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, 2008
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
INVENTIV HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2181734
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
200 Cottontail Lane
Vantage Court North
Somerset, New Jersey 08873
(Address of principal executive office and zip code)
(800) 416-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of October 31, 2008, there were 33,262,369 outstanding shares of the registrant's common stock.
INVENTIV HEALTH, INC.
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements are only predictions and provide our current expectations or forecasts of future events and financial performance and may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, though the absence of these words does not necessarily mean that a statement is not forward-looking.
We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Forward-looking statements include all matters that are not historical facts and include, without limitation statements concerning:
| | · | our business strategy, outlook, objectives, plans, intentions and goals; |
| | · | our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund our operations and planned capital expenditures for the foreseeable future; |
| | · | our belief that our growth and success will depend on our ability to continue to enhance the quality of our existing services, introduce new services on a timely and cost-effective basis, integrate new services with existing services, increase penetration with existing customers, recruit, motivate and retain qualified personnel and economically train existing sales representatives and recruit new sales representatives; |
| · | our expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions; |
| · | our belief that there are ample opportunities for cross-selling to our existing clients; |
| · | our anticipation that it will be necessary to continue to select, invest in and develop new and enhanced technology and end-user databases on a timely basis in the future in order to maintain our competitiveness; |
| · | our expectations regarding the impact of our acquisitions, joint ventures and partnerships; |
| | · | our expectations regarding the impact of the adoption of certain accounting standards; |
| | · | our expectations regarding the potential impact of pending litigation; and |
· | our expectations regarding the liquidation of the Columbia Strategic Cash Portfolio. |
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:
| | · | the potential impact of a recessionary environment on our customers and business; |
| | · | our ability to sufficiently increase our revenues and maintain or decrease expenses and cash capital expenditures to permit us to fund our operations; |
| | · | our ability to continue to comply with the covenants and terms of our credit facility and to access sufficient capital under our credit agreement or from other sources of debt or equity financing to fund our operations; |
| | · | the impact of any default by any of our credit providers or swap counterparties; |
| | · | our ability to accurately forecast costs to be incurred in providing services under fixed price contracts, including with respect to the leasing costs for our fleet vehicles and related fuel costs; |
| | · | the possibility that customer agreements will be terminated or not renewed; |
| | · | our ability to grow our existing client relationships, obtain new clients and cross-sell our services; |
| · | our ability to successfully operate new lines of business; |
| · | our ability to manage our infrastructure and resources to support our growth; |
| · | our ability to successfully identify new businesses to acquire, conclude acquisition negotiations and integrate the acquired businesses into our operations; |
| · | any disruptions, impairments, or malfunctions affecting software as well as excessive costs or delays that may adversely impact our continued investment in and development of software; |
| · | the potential impact of government regulation on us and on our clients base; |
| · | our ability to comply with all applicable laws as well as our ability to successfully implement from a timing and cost perspective any changes in applicable laws; |
| · | our ability to recruit, motivate and retain qualified personnel, including sales representatives and clinical staff; |
| · | our ability to maintain technological advantages in a variety of functional areas, including sales force automation, electronic claims surveillance and patient compliance; |
| · | the actual impact of the adoption of certain accounting standards; |
| · | the actual outcome of pending litigation; |
| · | any potential impairment of intangible assets derived from reductions in market capitalization; |
| · | changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing; and |
| · | our inability to determine the actual time at which the liquidation of our Columbia Strategic Cash Portfolio will be completed or the total losses that we will actually realize from that investment vehicle. |
Investors should carefully consider these risk factors and the matters discussed under Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2007.
Except to the extent required by applicable laws or rules, we do not undertake to update any forward-looking statements or to publicly announce revisions to any of the forward-looking statements, whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INVENTIV HEALTH, INC.
(in thousands, except share and per share amounts)
| | September 30, | December 31, |
| | 2008 (unaudited) | 2007 |
| ASSETS | | |
| Current assets: | | |
| Cash and equivalents | $86,880 | $50,973 |
| Restricted cash and marketable securities | 12,773 | 47,164 |
| Accounts receivable, net of allowances for doubtful accounts of $3,377 and $3,098 at | | |
| September 30, 2008 and December 31, 2007, respectively | 148,301 | 162,198 |
| Unbilled services | 105,653 | 89,384 |
| Prepaid expenses and other current assets | 13,968 | 19,836 |
| Current deferred tax assets | 4,846 | 4,279 |
| Total current assets | 372,421 | 373,834 |
| | | |
| Property and equipment, net | 66,951 | 54,740 |
| Equity investments | 220 | 309 |
| Goodwill | 388,238 | 383,714 |
| Other intangibles, net | 285,305 | 281,122 |
| Deposits and other assets | 22,042 | 17,137 |
| Total assets | $1,135,177 | $1,110,856 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | | |
| Current liabilities: | | |
| Current portion of capital lease obligations | $15,471 | $17,464 |
| Current portion of long-term debt | 3,300 | 3,300 |
| Accrued payroll, accounts payable and accrued expenses | 94,642 | 138,708 |
| Current income tax liabilities | 3,046 | 6,814 |
| Client advances and unearned revenue | 73,691 | 76,696 |
| Total current liabilities | 190,150 | 242,982 |
| | | |
| Capital lease obligations, net of current portion | 28,715 | 20,945 |
| Long-term debt | 322,575 | 325,050 |
| Non-current income tax liabilities | 5,584 | 7,323 |
| Deferred tax liabilities | 19,795 | 13,164 |
| Other non-current liabilities | 25,884 | 23,766 |
| Total liabilities | 592,703 | 633,230 |
| | | |
| Commitments and contingencies | | |
| | | |
| Minority interests | 375 | 160 |
| | | |
| Stockholders’ Equity: | | |
| Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding at | | |
| September 30, 2008 and December 31, 2007, respectively | -- | -- |
| Common stock, $.001 par value, 50,000,000 shares authorized; 33,255,812 and 32,325,109 | | |
| Shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively | 33 | 32 |
| Additional paid-in-capital | 392,204 | 362,116 |
| Accumulated other comprehensive losses | (6,485) | (6,493) |
| Accumulated earnings | 156,347 | 121,811 |
| Total stockholders’ equity | 542,099 | 477,466 |
| Total liabilities and stockholders’ equity | $1,135,177 | $1,110,856 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
(in thousands, except per share amounts)
(unaudited)
| | For the Three-Months Ended | | For the Nine-Months Ended |
| | September 30, | | September 30, |
| | 2008 | 2007 | | 2008 | 2007 |
| Net revenues | $243,383 | $212,650 | | $703,964 | $582,496 |
| Reimbursed out-of-pockets | 45,790 | 42,263 | | 132,572 | 126,807 |
| Total revenues | 289,173 | 254,913 | | 836,536 | 709,303 |
| | | | | | |
| Operating expenses: | | | | | |
| Cost of services | 153,427 | 131,575 | | 441,001 | 371,475 |
| Reimbursable out-of-pocket expenses | 48,649 | 42,977 | | 139,083 | 128,779 |
| Selling, general and administrative expenses | 59,498 | 51,515 | | 180,983 | 146,545 |
| Total operating expenses | 261,574 | 226,067 | | 761,067 | 646,799 |
| | | | | | |
| Operating income | 27,599 | 28,846 | | 75,469 | 62,504 |
| Interest expense | (6,443) | (6,574) | | (19,134) | (14,020) |
| Interest income | 438 | 727 | | 1,684 | 2,068 |
| Income from continuing operations before income tax provision, minority interest in income of subsidiary and (loss) income from equity investments | 21,594 | 22,999 | | 58,019 | 50,552 |
| Income tax provision | (8,125) | (8,711) | | (22,518) | (18,569) |
| Income from continuing operations before minority interest in income of subsidiary and (loss) income from equity investments | 13,469 | 14,288 | | 35,501 | 31,983 |
| Minority interest in income of subsidiary | (130) | (246) | | (1,022) | (736) |
| (Loss) income from equity investments | (13) | 92 | | (47) | 438 |
| Income from continuing operations | 13,326 | 14,134 | | 34,432 | 31,685 |
| | | | | | |
| Income from discontinued operations: | | | | | |
| (Losses) gains on disposals of discontinued operations, net of taxes | (3) | 90 | | 104 | 266 |
| Net (loss) income from discontinued operations | (3) | 90 | | 104 | 266 |
| | | | | | |
| Net income | $13,323 | $14,224 | | $34,536 | $31,951 |
| | | | | | |
| Earnings per share (see Note 7): | | | | | |
| Continuing operations: | | | | | |
| Basic | $0.40 | $0.44 | | $1.04 | $1.01 |
| Diluted | $0.40 | $0.43 | | $1.03 | $0.99 |
| Discontinued operations: | | | | | |
| Basic | $0.00 | $0.00 | | $0.01 | $0.01 |
| Diluted | $0.00 | $0.00 | | $0.00 | $0.00 |
| Net income: | | | | | |
| Basic | $0.40 | $0.44 | | $1.05 | $1.02 |
| Diluted | $0.40 | $0.43 | | $1.03 | $0.99 |
| Weighted average common shares outstanding: | | | | | |
| Basic | 33,215 | 32,232 | | 32,969 | 31,331 |
| Diluted | 33,498 | 32,876 | | 33,429 | 32,114 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
(in thousands)
(unaudited)
| | For the Nine-months Ended |
| | September 30, |
| | 2008 | 2007 |
| Cash flows from operating activities: | | |
| Net income | $34,536 | $31,951 |
| Income from discontinued operations | (104) | (266) |
| Income from continuing operations | 34,432 | 31,685 |
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | |
| Depreciation | 15,196 | 13,192 |
| Amortization | 11,302 | 7,315 |
| Loss (income) from equity investments | 47 | (438) |
| Minority interest in income of subsidiary | 1,022 | 736 |
| Fair market value adjustment on derivative financial instrument | 1,001 | 882 |
| Deferred taxes | 6,064 | (2,225) |
| Impairment of marketable securities | 607 | -- |
| Stock compensation expense | 8,321 | 7,807 |
| Tax benefit from stock option exercises and vesting of restricted shares | 3,131 | 9,390 |
| | | |
| Changes in assets and liabilities, net of effects from discontinued operations: | | |
| Accounts receivable, net | 14,564 | (4,171) |
| Unbilled services | (15,227) | (19,583) |
| Prepaid expenses and other current assets | 6,031 | (3,371) |
| Accrued payroll, accounts payable and accrued expenses | (6,054) | (5,038) |
| Net tax liabilities | (8,145) | 2,234 |
| Client advances and unearned revenue | (3,228) | (9,897) |
| Excess tax benefits from stock based compensation | (360) | (7,740) |
| Other | 2,833 | (5,077) |
| Net cash provided by continuing operations | 71,537 | 15,701 |
| Net cash used in discontinued operations | (52) | (215) |
| Net cash provided by operating activities | 71,485 | 15,486 |
| | | |
| Cash flows from investing activities: | | |
| Restricted cash balances and marketable securities | 28,687 | (399) |
| Investment in cash value of life insurance policies | (886) | (2,618) |
| Cash paid for acquisitions, net of cash acquired | (18,031) | (164,711) |
| Acquisition earn-out payments | (22,126) | (23,475) |
| Equity investments | 42 | (48) |
| Purchases of property and equipment | (13,506) | (6,049) |
| Proceeds from manufacturers rebates on leased vehicles | 3,773 | 3,718 |
| Net cash used in continuing operations | (22,047) | (193,582) |
| Net cash provided by discontinued operations | 156 | 481 |
| Net cash used in investing activities | (21,891) | (193,101) |
| | | |
| Cash flows from financing activities: | | |
| Net borrowings of long-term debt | -- | 166,250 |
| Repayments on long-term debt | (2,475) | (1,659) |
| Repayments on capital lease obligations | (11,499) | (10,362) |
| Deferred financing costs for long-term debt | -- | (2,154) |
| Withholding shares for taxes | (1,071) | (731) |
| Proceeds from exercise of stock options | 2,372 | 6,559 |
| Excess tax benefits from stock-based compensation | 360 | 7,740 |
| Distributions to minority interests in affiliated partnership | (807) | (899) |
| Net cash (used in) provided by continuing operations | (13,120) | 164,744 |
| Net cash (used in) provided by discontinued operations | -- | -- |
| Net cash (used in) provided by financing activities | (13,120) | 164,744 |
| | | |
| Effect of exchange rate changes | (567) | 255 |
| | | |
| Net change in cash and equivalents | 35,907 | (12,616) |
| Cash and equivalents, beginning of period | 50,973 | 79,835 |
| Cash and equivalents, end of period | $86,880 | $67,219 |
| | | |
| Supplemental disclosures of cash flow information: | | |
| Cash paid for interest | $17,727 | $13,093 |
| Cash paid for income taxes | $21,168 | $13,592 |
| Supplemental disclosures of non-cash activities: | | |
| Vehicles acquired through capital lease agreements | $20,139 | $10,435 |
| Stock issuance related to acquisitions | $18,921 | $53,173 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
inVentiv Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”) is a leading provider of value-added services to the pharmaceutical, life sciences and healthcare industries. The Company supports a broad range of clinical development, communications and commercialization activities that are critical to its customers' ability to complete the development of new drug products and medical devices and successfully commercialize them. In addition, the Company provides medical cost containment services to payors in its patient outcomes business. The Company’s goal is to assist its customers in meeting their objectives by providing our services in each of our operational areas on a flexible and cost-effective basis. We provide services to over 350 client organizations, including all top 20 global pharmaceutical companies, numerous emerging and specialty biotechnology companies and third party administrators.
