2002, under the assumption that Ventiv
would elect to not continue under the original contract on a loss basis beyond
May 14, 2002, which was the first date that Ventiv could exercise its right to
terminate the contract. As a result of the amendment and restatement of the
agreement effective May 15, 2002, the Company reduced its cumulative loss
estimate by $2.4 million, which positively impacted the Company's profit margins
in the second quarter of 2002.
15
Health Products Research's costs of services were $7.7 million for both
six-month periods ended June 30, 2002 and 2001. Costs of services as a
percentage of revenue increased slightly in the first half of 2002 to 61.0% from
60.3% in the first half of 2001 as a result of a change in the mix of services
sold.
Other costs of services increased to $0.7 million for the period ended June
30, 2002 from $0.1 million for the period ended June 30, 2001 as a result of VIS
operations which are discussed in greater detail in the "Recent Business
Developments" section above.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased by approximately $3.4 million, or 20.2%, to
$13.3 million from $16.7 million in the six-month periods ended June 30, 2002
and 2001, respectively. Selling, general, and administrative expenses as a
percentage of revenues decreased to 11.2% from 11.7%. The decline as a
percentage of revenues is primarily the result of the elimination of goodwill
amortization expense in 2002 pursuant to SFAS 142, and various cost savings
measures taken in the latter half of 2001 to scale the operational units to
levels commensurate with decreased revenue levels.
SG&A expenses for the Contract Sales and Services business unit decreased
by $2.2 million to $5.5 million from $7.7 million for the six months ended June
30, 2002 and 2001, respectively. This decrease is primarily due to restructuring
actions taken during the third quarter of 2001 and other cost savings measures,
together with the discontinuance of amortization of goodwill pursuant to SFAS
142.
Health Products Research's SG&A expenses decreased by $1.0 million to
$2.6 million from $3.6 million in the six-month periods ended June 30, 2002 and
2001, respectively. The decrease is due to a reduction of cost in the
compensation and benefits to employees, resulting from turnover involving some
higher-level management positions.
Other SG&A expenses decreased slightly to $5.2 million in the first half of
2002 from $5.3 million in the first half of 2001. Savings derived from
restructuring efforts in the latter half of 2001 were offset by additional
reserves accrued relative to the Cellegy contract discussed in more detail in
the "Recent Business Developments" section above.
Interest Expense: Ventiv recorded $0.8 million and $1.9 million of interest
expense in the six months ended June 30, 2002 and 2001, respectively. Interest
expense decreased in 2002 as a result of the Company's repayment of the $35.0
million outstanding under its prior line of credit and reflects the effect of
lower overall interest rates in 2002. The Company incurred $0.2 million of
interest expense related to obligations under its capital lease arrangement for
the U.S. Sales automobile fleet in the first half of 2002 and $0.7 million for
the corresponding period in 2001. The decrease in auto fleet interest relates
primarily to a decrease in contracts which provided leased autos as well as
lower prevailing interest rates in 2002.
Investment Income: Ventiv recorded approximately $0.2 million of investment
income in each of the six-month periods ended June 30, 2002 and 2001. Investment
income is effected by average amounts of cash and equivalents available for
investment and the prevailing short-term interest rates during these periods.
Loss on investment in equity of non-affiliate: In the first quarter of
2001, one of our e-Health partners, HeliosHealth, Inc. ("Helios"), advised us of
their intent to effect a significant restructuring of their business. On May 8,
2001, Helios filed for protection under Chapter 7 of the U.S. Bankruptcy Code.
Accordingly, the Company wrote off its entire $0.5 million investment as of
March 31, 2001.
