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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 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 (IRS Employer
jurisdiction Identification No.)
of incorporation or
organization)
c/o Ventiv Health U.S. Sales LLC
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, 22,973,500 shares outstanding as of November
8, 2002.
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VENTIV HEALTH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
-----
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001 (unaudited).................... 1
Condensed Consolidated Statements of Operations for the three- and
nine-month periods ended September 30, 2002 and 2001 (unaudited). 2
Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2002 and 2001 (unaudited)............ 3
Notes to Condensed Consolidated Financial Statements............... 4-13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 14-25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 26
ITEM 4. Controls and Procedures...................................... 26
PART II. Other Information
ITEM 1. Legal Proceedings............................................ 27
ITEM 6. Exhibits and Reports on Form 8-K............................. 27
Signatures............................................................ 28
Certifications........................................................ 29-30
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents................................................................. $ 38,321 $ 35,427
Restricted cash...................................................................... 3,304 1,025
Accounts receivable, net of allowances for doubtful accounts of $1,031 and $988 at
September 30, 2002 and December 31, 2001, respectively.............................. 24,993 38,481
Note receivable...................................................................... 330 --
Unbilled services.................................................................... 15,553 42,480
Prepaid expenses and other current assets............................................ 2,452 1,047
Current deferred tax asset........................................................... 536 1,099
Assets of discontinued and held for sale operations.................................. 21,583 55,612
-------- --------
Total current assets.............................................................. 107,072 175,171
Property and equipment, net.............................................................. 17,265 30,542
Goodwill and other intangible assets, net................................................ 20,780 20,813
Deferred taxes and other non-current assets.............................................. 9,269 9,043
-------- --------
Total assets...................................................................... $154,386 $235,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit..................................................... $ -- $ 35,000
Current portion of capital lease obligations......................................... 3,758 8,516
Accrued payroll, accounts payable and accrued expenses............................... 28,396 34,922
Current income tax liabilities....................................................... 909 2,208
Client advances and unearned revenue................................................. 3,706 16,429
Liabilities of discontinued and held for sale operations............................. 16,654 30,389
-------- --------
Total current liabilities......................................................... 53,423 127,464
Capital lease obligations................................................................ 7,102 16,947
Other non-current liabilities............................................................ 183 137
-------- --------
Total liabilities................................................................. 60,708 144,548
-------- --------
Commitments and contingencies............................................................ -- --
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and
outstanding at September 30, 2002 and December 31, 2001............................. -- --
Common stock, $.001 par value, 50,000,000 shares authorized; 22,973,500 and
22,992,397 shares issued at September 30, 2002 and December 31, 2001,
respectively........................................................................ 23 23
Additional paid-in-capital........................................................... 154,146 157,864
Deferred compensation................................................................ (690) (1,275)
Accumulated other comprehensive losses............................................... (2,870) (4,063)
Accumulated deficit.................................................................. (56,931) (61,528)
-------- --------
Total stockholders' equity........................................................ 93,678 91,021
-------- --------
Total liabilities and stockholders' equity........................................ $154,386 $235,569
======== ========
See accompanying notes to condensed consolidated financial statements
1
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- ------------------
2002 2001 2002 2001
------- -------- -------- --------
(unaudited)
Revenues.......................................................... $46,888 $ 68,885 $165,525 $215,738
Operating expenses:
Costs of services.............................................. 38,642 65,213 139,483 187,419
Selling, general and administrative expenses................... 6,137 9,238 19,449 25,917
Restructuring costs............................................ -- 2,025 -- 2,025
Impairment of intangible assets................................ -- 14,811 -- 14,811
------- -------- -------- --------
Operating earnings (losses)....................................... 2,109 (22,402) 6,593 (14,434)
Interest expense.................................................. (614) (1,254) (1,425) (3,181)
Investment income................................................. 144 154 325 350
Loss on investment in equity of non-affiliate..................... -- -- -- (500)
------- -------- -------- --------
Earnings (losses) from continuing operations before income
taxes........................................................... 1,639 (23,502) 5,493 (17,765)
Provision for (benefit from) income taxes......................... 623 (7,973) 2,087 (5,497)
------- -------- -------- --------
Earnings (losses) from continuing operations...................... 1,016 (15,529) 3,406 (12,268)
------- -------- -------- --------
Earnings (losses) from discontinued and held for sale operations:
Losses from discontinued operations, net of taxes.............. (117) (42,545) (2,797) (42,250)
Gains (losses) on disposals of discontinued operations, net of
taxes........................................................ 3,400 (1,954) (1,412) (1,954)
Tax benefit arising from the disposal of a discontinued
operation.................................................... -- -- 5,400 --
------- -------- -------- --------
Earnings (losses) from discontinued and held for sale operations.. 3,283 (44,499) 1,191 (44,204)
------- -------- -------- --------
Net earnings (losses)............................................. $ 4,299 $(60,028) $ 4,597 $(56,472)
======= ======== ======== ========
Earnings (losses) per share (see Note 3):
Continuing operations:
Basic.......................................................... $ 0.04 $ (0.68) $ 0.15 $ (0.54)
======= ======== ======== ========
Diluted........................................................ $ 0.04 $ (0.68) $ 0.15 $ (0.54)
======= ======== ======== ========
Discontinued and held for sale operations:
Basic.......................................................... $ 0.15 (1.96) $ 0.05 (1.96)
======= ======== ======== ========
Diluted........................................................ $ 0.15 (1.96) $ 0.05 (1.96)
======= ======== ======== ========
Net earnings (losses):
Basic.......................................................... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
======= ======== ======== ========
Diluted........................................................ $ 0.19 $ (2.64) $ 0.20 $ (2.50)
======= ======== ======== ========
See accompanying notes to condensed consolidated financial statements
2
VENTIV HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months
Ended September 30,
------------------
2002 2001
-------- --------
(unaudited)
Cash flows from operating activities:
Net earnings (losses)................................................................................... $ 4,597 $(56,472)
Adjustments to reconcile net earnings (losses) to net cash provided by (used in) operating activities:
Earnings (losses) from discontinued and held for sale operations..................................... (1,191) 44,204
Depreciation......................................................................................... 6,795 8,385
Amortization......................................................................................... 33 1,384
Deferred taxes....................................................................................... 551 (8,335)
Losses on disposals of capital assets................................................................ 1 166
Impairment of intangible assets...................................................................... -- 14,811
Write-off of deferred financing costs................................................................ 314 --
Restricted stock vesting............................................................................. 435 724
Valuation allowance on note receivable............................................................... 722 --
Loss on investment in equity of non-affiliate........................................................ -- 500
Net changes in assets and liabilities:
Restricted cash...................................................................................... (1,279) 379
Accounts receivable, net............................................................................. 13,488 (12,210)
Unbilled services.................................................................................... 26,927 (13,517)
Current tax assets................................................................................... -- (586)
Prepaid expenses and other current assets............................................................ (1,632) (706)
Accrued payroll, accounts payable and accrued expenses............................................... (6,526) 6,435
Current tax liabilities.............................................................................. (1,624) --
Client advances and unearned revenue................................................................. (12,723) 9,168
Other................................................................................................ 89 214
-------- --------
Net cash provided by (used in) operating activities..................................................... 28,977 (5,456)
-------- --------
Cash flows from investing activities:
Capital expenditures................................................................................. (3,078) (3,426)
Proceeds from disposals of discontinued operations................................................... 10,370 --
Funding of product commercialization expenditures.................................................... (825) --
-------- --------
Net cash provided by (used in) investing activities..................................................... 6,467 (3,426)
-------- --------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit........................................................ (35,000) 16,000
Payments under capital lease obligations............................................................. (5,044) (3,845)
Collateralization of obligations under standby letter of credit...................................... (1,000) --
Financing costs for new credit facility.............................................................. (571) --
Proceeds from the exercise of stock options.......................................................... -- 2,205
-------- --------
Net cash (used in) provided by financing activities..................................................... (41,615) 14,360
-------- --------
Net cash provided by discontinued and held for sale operations............................................. 7,872 18,428
-------- --------
Effect of exchange rate changes on cash and equivalents.................................................... 1,193 (1,807)
-------- --------
Net increase in cash and equivalents....................................................................... 2,894 22,099
Cash and equivalents, beginning of period............................................................ 35,427 16,387
-------- --------
Cash and equivalents, end of period.................................................................. $ 38,321 $ 38,486
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest............................................................................... $ 1,240 $ 2,456
Cash paid for income taxes........................................................................... $ 492 $ 813
Supplemental disclosures of non-cash activities:
Vehicles acquired under capital lease arrangements................................................... $ 3,237 $ 11,059
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 financial reporting 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 or 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 September 30, 2002 and December 31, 2001, the results of operations of the
Company for the three- and nine-month periods ended September 30, 2002 and
2001, and cash flows of the Company for the nine-month periods ended September
30, 2002 and 2001. Operating results for the three- and nine-month periods
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
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
financial statements did not reflect the classification of certain businesses
as discontinued or held for sale operations (see Note 10). The condensed
consolidated balance sheet as of December 31, 2001 included herein has been
derived from the audited consolidated balance sheet included in the Company's
Annual Report on Form 10-K, in order to present this classification with
respect to all business units divested subsequent to that date or presently
held for sale.