The Company’s service offerings reflect the changing needs of its clients as their products move through the late-stage development and regulatory approval processes and into product launch and then throughout the product lifecycle. The Company has established expertise and leadership in providing the services its clients require at each of these stages of product development and commercialization and seek to address their outsourced service needs on a comprehensive basis throughout the product life cycle. For payors, the Company provides a variety of services that enhance savings and improve patient outcomes including opportunities to address billing errors, additional discounts and treatment protocols for patients.
Business Segments
The Company currently serves its clients primarily through four business segments, which correspond to its reporting segments for 2008: See Note 20, Segment Information, for further details.
| · | inVentiv Clinical, which provides professional resourcing and services to pharmaceutical, biotech and device companies. Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing, and strategic resource teams. In addition, inVentiv Clinical provides its clinical research clients with outsourced functional services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (which includes Smith Hanley Associates (“SHA”), Smith Hanley Consulting Group (“SHCG”) and MedFocus), HHI Clinical & Statistical Research Services (“HHI”), and Synergos; |
| · | inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. This segment includes inVentiv Communications, Inc., Jeffrey Simbrow Associates (“JSAI”), Ignite Health and Incendia Health Studios (collectively, “Ignite”) (acquired in March 2007), Chamberlain Communications Group, Inc. (“Chamberlain”) (acquired in March 2007), Addison Whitney (acquired in June 2007) and Chandler Chicco Agency (“CCA”) (acquired in July 2007); |
| · | inVentiv Commercial, which consists of the Company’s outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. This segment includes inVentiv Strategy & Analytics (including its Strategyx business unit acquired in June 2007) and inVentiv Selling Solutions; and |
| · | inVentiv Patient Outcomes, which provides services related to patient adherence, patient assistance and reimbursement, clinical educator teams and medical cost containment and disease management. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute (“TTI”), AWAC (acquired in July 2007) and Patient Marketing Group, Inc. (“PMG”) (acquired in August 2008). |
The Company’s services are designed to provide resources and other clinical services in support of the pharmaceutical clinical development process, and 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. In addition, the Company provides a variety of services that enhance savings and improve patient outcomes for third party administrators and other payors.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the condensed consolidated balance sheets, condensed consolidated results of operations and condensed consolidated cash flows of the Company and its subsidiaries (the "condensed consolidated financial statements"). These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) related to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with 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) that, in the opinion of management, are necessary to fairly present the Company's condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007, the condensed consolidated income statements of the Company for the three and nine months ended September 30, 2008 and 2007 and the condensed consolidated cash flows for the nine-months ended September 30, 2008 and 2007. Operating results for the three and nine months ended September 30, 2008 are not indicative of the results that may be expected for the year ending December 31, 2008.
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 Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on February 29, 2008.
The consolidated financial statements include the accounts of inVentiv Health, Inc., its wholly owned subsidiaries and its 60% owned subsidiary, Taylor Search Partners (“TSP”), which was acquired in conjunction with the acquisition of inVentiv Communications, Inc. Our continuing operations consist primarily of four business segments: inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes. All significant intercompany transactions have been eliminated in consolidation. In December 2007, the Company increased its investment interest from 44% to 85% in Angela Liedler GmbH (“Liedler”), a service provider of communication and marketing tools for technical, medical and pharmaceutical products, located in Germany. The Company accounted for Liedler as an equity investment until the date of the acquisition of the additional interest, and then consolidated its results thereafter.
As a result of the acquisition of inVentiv Communications, Inc., the Company has a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden, which is accounted for by using the equity method of accounting.
3. Recently Issued Accounting Standards:
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 162 ("SFAS 162"), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards , AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The Company does not believe that SFAS 162 will have a material impact on its Condensed Consolidated Financial Statements.
In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133”, which requires additional disclosures regarding a company’s derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk–related as well as cross-referencing within the notes to the financial statements to enable financial statement users to locate important information about derivative instruments, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of this standard on its Condensed Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. SFAS 141(R) also establishes expanded disclosure requirements for business combinations. SFAS 141(R) will become effective January 1, 2009. The Company is currently evaluating the impact of this standard on its Condensed Consolidated Financial Statements; however, this is mainly dependent on the timing, nature and extent of our acquisitions consummated after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and reporting framework for minority interests by a parent company. SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. SFAS 160 will become effective January 1, 2009. The Company is currently evaluating the impact of this standard on its Condensed Consolidated Financial Statements.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company’s adoption of SFAS 159, effective January 1, 2008, did not have a material effect on its condensed consolidated balance sheets, results of operations and cash flows as we did not elect this fair value option.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal year beginning January 1, 2008; as such, the Company has adopted SFAS 157 as of January 1, 2008, as required. In February 2008, the FASB delayed the effective date of SFAS 157 for certain nonfinancial assets and liabilities until January 1, 2009; the scope of which applies to all the Company’s nonfinancial assets and liabilities. Accordingly, the Company’s adoption of this standard for 2008 is limited to financial assets and liabilities. The Company expects to complete its evaluation of the impact SFAS 157 will have on its nonfinancial assets and liabilities when the FASB completes its evaluation of implementation issues.