Provision for Income Taxes: Ventiv recorded provisions for income taxes on
continuing operations using estimated effective tax rates of 38% and 43% for the
six-month periods ended June 30, 2002, and 2001, respectively. The decrease in
the effective tax rate was primarily due to a shift in the expected distribution
of earnings across the Company's various business units and legal entities in
continuing operations. The Company's current effective tax rate is based on
current projections for earnings in each tax jurisdiction in which the Company
does business and is subject to taxation. The Company's effective tax rate could
fluctuate somewhat during the year, if the mix of earnings changes significantly
between operating entities and tax jurisdictions. Results of discontinued and
held for sale operations have been shown net of tax, exclusive of the $7.5
million goodwill write-down (for which there was no tax benefit as it was
non-deductible for tax purposes) reflecting a benefit from income taxes in the
first half of 2002 at an effective tax rate of 35.0% and a provision for income
taxes in the first half of 2001 at an estimated effective tax rate of 40.9%. An
estimated provision for taxes on the losses on disposal of discontinued
operations has been recorded at a rate of 35.0%. In addition, the Company
recorded an estimated tax benefit of $5.4 million for carryback deductions
related to the disposal of the Stamford, Connecticut-based business unit in the
second quarter of 2002.
Discontinued Operations: Effective May 7, 2002, the Company entered into
a definitive purchase and sale agreement, completing the sale of substantially
all of the net assets of its Stamford, Connecticut-based business unit to
Discovery East, LLC, a majority-owned subsidiary of Bcom3's Medicus business
unit, a leading provider of medical education and communications
16
services. In consideration for the sale, the Company received approximately $3.4
million in cash together with a note receivable in the amount of $550,000, due
on February 3, 2003 and guaranteed by Bcom3. In addition, the Company completed
the sale of substantially all of the net assets of its Alpharetta, Georgia-based
business unit to a management group of that business unit on June 3, 2002. The
Company received $0.9 million of cash at closing for the sale of this business
unit and will be entitled to contingent payments in each year commencing with
2003 based on a percentage of EBITDA for the business unit up to a maximum of
$0.5 million for all such contingent payments. Total losses on the disposals of
these businesses of $4.8 million, net of tax, were recorded in the second
quarter of 2002. As more fully explained above, included in those losses was a
$7.5 million dollars write-down of goodwill related to the Alpharetta,
Georgia-based business unit.
Operating results from the European Contract Sales operating segment
currently held for sale, as well as the operations of the Stamford, Connecticut
and Alpharetta, Georgia-based business units up to the dates of their
divestitures have been included in losses from discontinued and held for sale
operations for all periods presented. Results from discontinued and held for
sale operations were a loss of $2.7 million and earnings of $0.3 million, net of
tax, for the six-month periods ending June 30, 2002 and 2001, respectively. In
addition, the Company recorded a $5.4 million tax benefit arising from the sale
of the Stamford, Connecticut-based business unit.
Net Earnings and Earnings Per Share ("EPS"): Ventiv's net earnings
decreased by approximately $3.3 million to $0.3 million. Losses from the sale
of the two aforementioned business units and a decrease in incentive fees
recognized contributed to the decrease in net earnings, as more fully explained
above.
Liquidity and Capital Resources
At June 30, 2002, Ventiv had $27.3 million of unrestricted cash and cash
equivalents, a decrease of $8.1 million from December 31, 2001. For the
six-month periods ending June 30, 2002 compared to June 30, 2001, cash provided
by operations increased by $43.7 million from a use of $13.7 million to a source
of $30.0 million. Cash used in investing activities increased by $19.2 million
to $17.1 million, and cash used in financing activities decreased by $49.9
million from a source of $9.2 million in 2002 to a use of $40.7 million over the
same comparative periods.
Cash provided by operations was $30.0 million in the six-month period
ended June 30, 2002, as compared to a use of $13.7 million in 2001. This
increase was, in large part, due to the billing and collection of certain
payments due under the terms of the original Bayer agreement. Bayer paid the
Company $35.8 million in February 2002. The Company also had an overall
improvement in collections of outstanding billed accounts receivable. In
addition, there was a significant decrease in the amount of unbilled receivables
in 2002 as compared to 2001. This change was primarily attributable to changes
in the timing of billings and payments for services rendered under specific
contracts in the first quarter of 2001, most notably the BMS agreement.
Cash provided by investing activities was $17.1 million for the first
half of 2002 as compared to cash used in investing activities of $2.1 million
for the first half of 2001. This increase primarily resulted from the deposit of
proceeds from the short term advance under the Company's line of credit and the
net cash received from the disposal of our discontinued operating units.