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 its 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 September 30, 2002 and December 31, 2001 at a carrying
4
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amount of approximately $20.6 million. Selling, general & administrative
expense for the three and nine months ended September 30, 2001 includes
goodwill amortization of approximately $0.5 million and $1.4 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).The following table reconciles net income
amounts to calculate basic earnings per share ("EPS") and diluted earnings per
share had amortization expense related to goodwill not been recorded in prior
periods:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------
2002 2001 2002 2001
------ -------- ------ --------
(unaudited)
(in thousands, except per share data)
Reported net earnings (losses). $4,299 $(60,028) $4,597 $(56,472)
Add back: Goodwill amortization -- 457 -- 1,371
------ -------- ------ --------
Adjusted net earnings.......... $4,299 $(59,571) $4,597 $(55,101)
====== ======== ====== ========
Basic EPS:
Reported net earnings....... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
Goodwill amortization....... -- 0.02 -- 0.06
------ -------- ------ --------
Adjusted net earnings....... $ 0.19 $ (2.62) $ 0.20 $ (2.44)
====== ======== ====== ========
Diluted EPS:
Reported net earnings....... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
Goodwill amortization....... -- 0.02 -- 0.06
------ -------- ------ --------
Adjusted net earnings....... $ 0.19 $ (2.62) $ 0.20 $ (2.44)
====== ======== ====== ========
In the second quarter of 2002, management completed its initial analysis
under SFAS 142 and concluded that no current goodwill impairment charges were
necessary. 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. If an impairment loss is recorded, the adjusted carrying
amount of goodwill shall become the new accounting basis of such goodwill.
In September 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146)." SFAS 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 becomes effective 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.
5
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 EPS for the three- and nine-month periods
ended September 30, 2002 and 2001:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
2002 2001 2002 2001
------- -------- ------- --------
(in thousands, except per share data)
Basic EPS Computation:
Net earnings (losses)................................. $ 4,299 $(60,028) $ 4,597 $(56,472)
Weighted average common shares issued and outstanding. 22,828 22,703 22,826 22,591
------- -------- ------- --------
Basic EPS............................................. $ 0.19 $ (2.64) $ 0.20 $ (2.50)
======= ======== ======= ========
Diluted EPS Computation:
Net earnings (losses)................................. $ 4,299 $(60,028) $ 4,597 $(56,472)
Adjustments to net earnings (losses).................. -- -- -- --
------- -------- ------- --------
Adjusted net earnings (losses)........................ $ 4,299 $(60,028) $ 4,597 $(56,472)
======= ======== ======= ========
Diluted common shares outstanding:
Weighted average common shares outstanding............ 22,828 22,703 22,826 22,591
Stock options......................................... 2 n/a 4 n/a
Restricted stock awards............................... -- n/a -- n/a
------- -------- ------- --------
Total diluted common shares issued and outstanding.... 22,830 22,703 22,830 22,591
------- -------- ------- --------
Diluted EPS........................................... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
======= ======== ======= ========
Given the market price of the Company's Common Stock during the three and
nine month periods ended September 30, 2002 relative to the related grant date
prices, there were no common stock equivalents attributable to the Company's
outstanding restricted stock awards during those periods. Also, for the three
and nine month periods ended September 30, 2001, the computation of diluted EPS
excludes the effects of 433,000 and 712,000 shares from the assumed exercise of
employee stock options, and 148,000 and 177,000 shares relating to restricted
stock awards, respectively, as their effects on EPS were antidilutive.
4. Significant Clients:
During the nine-month period ended September 30, 2002, three clients, Bayer
Corporation ("Bayer"), Reliant Pharmaceuticals, Inc. ("Reliant") and Endo
Pharmaceuticals Holdings Inc. ("Endo") accounted for approximately 23.6%, 13.8%
and 12.2% of the Company's total revenue, respectively. For the nine-month
period ended September 30, 2001, three clients, Reliant, Bristol-Myers Squibb,
Inc. ("BMS") and Bayer accounted for 29.0%, 17.3% and 11.2%, respectively, of
the Company's total period revenue.
As of September 30, 2002 the Company had two clients, Endo and Reliant,
which accounted for 33.3% and 17.2%, respectively, of billed accounts
receivable. Also, Bayer and Abbott Laboratories accounted for 31.7% and 15.6%
of unbilled receivables as of September 30, 2002, respectively. As of September
30, 2001, the Company had two clients, Reliant and Endo, which accounted for
43.8% and 15.6%, respectively, of billed accounts receivable. The Company had
three clients, Bayer, BMS, and Reliant that accounted for 32.7%, 23.1%, and
18.7%, respectively, of unbilled receivables at September 30, 2001.
6
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ceased providing
contract sales services to Reliant as of March 31, 2002. In the third quarter,
the Company and Reliant commenced negotiations regarding final amounts due and
owing under the Reliant agreement. On October 9, 2002, the Company reached
final agreement with Reliant and received payment for all amounts due and
owing, as mutually agreed on that date. During the contract term, the Company
had deferred recognition of approximately $1.8 million of revenue to provide
for certain contingencies under the original Reliant agreement. In the course
of final negotiations, the Company agreed to approximately $0.7 million of
charge-backs and deductions relating to such contingencies. Accordingly,
revenue and operating income for the quarterly period ended September 30, 2002
reflect the recognition of $1.1 million of revenue and operating profit
previously deferred.