4. Acquisitions:
Acquisitions are accounted for using purchase accounting, including SFAS No. 141, Business Combinations, (“SFAS No. 141”) and the financial results of the acquired businesses are included in the Company’s financial statements from their acquisitions dates. If a business is acquired subsequent to a reporting period, but prior to the issuance of the Company’s financial statements, it is disclosed in the notes to the consolidated financial statements. Earn-out payments from acquisitions are generally accrued at the end of an earn-out period in conjunction with the preparation of the Company’s quarterly financial statements when the acquired company’s results are reviewed, as more fully described below. The terms of the acquisition agreements generally include multiple earn-out periods or a multi-year earnout period. Except for inVentiv Communications, Inc., pro forma financial information was not required to be disclosed under the Securities and Exchange Commission’s Regulation S-X for the following acquisitions because none of the specific thresholds were met as they were not material to the consolidated operations of the Company at the time of acquisition.
PMG - In August 2008, the Company completed the acquisition of the net assets of PMG for approximately $15.2 million in cash, including certain post-closing adjustments and direct acquisition costs yet to be finalized. The Company will be obligated to make certain earn-out payments, which may be material, contingent on PMG’s performance measurements during 2008 and 2009. PMG is headquartered in New Jersey and is a leading provider of patient relationship marketing services. PMG’s financial results have been reflected in the inVentiv Patient Outcomes segment since the date of its acquisition.
CCA - In July 2007, the Company completed the acquisition of CCA, for approximately $69.1 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on CCA’s performance measurements during 2007 through 2010. CCA is headquartered in New York and is one of the largest healthcare-focused public relations firms in the world. CCA includes agencies organized and operating in the United States, the United Kingdom and France. CCA’s financial results have been reflected in the inVentiv Communications’ segment since the date of its acquisition.
AWAC - In July 2007, the Company completed the acquisition of AWAC for approximately $76.3 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on AWAC’s performance measurements during 2007 through 2010. AWAC is based in Georgia and is a leading provider of proprietary IT-driven cost containment and medical consulting solutions to third party administrators, ERISA self-funded plans, fully insured plans, employer groups, managing general underwriters and insurance carriers. The AWAC acquisition included the business assets of AWAC.MD, Inc. as well as Innovative Health Strategies, Inc. and iProcert, LLC, which were acquired as entities. Innovative Health Strategies, Inc. and iProcert, LLC were subsequently dissolved and their business operations consolidated with the AWAC.MD business operations. AWAC’s financial results have been reflected in the inVentiv Patient Outcomes segment since the date of its acquisition.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Addison Whitney - In June 2007, the Company completed the acquisition of the net assets of Addison Whitney, Inc. for approximately $18.3 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Addison Whitney’s performance measurements during 2007 through 2010. Addison Whitney is based in North Carolina, and specializes in global branding consultancy that focuses on creating unique corporate and product brands. Addison Whitney’s financial results have been reflected in the inVentiv Communications’ segment since the date of its acquisition.
Strategyx - In June 2007, the Company completed the acquisition of Strategyx for approximately $9.9 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Strategyx’s performance measurements during 2007 through 2010. Strategyx is based in Somerville, New Jersey, and specializes in global strategic consulting. Strategyx’s financial results have been reflected in the inVentiv Commercial segment since the date of its acquisition.
Ignite - In March 2007, the Company completed the acquisition of the assets of ignite comm.net and Incendia Health, Inc. (including its Incendia Health Studios brand of services, which is now operated as a division of Ignite) for approximately $21.2 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Ignite's performance measurements during 2007 through 2010. For the 12-month period ended March 31, 2008, approximately $6.3 million of cash and stock was accrued, of which approximately $6.2 million was paid during the third quarter of 2008. Ignite is based in Irvine, California and specializes in medical advertising and interactive communications targeting patients and caregivers. Ignite’s financial results have been reflected in the inVentiv Communications segment since the date of its acquisition.
Chamberlain - In March 2007, the Company completed the acquisition of Chamberlain for approximately $14.7 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Chamberlain's performance measurements during 2007 through 2009. Chamberlain is based in New York, and specializes in public relations in the healthcare industry. Chamberlain’s financial results have been reflected in the inVentiv Communications segment since the date of its acquisition.
MedConference - In November 2006, the Company completed the acquisition of the net assets of The Maxwell Group, Inc. and its MedConference brand of services (“MedConference”) for approximately $8.1 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. MedConference, based in Norristown, PA, was founded in 1989 and is a leading provider of live and on-demand virtual event services to the pharmaceutical industry. The Company will be obligated to make certain earn-out payments, which may be material, contingent on MedConference's performance measurements during 2006 through 2008. The amount accrued at December 31, 2006, and paid in 2007, with respect to MedConference for the 2006 earnout was approximately $1.6 million in cash and stock. MedConference did not achieve the initial earnout threshold for 2007 and thus, no amount was accrued. The results of MedConference have been reflected in the inVentiv Commercial segment since the date of its acquisition.
DialogCoach - In November 2006, the Company completed the acquisition of the net assets of American Speakers Education Research and Training, L.L.C. and DialogCoach LLC (collectively, “DialogCoach”) for approximately $5.7 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. DialogCoach, based in Coopersburg, PA, is an education and training company focused on customized solutions in specialty markets and building training and educational programs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on DialogCoach's performance measurements during 2006 through 2008. DialogCoach did not achieve the initial earnout threshold for 2006 and 2007 and thus, no amount was accrued. The results of DialogCoach have been reflected in the inVentiv Commercial segment since the date of its acquisition.