Cash used in financing activities was $55.5 million, as compared to cash
provided by financing activities of $9.2 million for the six months ended June
30, 2002 and 2001, respectively. During the six months ended June 30, 2002, the
Company repaid the $35.0 million that was outstanding under its previous credit
facility (see below). During the same period last year, the Company borrowed
$11.0 against this credit facility, primarily to support operations. Subsequent
to the signing of a new credit agreement with Foothill, the Company received a
$15.0 million short term advance pursuant to this agreement which was treated as
restricted cash (see investing activities) as such cash will not be available to
the Company for any purpose. The Company plans to repay this draw on August 24,
2002 as per the credit agreement. In addition, the Company paid fees of
approximately $0.5 million in connection with this new credit facility,
effective as of March 29, 2002. These fees have been capitalized and will be
amortized over the three-year term of the agreement. Furthermore, the Company
commenced funding of the Cellegesic commercialization effort, pursuant to the
terms of VIS's agreement with Cellegy, for costs incurred in the pre-launch
phase. During the six-month period ending June 30, 2002, the Company advanced
approximately $0.8 million to Cellegy pursuant to the terms of the funding
arrangement. As a result of Cellegy withdrawing its application to the FDA for
their Cellegesic(R) product, the Company has recorded a valuation reserve of 50%
of the amounts advanced as of June 30, 2002. During the six-month periods ending
June 30, 2002 and 2001, the Company made capital lease payments of $3.5 million
and $3.7 million, respectively, under the fleet lease agreement in its Contract
Sales and Services business unit.
On December 1, 1999, Ventiv entered into a $50 million unsecured
revolving credit facility, expiring on December 1, 2003. At December 31, 2001,
the Company had $35.0 million outstanding under this line of credit with a
weighted average interest rate of 4.39%. Based on the Company's financial
results for the twelve-month period ending September 30, 2001, Ventiv was not in
compliance with certain covenants under this facility. Accordingly, all amounts
due under this facility were classified as current as of December 31, 2001. On
February 13, 2002, the Company repaid all amounts outstanding under this
facility. On March 29, 2002, the Company entered into a new asset-based lending
agreement with Foothill Capital Corporation ("FCC"), a wholly owned subsidiary
of Wells Fargo and Company. This new revolving credit facility provides for a
maximum borrowing amount of $50 million, subject to a borrowing base
calculation, on a revolving basis and is secured by substantially all of the
Company's assets. Interest on the new facility is payable at the Company's
option of a base rate (defined as the lending institution's prime rate) plus a
margin of up to 0.75% or LIBOR plus a margin ranging from 2.25% to 2.75%,
subject to a minimum borrowing rate of 4.75%. Under the facility, the Company
pays an unused commitment fee of 0.375%. The Company is also subject to certain
financial and other restrictive covenants, including, during
17
any period in which any amounts are outstanding under the credit agreement, a
requirement to maintain minimum levels of Earnings before Interest, Taxes,
Depreciation and Amortization ("EBITDA") and U.S. Earnings before Interest and
Taxes ("EBIT").
After consideration of certain significant customer payments received in
the first quarter of 2002, and the repayment of obligations due under the
original credit facility, we believe that we currently have adequate cash and
equivalents available for our operating needs. Accordingly, we believe that our
cash and equivalents, cash to be provided by operations and available credit
under our new credit facility will be sufficient to fund our current operating
requirements and planned capital expenditures over the next 12 months and for
the foreseeable future.