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. 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 $3.3 million and $1.0 million as of September 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 September 30,
2002. On May 23, 2002, the amount of standby letter of credit was reduced from
(Pounds)0.9 million to (Pounds)0.6 million, commensurate with the current
financial exposure to the U.K. fleet leasing agent. As a result of this
amendment, the Company was able to reduce the collateralization amount to $1.0
million. As a post-completion obligation, this standby letter of credit is to
be substituted or replaced by the acquirer of the U.K. business, United Drug
plc (see Note 10).
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 terms of the credit agreement. It was
7
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the intent of both the Company and Foothill that this initial advance be
repaid, together with accrued interest thereon, on or about August 24, 2002,
and that the funds would not be available to the Company for any purpose during
that time. Accordingly, this cash was classified as restricted while this
initial advance was outstanding. Per the terms of the credit agreement, the
related borrowing was not considered a draw against the Company's borrowing
availability under the line of credit. This initial advance was repaid,
together with accrued interest and fees of approximately $0.4 million, on
September 4, 2002.
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 approximately $0.8
million or 50% of the amounts due to be advanced as of that date. By mutual
agreement, Cellegy curtailed expenditures relating to this commercialization
effort, and funding was suspended pending the outcome of further discussions
between Cellegy and the FDA.
On September 30, 2002, the Company notified Cellegy of its intent to
exercise its rights to terminate this agreement, effective immediately. Both
Cellegy and the Company have agreed to such termination. The Company received
approximately $0.3 million from Cellegy on October 28, 2002 in full settlement
and satisfaction of Cellegy's contractual obligations for sharing of pre-launch
expenses. The Company had adequately provided for its shared portion of the
cumulative pre-launch expenses in the first and second quarters of 2002, based
on the amount of funding provided in each of those periods.
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 were permitted to 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 elected 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
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Nine Months
Ended September Ended September
30, 30,
---------------- ---------------
2002 2001 2002 2001
------ -------- ------ --------
(unaudited)
(in thousands)
Net earnings (losses)............................. $4,299 $(60,028) $4,597 $(56,472)
Other comprehensive earnings (losses), net of tax:
Foreign currency translation adjustments...... (152) 846 1,193 (1,807)
------ -------- ------ --------
Comprehensive earnings (losses)................... $4,147 $(59,182) $5,790 $(58,279)
====== ======== ====== ========
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. In August 2002, the Company entered into a new leasing
agreement with a second fleet leasing provider. Based on the terms of these
agreements, the Company has concluded that the leases are capital in nature
based on the criteria established by SFAS No. 13, "Accounting for Leases".
The Company capitalized newly-leased vehicles and recorded related capital
lease obligations totaling approximately $3.2 million and $11.1 million during
the nine-month periods ended September 30, 2002 and 2001, respectively. In
addition, the net book value of capitalized fleet vehicles was reduced by $13.4
million and $4.4 million in the nine-month periods ended September 30, 2002 and
2001, respectively. These reductions include the effect of transfers of fleet
vehicles to certain clients in connection with the conclusion of certain
contracts and the conversions of certain field forces from Ventiv employment to
client employment. The net book value of fleet vehicles as of the conversion
and transfer dates were approximately $12.7 million and $4.2 million for the
nine-month periods ended September 30, 2002 and 2001, respectively. From time
to time, fleet vehicles may be transferred or replaced based on overall client
requirements and fleet management practices.
10. Discontinued and Held for Sale Operations:
Based on historical performance and outcomes of strategic initiatives
implemented by Company management to better focus the Company on its core
businesses 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. In June 2002,
based on management's ongoing strategic assessment of the business, the
Company's Board of Directors authorized management to also evaluate the
potential sale of the business units comprising its European Contract Sales
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. In addition, the Company completed the sale of its
9
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Germany-based contract sales business unit on September 26, 2002. On October
16, 2002, the Company completed the sale of its United Kingdom ("U.K.") based
contract sales business unit, as more fully described below. The Company is
actively pursuing opportunities to divest its remaining European Contract Sales
businesses operating in France and Hungary, and still anticipates that it can
complete its plan of divestiture by June 2003. Any such transactions would be
subject to legal and financial due diligence, regulatory review and approval
(if necessary) and definitive negotiation of terms and conditions.
Operating results for the three and ninth-month periods ended September 30,
2002 and 2001 of each of the divested business units, as well as the remaining
European contract sales business units, have been reflected in the results from
discontinued and held for sale operations section of the accompanying
statements of operations. The net gains and losses realized, net of taxes, from
the sales of those business units divested on or prior to September 30, 2002
have been classified in "gains (losses) on disposals of discontinued
operations" in the accompanying statements of operations for the three- and
nine-month periods ended September 30, 2002. All assets and liabilities
specifically related to the business units held for sale (and, as of December
31, 2001, those of the now divested business units) have been classified as
held for sale in the accompanying condensed consolidated balance sheets.
Operating results from the held for sale business units, as well as the
operating results of the divested business units up to the completion and
effective dates of their divestitures, have been included in losses from
discontinued operations for all periods presented. Net losses from discontinued
and held for sale operations were $2.8 million and $42.3 million, net of tax,
for the nine-month periods ended September 30, 2002 and 2001, respectively. In
addition, the Company recorded an estimated $5.4 million tax benefit for
carry-back deductions relating to the disposal of the Stamford,
Connecticut-based business unit. In connection with that sale and wind-down,
the Company recorded a $2.5 million charge for remaining real estate
obligations associated with operations of the Stamford, Connecticut-based
business unit. Losses on disposals of discontinued operations were $1.4 million
and $2.0 million, net of tax, for the nine-month periods ending September 30,
2002 and 2001, respectively.
Below is a summary of the results of these operations:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
------- -------- ------- --------
(unaudited)
(in thousands)
Results from discontinued operations:
Revenue....................................................... $24,055 $ 24,937 $77,862 $ 85,950
Earnings (losses) before income taxes......................... 83 (42,783) (4,010) (42,285)
Benefit from (provision for) income taxes..................... (200) 238 1,213 35
------- -------- ------- --------
Net losses from discontinued operations....................... (117) (42,545) (2,797) (42,250)
------- -------- ------- --------
Gains (losses) on disposals of discontinued operations:
Gains (losses) on disposals of discontinued operations........ 2,951 (3,006) (424) (3,006)
Benefit from (provision for) income taxes..................... 449 1,052 (988) 1,052
------- -------- ------- --------
Gains (losses) on disposals of discontinued operations........ 3,400 (1,954) (1,412) (1,954)
------- -------- ------- --------
Tax benefit arising from the disposal of a discontinued operation -- -- 5,400 --
------- -------- ------- --------
Net results from discontinued operations......................... $ 3,283 $(44,499) $ 1,191 $(44,204)
======= ======== ======= ========
10
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 as defined in the
agreement for the business unit, up to a total maximum amount of $0.5 million.
Total losses on the disposals of these businesses of $4.9 million, net of tax,
were recorded in the second quarter of 2002. These losses included a charge of
$7.5 million for the write-down of goodwill related to the Alpharetta,
Georgia-based business unit.