Synergos - In April 2006, the Company acquired the net assets of Synergos for approximately $6.4 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. Synergos, based in The Woodlands, Texas, is a focused clinical services provider with expertise in clinical trial management services, particularly project management and monitoring. The Company was obligated to make certain earn-out payments, contingent on Synergos’s performance measurements during 2006 and 2007. The amount accrued at December 31, 2006, and paid in 2007, with respect to Synergos for the 2006 earnout, was approximately $0.8 million in cash and stock. The amount accrued at December 31, 2007 for the 2007 earnout was approximately $0.9 million in cash and stock, which was paid in May 2008. The results of Synergos have been reflected in the inVentiv Clinical segment from the date of its acquisition.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
JSAI - In April 2006, the Company acquired JSAI for approximately $8.8 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. JSAI is Canada's leading healthcare marketing and communications agency. The Company will be obligated to make certain earn-out payments, which may be material, contingent on JSAI’s performance measurements during the 12-month periods ending March 31, 2007, 2008 and 2009. The amount due with respect to JSAI for the 12-month period ended March 31, 2007 was approximately $2.8 million in cash and stock, which the Company accrued at March 31, 2007, of which the cash portion was paid in 2007 and stock portion was paid in 2008 once certain contractual restrictions were met. JSAI did not achieve the initial earnout threshold for the 12-month period ended March 31, 2008 and thus, no amount was accrued. The results of JSAI have been reflected in the inVentiv Communications segment since the date of its acquisition.
Adheris - In February 2006, the Company acquired Adheris for approximately $69.9 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. Adheris is a Massachusetts-based industry leader in the area of patient compliance and persistency programs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Adheris's performance measurements during 2006 through 2008. Adheris’s 2006 earnout of approximately $7.7 million in cash and stock, of which $7.9 million was accrued at December 31, 2006, was paid in 2007. Adheris’ 2007 earnout of approximately $15.1 million in cash and stock, of which $15.3 million was accrued at December 31, 2007, was paid in 2008. The portions adjusted in the subsequent years mainly relate to the finalization of the earn-out for the previous years, as allowed under the contract. The results of Adheris were reflected in the inVentiv Communications segment from the date of its acquisition until June 30, 2007. Adheris was transferred from the inVentiv Communications segment to the inVentiv Patient Outcomes segment following the acquisition of AWAC and the concomitant revision of our segment reporting analysis.
inVentiv Communications, Inc. - - In October 2005, the Company acquired all of the outstanding capital stock of inVentiv Communications, Inc. (then known as inChord Communications, Inc.) for approximately $196.8 million of cash and stock, including certain post-closing adjustments and direct acquisition costs. To help finance the transaction, the Company entered into a Credit Agreement, dated October 5, 2005, which was amended and restated on July 6, 2007, as more fully described in Note 11. The Company acquired inVentiv Communications, Inc. to vastly expand its service portfolio in the marketing and communications arena, expand its market position in the pharmaceutical services market and achieve cross-selling opportunities by leveraging its existing businesses. The Company was obligated to make certain earn-out payments, contingent on inVentiv Communications, Inc.’s performance measurements from 2005 through 2007. inVentiv Communications, Inc.’s 2005 earnout of approximately $3.8 million in cash and stock, of which $3.6 million was accrued at December 31, 2005, was paid in 2006. inVentiv Communications, Inc.’s 2006 earnout of approximately $24.7 million in cash and stock, of which $25.0 million was accrued for at December 31, 2006, was paid in 2007. inVentiv Communications, Inc.’s 2007 earnout was approximately $21.8 million in cash and stock, which was accrued at December 31, 2007, of which $18.5 million was paid in 2008 and $3.3 million remains accrued at September 30, 2008. The portions adjusted in the subsequent years mainly relate to the finalization of the earn-outs for the previous years, as allowed under the contract. The results of inVentiv Communications, Inc. have been reflected in the inVentiv Communications segment since the date of acquisition.
5. Restricted Cash and Marketable Securities:
As of September 30, 2008, there was approximately $1.6 million of restricted cash, of which $0.3 million relates to outstanding letters of credit, to support the security deposits relating to the New York, Washington D.C, California and London offices of CCA and are reflected in the inVentiv Communications segment. The beneficiaries have not drawn on the $0.3 million letters of credit. As this cash has been pledged as collateral, it is restricted from use for general purposes and has been classified in restricted cash and marketable securities at September 30, 2008 and December 31, 2007.
The Company receives cash advances from its clients as funding for specific projects and engagements. These funds are deposited into segregated bank accounts and used solely for purposes relating to the designated projects. Although these funds are not held subject to formal escrow agreements, the Company considers these funds to be restricted and has classified these balances accordingly. Cash held in such segregated bank accounts totaled approximately $0.1 million and $0.2 million held in escrow on behalf of clients and was included in restricted cash and marketable securities at September 30, 2008 and December 31, 2007, respectively.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of September 30, 2008 and December 31, 2007, the Company had $16.2 million and $45.3 million, respectively, invested in the Columbia Strategic Cash Portfolio (“CSCP”). During the third quarter of 2008, based on an update provided by CSCP, the Company has recorded $5.1 million of the $16.2 million balance as long-term. The $5.1 million is classified as deposits and other assets on the September 30, 2008 Balance Sheet, which is expected to be distributed after the third quarter of 2009. As the majority of the Company’s recorded balances in the CSCP continue to be short-term in nature, $11.1 million and $45.3 million, respectively, are classified as restricted cash and marketable securities on the September 30, 2008 and December 31, 2007 Balance Sheets. During the nine months ended September 30, 2008 and fourth quarter of 2007, the Company recorded $0.6 million and $0.8 million, respectively, relating to impairments of the Company's investment in the CSCP, which held certain asset-backed securities. Subsequent to the end of the third quarter of 2008, based on current portfolio data available, there was approximately $0.7 million of additional impairment, which will be recorded during the fourth quarter of 2008 and may materially change depending on market conditions. Consistent with the Company's investment policy guidelines, the majority of CSCP investments held by the Company had AAA/Aaa credit ratings at the time of purchase.
The CSCP maintained a net asset value of $1 per unit until December 2007, after which the net asset value per unit fluctuated, and will continue to fluctuate, based on changes in market values of the securities held by the portfolio. The process of liquidating CSCP’s portfolio was initiated in December 2007 and is anticipated to continue through 2009. Future impairment charges may result depending on market conditions until the fund is fully liquidated. The $1.4 million cumulative impairment charge through September 30, 2008, which excludes the subsequent additional impairment discussed in the preceding paragraph, does not have a material impact on the company's liquidity or financial flexibility.