We plan to focus on internal growth in the near term as the primary
means of our expansion, although we may consider acquisition and investment
opportunities as they arise, to the extent permissible. Cash provided by
operations may not be sufficient to fund all internal growth initiatives that we
may wish to pursue. If we pursue significant internal growth initiatives or if
we wish to acquire additional businesses in transactions that include cash
payments as part of the purchase price, we may pursue additional debt or equity
sources to finance such transactions and activities, depending on market
conditions. In addition, the Company may consider divesting certain business
units in order to generate cash to support future growth initiatives. We cannot
assure you that we will be successful in raising the cash required to complete
all acquisition, investment or business opportunities which we may wish to
pursue in the future.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Company is evaluating the impact of the adoption of SFAS
No. 146, which is effective for the Company as of January 1, 2003, but does not
believe it will have a material impact on the Company's financial position or
results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in market interest
rates and foreign currency exchange rates. To the extent we have borrowings
outstanding under our credit facility at any given time, we are subject to
interest rate risk on our debt for changes in LIBOR and other contractual base
rates, and we are also subject to foreign currency exchange rate risk with
respect to our international operations. We do not currently engage in hedging
or other market risk management tools with respect to these exposures.
Foreign Currency Exchange Rate Exposure
Fluctuations in foreign currency exchange rates affect the reported
amounts of our assets, liabilities and operations. For purposes of quantifying
the risk associated with fluctuations in the foreign exchange rate, we assumed a
hypothetical 10% detrimental change in the exchange rates on our assets,
liabilities and revenue denominated in foreign currencies. A 10% fluctuation was
assumed for all exchange rates at June 30, 2002. The Company's material
exposures to foreign exchange rate fluctuations relate to the Euro and British
Pound. The table below presents the hypothetical impact of an assumed 10%
unfavorable change in all exchange rates to which we are exposed on total assets
and total liabilities held for sale, as well as on revenues of discontinued and
held for sale business.
18
10% Decrease in
Balance at Value of Local
June 30, Currencies to
2002 US Dollar
Total Assets Held for Sale $38,055 $34,250
Total Liabilities Held for Sale $21,619 $19,457
Revenues of Discontinued and Held
for Sale Operations $53,807 $49,300
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time we are involved in litigation incidental to our business.
In our opinion, no pending or threatened litigation of which we are aware has
had or is expected to have a material adverse effect on our results of
operations, financial condition or liquidity.
In June 2001 Christian Levistre commenced an arbitration proceeding
against the Company before the International Chamber of Commerce arising from
the acquisition by the Company's predecessor of two healthcare marketing
businesses, one of which was wholly owned and one of which was partially owned
by Mr. Levistre. Mr. Levistre has asserted claims in the arbitration for (i)
payment of the remaining 10% of the sales price for the businesses, which amount
(originally consisting of shares of Snyder Communications, Inc. common stock)
was retained in escrow under the terms of the acquisition, as subsequently
amended by a settlement agreement between the parties, (ii) amounts arising from
the termination of his employment with Ventiv Health France under the terms of
the settlement agreement, (iii) payment of a price adjustment to the sale price
of the escrowed shares, (iv) financial prejudice arising from the decline in
value of the escrowed portion of the purchase price for the acquired businesses
and (v) improper resistance. The Company has asserted that Mr. Levistre violated
his contractual obligations under the relevant agreements and has requested the
retention of the escrowed securities and the stay of the arbitration proceedings
pending resolution of separate claims made by one of the Company's French
subsidiaries relating to unfair competition and related claims in the French
courts. The Company intends to defend the arbitration claims vigorously and
believes it has meritorious defenses.
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ITEM 4. Submission of Matters to a Vote of Security Holders
At an annual meeting of the stockholders of the Company, held on June 19,
2001, the election of six directors was voted on by the stockholders, with the
following votes cast:
(i) Election of Directors For Withheld
Daniel M. Snyder [19,702,149] [346,315]
Eran Broshy [19,509,803] [538,664]
Fred Drasner [19,702,525] [345,989]
A. Clayton Perfall [19,667,598] [380,866]
Donald Conklin [19,702,575] [345,939]
John R. Harris [19,702,525] [345,989]
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Chief Executive Officer's Certification of Financial Statements
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer's Certification of Financial Statements
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K, filed as of July 19, 2002 and as amended on
July 20, 2002, Item 4, regarding the Company's change in certifying accountants
from Arthur Andersen LLP to Deloitte and Touche LLP.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENTIV HEALTH, INC.
Date: September 5, 2002 By: /s/ John R. Emery
--------------------------------
John R. Emery
Chief Financial Officer
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