On September 26, 2002 and effective September 30, 2002, the Company
completed the sale of 100% of the shares of Ventiv Health Germany GmbH (the
holding company for the subsidiaries comprising the Ventiv Health Germany
operating unit) to a group of management purchasers, led by the managing
director of that business. In consideration for the sale, the Company received
EUR 6.2 million ($6.1 million) at closing, and may receive additional
consideration of EUR 5.0 million payable from future earnings of the business.
The business will continue to operate under the name "Ventiv Health Germany"
for a period of up to three (3) years. The Company shall also provide ongoing
assistance, business referrals and other consultancy services for a period of
three (3) years, for which it expects to receive total compensation of $0.8
million over term of the related agreement. The Company recognized a gain of
approximately $4.2 million on the sale of this business unit. The Company
anticipates that this transaction will result in a loss for tax purposes. Given
that the Company may be limited in its ability to utilize such losses in the
foreseeable future, a tax benefit for such loss has not been recorded.
On October 16, 2002, the Company completed the sale of the assets and
business of its Ventiv Health U.K. operating unit to Ireland-based United Drug
plc. Total consideration of $7.5 million was satisfied in cash and received in
full on completion of transaction. The Company estimates that it will record a
gain of approximately $3.8 million from this sale in the fourth quarter of
2002. The Company believes that it has sufficient capital losses available in
the U.K. to offset any capital gains that may be attributable to this
asset-based transaction.
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 business have been 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, was
operationally merged with its U.S. Contract Sales segment. Together, these
businesses now constitute the Company's Contract Sales and Services operating
segment.
11
VENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following presents information about the reported segments:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- ------------------
2002 2001 2002 2001
------- -------- -------- --------
(unaudited) (unaudited)
(in thousands) (in thousands)
Revenue:
Contract Sales and Services............... $40,458 $ 62,960 $145,708 198,952
Planning and Analytics.................... 6,430 5,925 19,085 16,786
Other..................................... -- -- 732 --
------- -------- -------- --------
Total revenue......................... $46,888 $ 68,885 $165,525 $215,738
======= ======== ======== ========
Operating earnings (losses):
Contract Sales and Services............... 3,255 (19,306) 10,548 (7,422)
Planning and Analytics.................... 566 1,227 2,955 2,659
Other..................................... (1,712) (4,323) (6,910) (9,671)
------- -------- -------- --------
Total operating earnings (losses)..... $ 2,109 $(22,402) $ 6,593 $(14,434)
======= ======== ======== ========
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
(unaudited)
Total Assets:
Contract Sales and Services. $ 75,717 $101,535
Planning and Analytics...... 11,228 21,939
Other....................... 45,858 56,483
-------- --------
132,803 179,957
Assets held for sale........... 21,583 55,612
-------- --------
Total assets............ $154,386 $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:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -----------------
2002 2001 2002 2001
------ -------- ------- --------
(unaudited) (unaudited)
(in thousands) (in thousands)
Operating earnings (losses) from segments....................... $2,109 $(20,377) $ 6,593 $(12,409)
Interest expense................................................ (614) (1,254) (1,425) (3,181)
Investment income............................................... 144 154 325 350
Loss on investment in equity of non-affiliates.................. -- -- -- (500)
------ -------- ------- --------
Earnings (losses) from continuing operations before income taxes $1,639 $(21,477) $ 5,493 $(15,740)
====== ======== ======= ========
The Company's continuing operations are conducted principally in the United
States.
12
Note 12. Commitments 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 September 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. On October 28, 2002, the sole arbitrator assigned by the
International Chamber of Commerce issued a final and binding award, requiring
Ventiv to deliver the shares previously held in escrow, together with cash
payment of damages totaling approximately $0.2 million. All other claims and
demands of Mr. Levistre were dismissed. Arbitration expenses totaling $78,000
were borne equally by both parties. The Company intends to continue to pursue
its claims for damages from Mr. Levistre in the separate proceedings in the
French commercial courts relating to the Company's assertions of unfair
competition and related matters.
13
VENTIV HEALTH, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 2002
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 many 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, except as discussed in New Accounting
Pronouncements.
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).
14
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 21.0% and 21.7% of the Company's
revenues for the nine-month period ended September 30, 2002 and twelve-month
period ended December 31, 2001, respectively. As a consequence of the
conversion, Ventiv ceased providing contract sales services to Reliant as of
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 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. On September 30, 2002, the Company notified Cellegy of
its intent to exercise its rights to terminate this agreement, effective
immediately. Both Cellegy and the Company have agreed to such termination. The
Company received approximately $0.3 million from Cellegy on October 28, 2002 in
full settlement and satisfaction of Cellegy's contractual obligations for
sharing of pre-launch expenses. The Company had adequately provided for its
shared portion of the cumulative pre-launch expenses in the first and second
quarters of 2002, based on the amount of funding provided in each of those
periods.
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.
Effective September 12, 2002, the Company entered into a multi-year fee for
service agreement to provide Altana Pharma ("Altana"), the U.S. operations of
German-based Altana Pharma AG, with a nationwide sales force, including
recruitment, training and operational support. Under the terms of the
agreement, in a first phase, Ventiv's Contract Sales and Services group will
provide 220 full-time sales representatives and 10 Regional Training and
Administrative Managers. The Altana sales force has been co-promoting Detrol(R)
and other products together with Pharmacia starting in October 2002. Revenues
and costs of services associated with the initial recruiting and training of
this sales force were recognized in September 2002.
Based on historical performance and as outcomes of strategic initiatives
implemented by Company management to better focus the Company on its core
businesses 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. In June 2002,
based on management's ongoing strategic assessment of the business, the
Company's Board of Directors authorized management to also evaluate the
potential sale of the business units comprising its European Contract Sales
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. In addition, the Company completed the sale of its Germany-based contract
sales business unit on September 26, 2002. On October 16, 2002, the Company
15
completed the sale of its United Kingdom ("U.K.") based contract sales business
unit, as more fully described below. The Company is in ongoing discussions and
negotiations regarding the potential sale of its remaining European Contract
Sales businesses operating in France and Hungary. Any transactions resulting
from these negotiations would be subject to legal and financial due diligence,
regulatory review and approval (if necessary) and final negotiation of terms
and conditions.
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 operations, including such data
as a percentage of revenues.
For the three months
ended September 30,
($'s in 000's) --------------------------------
2002 2001
-------------- ---------------
(unaudited)
Revenues................................................................. $46,888 100.0% $ 68,885 100.0%
Operating expenses:
Costs of services........................................................ 38,642 82.4% 65,213 94.7%
Restructuring costs...................................................... -- -- 2,025 2.9%
Impairment of intangible assets.......................................... -- -- 14,811 21.5%
Selling, general and administrative expenses............................. 6,137 13.1% 9,238 13.4%
------- ----- -------- -----
Operating earnings (losses).............................................. 2,109 4.5% (22,402) (32.5)%
Interest expense......................................................... (614) (1.31)% (1,254) (1.82)%
Investment income........................................................ 144 0.3% 154 0.2%
------- ----- -------- -----
Earnings (losses) from continuing operations before income taxes......... 1,639 3.5% (23,502) (34.0)%
Provision for (benefit from) income taxes................................ 623 1.3% (7,973) (11.5)%
------- ----- -------- -----
Earnings (losses) from continuing operations............................. 1,016 2.2% (15,529) (22.5)%
------- ----- -------- -----
Earnings (losses) from discontinued and held for sale operations:
Losses from discontinued operations, net of taxes........................ (117) (0.2)% (42,545) (61.8)%
Gains (losses) on disposals of discontinued and held for sale operations,
net of taxes........................................................... 3,400 7.3% (1,954) (2.8)%
------- ----- -------- -----
Earnings (losses) from discontinued and held for sale operations......... 3,283 7.0% (44,499) (64.6)%
------- ----- -------- -----
Net earnings (losses).................................................... $ 4,299 9.2% $(60,028) (87.1)%
======= ===== ======== =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Revenues: Revenues decreased by approximately $22.0 million, or 31.9%, to
$46.9 million in the three-month period ended September 30, 2002, from $68.9
million in the three months ended September 30, 2001.