On February 27, 2008, we entered into an unsecured credit facility (the “Blue Ridge facility”) with Blue Ridge Investments, L.L.C., an affiliate of Bank of America, N.A., to allow the Company to separately borrow up to the current balance remaining in the CSCP. We have not borrowed any funds under this credit facility. The Blue Ridge facility provides for multiple drawdowns from time to time until maturity, which shall be the earlier of the day following the redemption of all of our shares of the CSCP and July 1, 2009. The outstanding balance under the facility may not (subject to limited exceptions) exceed our account value in the CSCP, and distributions from the CSCP must be applied to reduce the outstanding principal balance under the facility. Amounts borrowed bear interest at the one-month LIBOR rate plus 0.35% per annum, fluctuating daily.
6. Employee Stock Compensation:
The Company follows SFAS No. 123 (“SFAS 123R”), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period.
The Company uses the modified prospective application method, as permitted under SFAS 123R, which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation over the service periods for awards expected to vest. Under this method, compensation cost in the year of adoption includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, the date of adoption, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (2) all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company will recognize the cost of all employee stock awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures. Accordingly, prior periods amounts have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
The adoption of SFAS 123R resulted in stock-based compensation expense of $2.6 million, of which $0.6 million was recorded in cost of services and $2.0 million recorded as Selling, General and Administrative expenses (“SG&A”) for the three months ended September 30, 2008 and $2.8 million, of which $0.7 million was recorded in cost of services and $2.1 million recorded as SG&A for the three months ended September 30, 2007. For the nine-months ended September 30, 2008, stock-based compensation expense was $8.3 million, of which $1.9 million was recorded in cost of services and $6.4 million recorded as SG&A; for the nine-months ended September 30, 2007, stock-based compensation expense was $7.8 million, of which $2.0 million was recorded in cost of services and $5.8 million was recorded as SG&A.
Stock-based compensation expense caused income before income tax provision, minority interest in income of subsidiary and income from equity investments to decrease by $2.6 million and $2.8 million for the three months ended September 30, 2008 and 2007, respectively, caused net income to decrease by $1.6 million and $1.7 million for the three months ended September 30, 2008 and 2007, respectively, and caused basic and diluted earnings per share to decrease by $0.05 per share for the three months ended September 30, 2008 and 2007. During the nine months ended September 30, 2008 and September 30, 2007 the stock-based compensation expense caused income before income tax provision, minority interest in income of subsidiary and income from equity investments to decrease by $8.3 million and $7.8 million, respectively, caused net income to decrease by $4.9 million and $4.6 million for the nine months ended September 30, 2008 and 2007, respectively, and caused basic and diluted earnings per share to decrease by $0.15 per share and $0.14 per share for the nine months ended September 30, 2008 and 2007, respectively.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cash provided by financing activities increased by $0.4 million and $7.7 million for the nine-months ended September 30, 2008 and 2007, respectively, related to excess tax benefits from the exercise of stock-based awards.
Assumptions
The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2008 | 2007 | 2008 | 2007 |
| Expected life of option | 5.5-6 yrs | 5.5-6 yrs | 5.5-6 yrs | 5.5-6 yrs |
| Risk-free interest rate | --(1) | 4.90% | 3.06% | 4.81% |
| Expected volatility | 40% | 40% | 37% | 40% |
| Expected dividend yield | 0.00% | 0.00% | 0.00% | 0.00% |
(1) In the third quarter of 2008, no options were granted by the Company, hence, the interest rate was not applicable.
With the adoption of SFAS 123R in 2006, the Company has limited its issuance of stock options to senior executives, while granting restricted shares to employees at various levels. During the fourth quarter of 2005, prior to the adoption of SFAS 123R, management analyzed its expected volatility and expected life of stock options and concluded that the expected volatility for options granted during the fourth quarter of 2005 should be 45% and the expected life of the options granted should range between 5.5 and 6.0 years, depending on the grantee’s employee status. The Company analyzed historical trends in these variables on a quarterly basis; during the nine months of 2008 and 2007 the volatility remains at a range of 37-40%. As of January 1, 2008, the Company adopted SAB 110 revision to SAB topic 14 for determining the expected term and the range of the expected term remained unchanged at 5.5 to 6 years as previously reported under SAB 107. The Company continues to base the estimate of risk-free rate on the U.S. Treasury yield curve in effect at the time of grant. The Company has never paid cash dividends, does not currently intend to pay cash dividends, and has certain restrictions under its credit facility to pay dividends and thus has assumed a 0% dividend yield. These conclusions were based on several factors, including past company history, current and future trends, comparable benchmarked data and other key metrics.
As part of the requirements of SFAS 123R, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The forfeiture rate was estimated based on historical forfeitures. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. The forfeiture rates utilized for the nine months ended 2008 and 2007 were 6.92% and 3.36%, respectively.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock Incentive Plan and Award Activity
The Company’s 2006 Stock Incentive Plan (“Stock Plan” or “LTIP”) authorizes incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights ("SARs”). Prior to the adoption of the LTIP, the Company was authorized to grant equity incentive awards under its 1999 Stock Incentive Plan (together with the LTIP, the "Equity Incentive Plans"), which was terminated at the time the LTIP was adopted. The aggregate number of unissued shares of the Company’s common stock that may be issued under the Stock Plan is 1.5 million shares.
The exercise price of options granted under the Stock Plan may not be less than 100% of the fair market value per share of the Company’s common stock on the date of the option grant. The vesting and other provisions of the options are determined by the Compensation Committee of the Company’s Board of Directors.
The following table summarizes activity under the Company’s Equity Incentive Plans for the nine months ended September 30, 2008 (in thousands, except per share amounts):
| | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value |
| Outstanding at January 1, 2008 | 1,506 | $19.43 | | |
| Granted and assumed | 261 | $31.37 | | |
| Exercised | (170) | $13.96 | | |
| Forfeited/expired/cancelled | (91) | $19.29 | | |
| Outstanding at September 30, 2008 | 1,506 | $22.13 | 6.74 | $3,007 |
| | | | | |
| Vested and expected to vest at September 30, 2008 | 1,440 | $21.74 | 6.66 | $3,007 |
| | | | | |
| Options exercisable at September 30, 2008 | 836 | $16.76 | 5.57 | $2,967 |
The weighted-average grant-date fair value of stock options granted during the three-months ended September 30, 2008 was not applicable because no stock options were granted and $17.36 per share for the three-months ended September 30, 2007. The weighted-average grant-date fair value of stock options granted during the nine-months ended September 30, 2008 and 2007 was $12.83 per share and $16.62 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2008 and 2007 was $0.2 million and $0.7 million, respectively, and was $2.4 million and $6.6 million during the nine-months ended September 30, 2008 and 2007, respectively. As of September 30, 2008 and December 31, 2007, there was approximately $5.3 million and $6.6 million, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan; that cost is expected to be recognized over a weighted average of 2.4 years and 2.2 years, respectively.