Revenues in our Contract Sales and Services group were $40.5 million for the
quarter ended September 30, 2002, a decrease of $22.5 million or 35.7% from
$63.0 million in the same period in 2001. Revenues of the Contract Sales and
Services group accounted for 86.3% and 91.4% of the Company's total revenues
for the three-month periods ended September 30, 2002 and 2001, respectively.
This decrease resulted primarily from the
16
conversion of the Reliant field force from full-time Ventiv employment to
full-time Reliant employment and the completion of Ventiv's contract with
Bristol-Myers Squibb ("BMS"), both effective as of March 31, 2002. These
reductions in revenues were partially offset by increased revenues generated
through continuing business with Bayer (which commenced in May 2001), the
launch of the Altana project in September 2002, and several other new and
expanded contracts.
Our Planning and Analytics business, Health Products Research ("HPR"),
generated revenues of $6.4 million in the three-month period ended September
30, 2002, up $0.5 million or 8.5% from $5.9 million in the three-month period
ended September 30, 2001. HPR revenues represented 13.7% and 8.6% of the
Company's total revenues in the third quarter of 2002 and 2001, respectively.
Increased business with Abbott Laboratories was offset in part by reduced
business volume with Ortho McNeil and other smaller clients.
Costs of Services: Costs of services decreased by approximately $26.6
million or 40.7%, to $38.6 million this fiscal quarter from $65.2 million in
the three-month period ended September 30, 2001. Costs of services decreased as
a percentage of revenues to 82.4% from 94.7% in the three-month periods ended
September 30, 2002 and 2001, respectively.
Costs of services in the Contract Sales and Services group decreased by
approximately $27.8 million, or 44.9%, to $34.2 million in 2002 from $62.0
million in 2001. Costs of services were 84.5% of revenue in 2002 compared to
98.5% in 2001. The decrease in costs of services as a percentage of revenue is
a product of several factors. Effective March 31, 2002, Reliant opted to
internalize the entire Ventiv field force. In the third quarter, the Company
and Reliant commenced negotiations regarding final amounts due and owing under
the Reliant agreement. On October 9, 2002, the Company reached final agreement
with Reliant and received payment for all amounts due and owing, as mutually
agreed on that date. During the contract term, the Company had deferred
recognition of approximately $1.8 million of revenue to provide for certain
contingencies under the original Reliant agreement. In the course of final
negotiations, the Company agreed to approximately $0.7 million of charge-backs
and deductions relating to such contingencies. Accordingly, revenue and
operating income for the quarterly period ended September 30, 2002 reflect the
recognition of $1.1 million of revenue and operating profit previously
deferred. Also, the Company renegotiated the Bayer contract in the second
quarter of 2002. The Bayer contract is now structured as a profitable, fixed
fee arrangement. Under the original contract, the Bayer engagement yielded
minimal gross profit on a substantial revenue base during the three months
ended September 30, 2001. Margins in the three-month period ended September 30,
2001 were also adversely impacted by results under the contract with BMS, which
concluded on March 31, 2002. In 2001, the BMS agreement transitioned to a
revenue sharing arrangement under which fees were determined as a percentage of
the revenue of each of the promoted products. Given the seasonality associated
with one of the promoted products, this engagement operated at a loss during
the three-month period ended September 30, 2002. Finally, the decrease of costs
of services as a percentage of revenue in the three months ended September 30,
2002 as compared to the same period in 2001 was attributable in part to the
Contract Sales and Services group's ongoing initiatives to increase operating
efficiencies and minimize internal operating costs and expenses.
HPR's costs of services were $4.5 million for 2002, an increase of $1.3
million or 38.8%, from $3.2 million in 2001. Costs of services represented
69.5% of revenue in 2002 compared to 54.4% 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 $3.1 million, or
33.6%, to $6.1 million from $9.2 million in the three-month periods ended
September 30, 2002 and 2001, respectively. SG&A expenses decreased as a
percentage of revenue to 13.1% for the three months ended September 30, 2002
from 13.4% for the three months ended September 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. Additional decreases in SG&A expenses arose
from various cost saving measures taken in the second half of 2001 and to date
to streamline the Company's operations.
17
SG&A expenses in the Contract Sales and Services business unit decreased by
approximately $1.0 million or 24.3% to $3.0 million at September 30, 2002 from
$4.0 million at September 30, 2001. This decrease is primarily due to
restructuring actions taken during the third quarter of 2001, together with the
aforementioned $0.2 million decrease in amortization of goodwill pursuant to
SFAS 142. All remaining unamortized goodwill is attributable to the businesses
comprising this operating segment.
SG&A expenses at HPR decreased by approximately $0.1 million or 5.6% to $1.4
million for the three-month period ended September 30, 2002 from $1.5 million
for the three-month period ended September 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 $1.7 million for the
three months ended September 30, 2002, a decrease of approximately $2.1 million
or 54.4% from $3.8 million for the three months ending September 30, 2001. The
decrease was driven by cost savings at corporate which resulted from the
restructuring actions taken in the third quarter of 2001 as well as a reduction
in professional fees incurred by the Company for various corporate matters.
Restructuring: During the three-month period ended September 30, 2001 the
Company completed an evaluation of the operations of certain U.S.-based
business units. As a result of this evaluation, the Company adopted a plan of
restructuring and recorded a charge of approximately $2.0 million, which
included provisions for the severance of 23 people, costs to exit the New York
office lease and to reduce the size of the Somerset, NJ administrative office.
Impairment of Intangible Assets: During the three-month period ended
September 30, 2001, the Company completed an evaluation of the goodwill and
other intangible assets of several of its operating units. In accordance with
the Company's accounting policy in effect at that time, undiscounted cash flow
projections were prepared and analyzed for these operating units in order to
determine whether such undiscounted cash flows were sufficient to support
current intangible asset carrying values relating directly to these operations.
Based on changes in market conditions and competitive factors, projected
undiscounted cash flows for Promotech (now a part of the Contract Sales and
Services operating segment) were insufficient to support the carrying amounts
of related goodwill. The Company obtained estimates of the current fair values
of this operation through an independent third party appraisal. Based on the
appraised value in relation to the net book values of this operation at that
time, the Company recorded a goodwill impairment charge of approximately $14.8
million.
Interest Expense: Ventiv recorded $0.6 million and $1.3 million of interest
expense in the three-months ended September 30, 2002 and 2001, respectively.
Interest expense decreased in 2002 as a result of the Company's repayment of
the $50.0 million outstanding under its prior line of credit and reflects the
effect of lower overall interest rates in 2002. During the second quarter of
2002, the Company received a $15.0 million short-term advance pursuant to its
credit agreement with Foothill Capital Corporation ("Foothill"). Per the terms
of the credit agreement, the related borrowing was not considered a draw
against the Company's borrowing availability under the line of credit. The cash
received was restricted from use for any purpose and was accordingly classified
as restricted while the related advance remained outstanding. This advance was
repaid on September 4, 2002, together with accrued interest and fees of
approximately $0.4 million (approximately $0.3 million of which was incurred in
the three-month period ended September 30, 2002). The Company also incurred
$0.1 million and $0.3 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 September 30, 2002 and 2001,
respectively.
Investment Income: Ventiv recorded approximately $0.1 million and $0.2
million of investment income in the three-months ended September 30, 2002 and
2001, respectively. 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.
18
Provision for Income Taxes: Ventiv recorded a provision for income taxes on
continuing operations using an estimated effective tax rate of 38.0% for the
three-month period ended September 30, 2002. The estimated effective rate for
the year ending December 31, 2002 of 38.0% was based on current projections for
earnings in each tax jurisdiction in which the Company's continuing operations
conduct business and are 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. The Company
reported a benefit from income taxes in the quarterly period ended September
30, 2001 of just under $8.0 million, approximately $5.2 million of which was
directly attributable to the impairment charge taken against goodwill related
to the Promotech operating unit.
Discontinued Operations: Net losses from discontinued and held for sale
operations were $0.1 million and $42.5 million for the three-month periods
ended September 30, 2002 and 2001, respectively. As noted previously, in
September 2001, the Company completed an evaluation of the goodwill and other
intangible assets of several of its operating units. The Company recorded
goodwill and other intangible asset impairment charges of approximately $13.7
million and $23.2 million related to the U.K. and France-based contract sales
businesses, respectively, and $1.1 million related to the Stamford,
Connecticut-based Communications business unit. Results of discontinued and
held for sale operations have been shown net of tax, the effects of which were
minimal in both quarterly periods given the net losses attributable to the
operations. Accordingly, the Company has not recognized tax benefits for losses
attributable to these business units. Goodwill associated with the U.K. and
France based contract sales businesses were not deductible for tax purposes;
therefore, there were no current or future benefits attributable to the
goodwill impairment charges taken in the third quarter of 2001 related to these
operations.
Gains (losses) on disposals of discontinued operations were a $3.4 million
gain and a $2.0 million loss, net of tax, for the three-month periods ended
September 30, 2002 and 2001, respectively. The gain mainly resulted from the
divestiture of the Company's Germany-based contract sales business unit on
September 26, 2002. On September 26, 2002 and effective September 30, 2002, the
Company completed the sale of 100% of the shares of Ventiv Health Germany GmbH
(the holding company for the subsidiaries comprising the Ventiv Health Germany
operating unit) to a group of management purchasers, led by the managing
director of that business. In consideration for the sale, the Company received
EUR 6.2 million ($6.1 million) at closing, and may receive additional
consideration of EUR 5.0 million payable from future earnings of the business.
The Company recognized a gain of approximately $4.2 million on the sale of this
business unit. The Company anticipates that this transaction will result in a
loss for tax purposes. Given that the Company may be limited in its ability to
utilize such losses in the foreseeable future, a tax benefit for such loss has
not been recorded. In 2001, the Company recorded an estimated loss of $2.0
million, net of tax, related to the disposal of the net assets of its Stamford,
Connecticut-based business unit, which was subsequently divested on May 7, 2002.
Net Earnings and Earnings Per Share ("EPS"): Ventiv's net earnings
increased by approximately $64.3 million to $4.3 million, from a loss of $60.0
million, in the three months ended September 30, 2002 and 2001, respectively.
Diluted earnings per share increased to $0.19 for the three-month period ending
September 30, 2002 from a loss of $2.64 for the three-month period ended
September 30, 2001. Impairment charges for intangible assets and restructuring
expenses recorded in the third quarter of 2001, as well as new business and
savings initiatives coupled with earnings from the sale of discontinued
operations in the third quarter of 2002, resulted in the increase in net
earnings, as more fully explained above.
19
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
For the nine months
ended September 30,
($'s in 000's) ---------------------------------
2002 2001
--------------- ---------------
(unaudited)
Revenues............................................................ $165,525 100.0% $215,738 100.0%
Operating expenses:
Costs of services................................................... 139,483 84.3% $187,419 86.9%
Restructuring costs................................................. -- -- 2,025 0.9%
Impairment of intangibles........................................... -- -- 14,811 6.9%
Selling, general and administrative expenses........................ 19,449 11.7% 25,917 12.0%
-------- ----- -------- -----
Operating earnings (losses)......................................... 6,593 4.0% (14,434) (6.7)%
Interest expense.................................................... (1,425) (0.9)% (3,181) (1.5)%
Investment income................................................... 325 0.2% 350 0.2%
Loss on investment of equity of non-affiliate....................... -- -- (500) (0.2)%
-------- ----- -------- -----
Earnings (losses) from continuing operations before income taxes.... 5,493 3.3% (17,765) (8.2)%
Provision for (benefit from) income taxes........................... 2,087 1.3% (5,497) (2.5)%
-------- ----- -------- -----
Earnings (losses) from continuing operations........................ 3,406 2.0% (12,268) (5.7)%
-------- ----- -------- -----
Earnings (losses) from discontinued and held for sale operations:
Results of operations, net of taxes................................. (2,797) (1.7)% (42,250) (19.6)%
Losses on disposals of discontinued operations, net of taxes........ (1,412) (0.9)% (1,954) (0.9)%
Tax benefits related to disposal of discontinued operation.......... 5,400 3.3% -- --
-------- ----- -------- -----
Net earnings (losses) from discontinued and held for sale operations 1,191 0.7% (44,204) (20.5)%
-------- --------
Net earnings (losses)............................................... $ 4,597 2.8% $(56,472) (26.2)%
======== ===== ======== =====
Revenues: Revenues decreased by approximately $50.2 million, or 23.3%, to
$165.5 million in the nine-month period ended September 30, 2002, from $215.7
million in the nine-month period ended September 30, 2001.
Revenues from the Contract Sales and Services business were $145.7 million,
a decrease of 26.0% from $197.0 in the first three quarters of 2001. Revenues
of the Contract Sales and Services group accounted for 88.0% and 92.2% of the
Company's total revenues for the nine-month periods ended September 30, 2002
and 2001, respectively. This decrease was driven primarily by the conversion of
the Reliant field force at the end of the first 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 three quarters 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 $0.6 million and $2.1 million for the
nine months ended September 30, 2002 and 2001, respectively.
Health Products Research revenues represented 11.5% and 7.8% of total
revenues for the nine-month periods ended September 30, 2002 and 2001,
respectively. Revenues for this business unit were approximately $19.1 million,
an increase of $0.4 million from the $18.7 million recorded in the nine-month
period ended September 30, 2001. Increased business with Abbott Laboratories,
Astra Zeneca and Bayer was offset in part by a reduction in business from BMS
and Ortho McNeil.