The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements were negligible and $1.3 million for the three months ended September 30, 2008 and 2007, respectively, and totaled $1.0 million and $7.8 million for the nine-months ended September 30, 2008 and 2007, respectively.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Options outstanding and exercisable have exercise price ranges and weighted average remaining contractual lives of:
| | | Outstanding Options | | Exercisable Options |
Exercise Price Range | Numbers of Options | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Number of Options | Weighted Average Exercise Price |
| $1.66 | To | $8.06 | 151,674 | $6.21 | 2.05 | 151,674 | $6.21 |
| $8.45 | To | $15.48 | 99,916 | $10.00 | 5.27 | 99,916 | $10.00 |
| $15.96 | To | $15.96 | 250,000 | $15.96 | 5.98 | 250,000 | $15.96 |
| $16.89 | To | $17.75 | 188,803 | $17.26 | 5.88 | 112,413 | $17.34 |
| $18.20 | To | $26.76 | 198,623 | $24.92 | 7.05 | 88,750 | $24.80 |
| $26.77 | To | $26.77 | 180,000 | $26.77 | 7.70 | 90,000 | $26.77 |
| $28.66 | To | $31.45 | 124,882 | $29.73 | 9.24 | 4,352 | $30.64 |
| $32.55 | To | $32.55 | 156,891 | $32.55 | 9.30 | -- | -- |
| $35.01 | To | $35.01 | 96,822 | $35.01 | 8.31 | 24,213 | $35.01 |
| $37.21 | To | $37.21 | 57,914 | $37.21 | 8.75 | 14,479 | $37.21 |
| | | | 1,505,525 | | | 835,797 | |
A summary of the status and changes of the Company’s nonvested shares related to its Equity Incentive Plans as of and during the nine months ended September 30, 2008 is presented below:
(in thousands, except per share amounts) | Shares | Weighted Average Grant-Date Fair Value |
| Nonvested at January 1, 2008 | 596 | $29.41 |
| Granted | 313 | $30.45 |
| Released | (181) | $27.49 |
| Forfeited | (38) | $28.66 |
| Nonvested at September 30, 2008 | 690 | $30.41 |
As of September 30, 2008 and December 31, 2007, there was approximately $14.1 million and $12.4 million, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan; that cost is expected to be recognized over a weighted average of 2.7 years and 2.8 years, respectively. The total fair value of shares vested during the three and nine months ended September 30, 2008 was $0.1 million and $5.5 million, respectively. During the three and nine-months ended September 30, 2007 the amounts were $0.2 million and $4.3 million, respectively.
7. Earnings Per Share (“EPS”):
Basic earnings per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net income per share when their inclusion would be antidilutive.
A summary of the computation of basic and diluted earnings per share from continuing operations is as follows:
| | Three-Months Ended September 30, | Nine-months Ended September 30, |
| | 2008 | 2007 | 2008 | 2007 |
| | (in thousands, except per share data) |
| Basic EPS from Continuing Operations Computation | | | | |
| Income from continuing operations | $13,326 | $14,134 | $34,432 | $31,685 |
| Weighted average number of common shares outstanding | 33,215 | 32,232 | 32,969 | 31,331 |
| Basic EPS from continuing operations | $0.40 | $0.44 | $1.04 | $1.01 |
| | | | | |
| Diluted EPS from Continuing Operations Computation | | | | |
| Income from continuing operations | $13,326 | $14,134 | $34,432 | $31,685 |
| | | | | |
| Weighted average number of common shares outstanding | 33,215 | 32,232 | 32,969 | 31,331 |
Stock options (1) | 229 | 465 | 293 | 596 |
Restricted stock awards (2) | 54 | 179 | 167 | 187 |
| Total diluted common shares outstanding | 33,498 | 32,876 | 33,429 | 32,114 |
| | | | | |
| Diluted EPS from continuing operations | $0.40 | $0.43 | $1.03 | $0.99 |
(1) For the three-months and nine-months ended September 30, 2008, 798,133 shares and 566,365 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding. Similarly, for the three and nine months ended September 30, 2007, 180,724 shares and 143,941 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding.
(2) For the three-months and nine-months ended September 30, 2008, 489,774 shares and 48,303 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding. Similarly, for the three and nine months ended September 30, 2007, negligible amount of shares were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Significant Clients:
During the nine-months ended September 30, 2008 and 2007 the Company had no clients that accounted for more than 10%, individually, of the Company's total revenues across our inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments.