Costs of Services: Costs of services decreased by approximately $47.9
million, or 25.6%, to $139.5 million for the nine-month period ended September
30, 2002 from $187.4 million in the nine-month period ending September 30, 2001.
20
Contract Sales and Services reported costs of services of $126.6 million for
the nine months ended September 30, 2002, a decrease of $49.8 million or 28.2%
from $176.4 million for the nine months ended September 30, 2001. Costs of
services as a percentage of revenue decreased to 86.9% for the first three
quarters of 2002 from 89.5% for the first three quarters of 2001, primarily due
to the effect of a more profitable mix of primarily fixed-fee contracts and the
effect of the renegotiated Bayer agreement. 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 (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. The Bayer engagement
has operated at a profit subsequent to the effective date of the amended and
restated agreement. Additionally, effective March 31, 2002, Reliant opted to
internalize the entire Ventiv field force. In the third quarter, the Company
and Reliant commenced negotiations regarding final amounts due and owing under
the Reliant agreement. On October 9, 2002, the Company reached final agreement
with Reliant and received payment for all amounts due and owing, as mutually
agreed on that date. During the contract term, the Company had deferred
recognition of approximately $1.8 million of revenue to provide for certain
contingencies under the original Reliant agreement. In the course of final
negotiations, the Company agreed to approximately $0.7 million of charge-backs
and deductions relating to such contingencies. Accordingly, revenue and
operating income for the quarterly period ended September 30, 2002 reflect the
recognition of $1.1 million of revenue and operating profit previously deferred.
Health Products Research's costs of services were $12.2 million and $10.9
for the nine-month periods ended September 30, 2002 and 2001, respectively.
Costs of services as a percentage of revenue increased in the first three
quarters of 2002 to 63.9% from 58.4% in the first three quarters 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 nine-month period
ended September 30, 2002 from $0.1 million for the period ended September 30,
2001, primarily from the initial VIS operations under the Cellegy agreement
(see "Recent Business Developments" above).
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased by approximately $6.5 million, or 24.7%, to
$19.4 million from $25.9 million in the nine-month periods ended September 30,
2002 and 2001, respectively. Selling, general, and administrative expenses as a
percentage of revenues decreased slightly to 11.8% from 12.0%. 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 three quarters 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
$3.2 million to $8.6 million from $11.7 million for the nine months ended
September 30, 2002 and 2001, respectively. This decrease is primarily due to
restructuring actions taken during the third quarters of 2001 and other ongoing
cost savings measures, together with the discontinuance of amortization of
goodwill pursuant to SFAS 142.
Health Products Research's SG&A expenses decreased by $1.2 million to $3.9
million from $5.1 million in the nine-month periods ended September 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 by $2.1 million from $9.0 million in the first
three quarters of 2001 to $6.9 million in the first three quarters of 2002.
Savings derived from restructuring efforts in the latter three quarters of 2001
were offset in part by valuation allowance recorded relative to the note
receivable under the Cellegy contract (see "Recent Business Developments"
above).
21
Restructuring: In the third quarter of 2001, the Company completed an
evaluation of the operations of certain U.S.-based business units. As a result
of this evaluation, the Company adopted a plan of restructuring and recorded a
charge of approximately $2.0 million. Included in this charge were provisions
for the severance of 23 employees, as well as for costs and expenses associated
with the elimination of the New York office and the reduction of the size of
the Somerset, NJ administrative office.
Impairment of Intangible Assets: During the nine-month period ended
September 30, 2001, the Company completed an evaluation of the goodwill and
other intangible assets of several of its operating units. In accordance with
the Company's accounting policy in effect at that time, undiscounted cash flow
projections were prepared and analyzed for these operating units in order to
determine whether such undiscounted cash flows were sufficient to support
current intangible asset carrying values relating directly to these operations.
Based on changes in market conditions and competitive factors, projected
undiscounted cash flows for Promotech (now a part of the Contract Sales and
Services operating segment) were insufficient to support the carrying amounts
of related goodwill. The Company obtained estimates of the current fair values
of this operation through an independent third party appraisal. Based on the
appraised value in relation to the net book values of this operation at that
time, the Company recorded a goodwill impairment charge of approximately $14.8
million.
Interest Expense: Ventiv recorded $1.4 million and $3.2 million of interest
expense in the nine months ended September 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. During the second quarter of
2002, the Company received a $15.0 million short-term advance pursuant to its
credit agreement with Foothill Capital which was treated as restricted cash.
Per the terms of the credit agreement, the related borrowing was not considered
a draw against the Company's borrowing availability under the line of credit.
This initial advance was repaid, together with accrued interest and fees of
approximately $0.4 million, on September 4, 2002. The Company also incurred
$0.3 million of interest expense related to obligations under its capital lease
arrangement for the U.S. Sales automobile fleet in the first three quarters of
2002 and $0.9 million for the corresponding period in 2001. The decrease in
auto fleet interest relates primarily to a decrease in contracts that provided
leased autos as well as lower prevailing interest rates in 2002.
Investment Income: Ventiv recorded approximately $0.3 million and $0.4
million of investment income in the nine-month periods ended September 30, 2002
and 2001, respectively. Investment income is affected 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 a provision for income taxes on
continuing operations using an estimated effective tax rate of 38.0% for the
nine-month period ended September 30, 2002. The estimated effective rate for
the year ending December 31, 2002 of 38.0% was based on current projections for
earnings in each tax jurisdiction in which the Company's continuing operations
conduct business and are 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. The Company
reported a benefit from income taxes in the nine-month period ended September
30, 2001 of approximately $5.5 million, approximately $5.2 million of which was
directly attributable to the impairment charge taken against goodwill related
to the Promotech operating unit.
Discontinued Operations: Net losses from discontinued and held for sale
operations were $2.8 million and $42.3 million for the nine-month periods ended
September 30, 2002 and 2001, respectively. As noted previously,
22
in September 2001, the Company completed an evaluation of the goodwill and
other intangible assets of several of its operating units. The Company recorded
goodwill and other intangible asset impairment charges of approximately $13.7
million and $23.2 million related to the U.K. and France-based contract sales
businesses, respectively, and $1.1 million related to the Stamford,
Connecticut-based Communications business unit. These goodwill impairment
charges are included in the reported net losses from discontinued and held for
sale operations for the nine-month period ended September 30, 2001. During the
nine-month period ended September 30, 2002, the Company recorded losses on
disposals of discontinued operations of $1.4 million, net of tax, while during
the corresponding period in 2001, the Company recorded an estimated loss on
disposal of a discontinued operation of $2.0 million, net of tax, as more fully
explained below. Results of discontinued and held for sale operations have been
shown net of tax, the effects of which were minimal in both periods given the
net losses attributable to the operations. Accordingly, the Company has not
recognized tax benefits for losses attributable to these business units.
Goodwill associated with the U.K. and France based contract sales businesses
were not deductible for tax purposes; therefore, there were no current or
future benefits attributable to the goodwill impairment charges taken in the
third quarter of 2001 related to these 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 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 connection with the completion
of this divestiture, the Company recorded an estimated $5.4 million tax benefit
for carry-back deductions relating to the disposal of this business unit. 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 as
defined in the agreement for the business unit, up to a total maximum amount of
$0.5 million. Total losses on the disposals of these businesses of $4.9
million, net of tax, were recorded in the second quarter of 2002. These losses
included a charge of $7.5 million for the write-down of goodwill related to the
Alpharetta, Georgia-based business unit.
On September 26, 2002 and effective September 30, 2002, the Company
completed the sale of 100% of the shares of Ventiv Health Germany GmbH (the
holding company for the subsidiaries comprising the Ventiv Health Germany
operating unit) to a group of management purchasers, led by the managing
director of that business. In consideration for the sale, the Company received
EUR 6.2 million ($6.1 million) at closing, and shall receive additional
consideration of EUR 5.0 million payable from future earnings of the business.
The business will continue to operate under the name "Ventiv Health Germany"
for a period of up to three (3) years. The Company recognized a gain of
approximately $4.2 million on the sale of this business unit. The Company
anticipates that this transaction will result in a loss for tax purposes. Given
that the Company may be limited in its ability to utilize such losses in the
foreseeable future, a tax benefit for such loss has not been recorded.
Net Earnings and Earnings Per Share ("EPS"): Ventiv's net earnings
increased by approximately $61.1 million to $4.6 million. Diluted earnings per
share increased to $0.20 for the nine-month period ended September 30, 2002
from a loss of $2.50 for the nine-month period ended September 30, 2001.
Impairment charges for intangible assets and restructuring expenses recorded in
the third quarter of 2001, as well as new business and savings initiatives
coupled with earnings from the sale of discontinued operations in the first
three quarters of 2002 contributed to the increase in earnings as more fully
explained above.
Liquidity and Capital Resources
At September 30, 2002, Ventiv had $38.3 million of unrestricted cash and
cash equivalents, an increase of $2.9 million from December 31, 2001. For the
nine-month periods ended September 30, 2002 compared to September 30, 2001,
cash provided by operations increased by $37.7 million from a use of $5.5
million to a
23
source of $29.0 million. Cash provided by investing activities increased by
$9.9 million from a use of $3.4 million to a source of $6.5 million. Cash used
in financing activities increased by $56.0 million from a source of $14.4
million in 2001 to a use of $41.6 million over the same comparative periods.
Cash provided by operations was $29.0 million in the nine-month period ended
September 30, 2002, as compared to a use of $5.5 million in 2001. This increase
was, in large part, due to the billing and collection of certain payments due
under the Bayer and BMS agreements. Bayer paid the Company $35.8 million in
February 2002. The Company also had an overall improvement in collections of
outstanding billed accounts receivable.
Cash provided by investing activities was $6.5 million for the first three
quarters of 2002 as compared to cash used in investing activities of $3.4
million for the first three quarters of 2001. The Company received total
proceeds of approximately $10.4 million from divestitures completed on or prior
to September 30, 2002. Investing activities included capital expenditures of
approximately $3.1 million and $3.4 million for the nine-month periods ended
September 30, 2002 and 2001, respectively.
Cash used in financing activities was $41.6 million, as compared to cash
provided by financing activities of $14.4 million for the nine months ended
September 30, 2002 and 2001, respectively. During the nine months ended
September 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 made net borrowings of $16.0 million under this credit
facility, primarily to support operations. Subsequent to the signing and
pursuant to the terms of its new credit agreement with Foothill (described
below), the Company drew a $15.0 million short-term advance on May 24, 2002.
This advance was restricted from use for any purpose and accordingly was
classified as restricted for the entire term of the advance, and was repaid on
September 4, 2002, together with accrued interest and fees of approximately
$0.4 million. In addition, the Company paid fees and related expenses of
approximately $0.6 million in connection with this new credit facility, which
became effective as of March 29, 2002. These fees have been capitalized and are
being amortized over the three-year term of the agreement. During the
nine-month periods ended September 30, 2002 and 2001, the Company made capital
lease payments of $5.0 million and $3.8 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 ended 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, 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 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").
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
24
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 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 its goodwill effective January 1, 2002.
Goodwill related to those businesses now comprising the Company's continuing
operations was reflected in the Company's consolidated balance sheets as of
September 30, 2002 and December 31, 2001 at a carrying amount of approximately
$20.6 million. Selling, general & administrative expense for the three and nine
months ended September 30, 2001 includes goodwill amortization of approximately
$0.5 million and $1.4 million, respectively. The remaining unamortized goodwill
balance relates solely to the businesses currently comprising the Company's
Contract Sales and Services operating segment. The following table reconciles
net income amounts to calculate basic earnings per share "EPS" and diluted
earnings per share had amortization expense related to goodwill not been
recorded in prior periods:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------
2002 2001 2002 2001
------ -------- ------ --------
(unaudited)
(in thousands, except per share data)
Reported net earnings (losses). $4,299 $(60,028) $4,597 $(56,472)
Add back: Goodwill amortization -- 457 -- 1,371
------ -------- ------ --------
Adjusted net earnings.......... $4,299 $(59,571) $4,597 $(55,101)
====== ======== ====== ========
Basic EPS:
Reported net earnings....... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
Goodwill amortization....... -- 0.02 -- 0.06
------ -------- ------ --------
Adjusted net earnings....... $ 0.19 $ (2.62) $ 0.20 $ (2.44)
====== ======== ====== ========
Diluted EPS:
Reported net earnings....... $ 0.19 $ (2.64) $ 0.20 $ (2.50)
Goodwill amortization....... -- 0.02 -- 0.06
------ -------- ------ --------
Adjusted net earnings....... $ 0.19 $ (2.62) $ 0.20 $ (2.44)
====== ======== ====== ========
In September 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.
25
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 September 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 businesses.
10% Decrease in
Balance at Value of Local
September 30, Currencies to
2002 US Dollar
------------- ---------------
Total Assets Held for Sale........................... $21,583 $19,425
Total Liabilities Held for Sale...................... $16,654 $14,989
Revenues of Discontinued and Held for Sale Operations $77,862 $73,857
ITEM 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
Subsequent to the evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
26
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 September 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. On October 28, 2002, the sole arbitrator assigned by the
International Chamber of Commerce issued a final and binding award, requiring
Ventiv to deliver the shares previously held in escrow, together with cash
payment of damages totaling approximately $0.2 million. All other claims and
demands of Mr. Levistre were dismissed. Arbitration expenses totaling $78,000
were borne equally by both parties. The Company intends to continue to pursue
its claims for damages from Mr. Levistre in the separate proceedings in the
French commercial courts relating to the Company's assertions of unfair
competition and related matters.
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
None.
27
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.
By: /s/ JOHN R. EMERY
-----------------------------
John R. Emery
Chief Financial Officer
Date: November 13, 2002
CERTIFICATIONS
I, Eran Broshy, Chief Executive Officer of the Company, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ventiv Health, Inc;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Quarterly Report (the "Evaluation Date"); and
c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
DATE: November 13, 2002 By: /S/ ERAN BROSHY
-----------------------
Eran Broshy
Chief Executive Officer
29
CERTIFICATIONS
I, John Emery, Chief Financial Officer of the Company, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ventiv Health, Inc;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Quarterly Report (the "Evaluation Date"); and
c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
DATE: November 13, 2002 By: /S/ JOHN R. EMERY
-----------------------
John R. Emery
Chief Financial Officer
30