9. Goodwill and Other Intangible Assets:
Goodwill consists of the following:
(in thousands) | January 1, 2008 | Acquisitions | Contingent Consideration(1) | Other | September 30, 2008 |
| inVentiv Clinical | $56,944 | $-- | $32 | $186 | $57,162 |
| inVentiv Communications | 190,958 | (6,517) (2) | 6,107 | 863(3) | 191,411 |
| inVentiv Commercial | 45,773 | -- | -- | -- | 45,773 |
| inVentiv Patient Outcomes | 90,039 | 4,046 | (193) | -- | 93,892 |
| Total | $383,714 | ($2,471) | $5,946 | $1,049 | $388,238 |
| (1) | The contingent consideration represents adjustments relating to the finalization of the earnouts for the twelve months ended December 31, 2007 and March 31, 2008. (see Note 4) |
| (2) | The entire amount relates to the allocation of the goodwill at year-end to identifiable intangible assets arising from the Liedler acquisition, which was acquired on December 28, 2007. Under SFAS 141, if a business combination is consummated toward the end of an acquiring enterprise's fiscal year or the acquired enterprise is very large or unusually complex, the acquiring enterprise may not be able to obtain some of the data required to complete the allocation of the cost of the purchased enterprise for inclusion in its next annual financial report. As discussed in Part 2, Item 8 of our Annual Report on Form 10-K, since Liedler was acquired on December 28, 2007, the valuation was not completed by the time the 10-K was filed. The allocation period of Liedler will culminate later this year when the Company finalizes its valuation in this investment. |
| (3) | This amount relates to a tax adjustment on the Chamberlain acquisition accounted for under EITF 93-7 Uncertainties Related to Income Taxes in a Purchase Business Combination. |
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Other intangible assets consist of the following:
| | September 30, 2008 | | December 31, 2007 |
| (in thousands) | | Accumulated | | | | Accumulated | |
| | Gross | Amortization | Net | | Gross | Amortization | Net |
| Customer relationships | $117,369 | $(24,270) | $93,099 | | $105,537 | $(15,946) | $89,591 |
| Technology | 39,440 | (3,850) | 35,590 | | 37,940 | (1,714) | 36,226 |
| Noncompete agreement | 1,506 | (847) | 659 | | 880 | (617) | 263 |
| Tradenames subject to amortization | 3,008 | (666) | 2,342 | | 1,211 | (277) | 934 |
| Other | 1,234 | (609) | 625 | | 1,234 | (386) | 848 |
| Total definite-life intangibles | 162,557 | (30,242) | 132,315 | | 146,802 | (18,940) | 127,862 |
Tradenames not subject to amortization (1) | 152,990 | -- | 152,990 | | 153,260 | -- | 153,260 |
Total other intangibles (2) | $315,547 | $(30,242) | $285,305 | | $300,062 | $(18,940) | $281,122 |
| (1) | These indefinite-life tradenames arose primarily from acquisitions where the brand names of the entities acquired are very strong and longstanding. These tradenames are also supported annually in the Company’s impairment test for goodwill and tradenames conducted in June of every year. |
| (2) | The $15.5 million increase in total gross other intangibles arise from the assignment of intangibles from the Liedler and PMG acquisitions. |
The Company’s acquisitions have resulted in approximately $367.5 million of goodwill and the following gross intangible assets:
| Intangible asset | | Amount (in thousands) | Weighted average amortization period |
| Tradename | | $155,998 | (1) |
| Customer relationships | | 117,369 | 10.7 years |
| Technology | | 39,440 | 14.2 years |
| Noncompete agreement | | 1,506 | 4.5 years |
| Other | | 975 | 3.5 years |
| Total | | $315,288 | (2) |
| (1) | $3.0 million of the tradenames are definite-life intangibles, which have a weighted average amortization period of 5.0 years. |
| (2) | Excludes $0.3 million of a definite-life intangible asset that was not acquisition-related. |
Amortization expense, based on intangibles subject to amortization held at September 30, 2008, is expected to be $3.9 million for the remainder of 2008, $15.5 million in 2009, $15.0 million in 2010, $14.6 million in 2011, $14.1 million in 2012, $12.6 million in 2013 and $56.6 million thereafter.
The balances recorded on the Company’s Condensed Balance Sheet for goodwill and other indefinite-life intangibles, such as tradenames, are assessed annually for potential impairment as of June 30, pursuant to the guidelines of SFAS 142, Goodwill and Other Intangible Assets. The Company conducted its assessment and concluded that these balances were not impaired as of June 30, 2008, and has determined that there are no factors present that would more-likely-than-not reduce the fair value of the Company’s reporting units below their carrying amounts and therefore the Company believes that no impairment exists as of September 30, 2008.
As a result of recent market conditions, including the credit crisis, the Company, along with many other companies in and out of the industry, has experienced a decline in market capitalization. The Company does not believe that an event occurred or circumstances changed that would more-likely-than-not reduce the fair value of the Company’s reporting units below their carrying amounts as of September 30, 2008, but it will continue to monitor economic conditions and other factors to determine whether an impairment test is warranted during future periods. Continuance of the current market conditions and other factors could result in the Company determining that some or all of its goodwill and other intangible assets are impaired.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. Fair Value Measurement
As discussed in Note 3, the Company adopted SFAS 157 on January 1, 2008 which requires enhanced disclosures about assets and liabilities measured at fair value. Our adoption of SFAS 157 was limited to financial assets and liabilities, which primarily relate to our marketable securities, deferred compensation plan and derivative contracts.
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| | | | | |
| Level 1 | | - | | Inputs are quoted prices in active markets for identical assets or liabilities. |
| Level 2 | | - | | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
| Level 3 | | - | | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 and the basis for that measurement:
(in thousands) | Total Fair Value Measurement September 30, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| ASSETS | | | | |
| Marketable Securities | $16,221 (1) | $-- | $16,221 (1) | $-- |
Deferred Compensation Plan Assets | 7,404 | -- | 7,404 | -- |
| TOTAL ASSETS | $23,625 | -- | $23,625 | -- |
| | | | | |
| LIABILITIES | | | | |
Deferred Compensation Plan Liabilities | $7,418 | -- | $7,418 | -- |
| Derivative Liabilities | 10,830 | -- | 339 | 10,491 |
| TOTAL LIABILITIES | $18,248 | $-- | $7,757 | $10,491 |
(1) – As described in Note 5, the marketable securities balance of $16.2 million includes $11.1 million classified as restricted cash and marketable securities and $5.1 million as deposits and other assets, respectively, on the Company’s September 30, 2008 Balance Sheet.
As mentioned in Note 13 below, as a result of recent market conditions, the Company updated its valuation of its five-year interest rate derivative as of September 30, 2008, resulting in a credit value adjustment of $1.4 million to the derivative liability, with a corresponding offset to Other Comprehensive Income as a result of cash flow hedge accounting. This valuation, which involved current and future probability-adjusted risk factors, included inputs derived from valuation techniques in which one or more significant inputs were unobservable, thus changing the classification from a Level 2 input to a Level 3 input. The significant inputs in this valuation included credit market spread, estimated exposure and company and counterparty default risk. The following is a rollforward of the Level 3 liability through September 30, 2008:
| | Fair Value Measurements |
(in thousands) | Using Significant Unobservable Inputs (Level 3) |
| | Derivative |
| Balance at January 1, 2008 | $-- |
| Included in earnings (or changes in net assets) | -- |
| Included in other comprehensive income | -- |
| Purchases, issuances and settlements | -- |
| Transfers in and/or out of Level 3 | 10,491 |
| Balance at September 30, 2008 | $10,491 |
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. Debt:
On July 6, 2007, the Company entered into an Amended and Restated Credit Agreement (“the Credit Agreement”) with UBS AG, Stamford Branch and others. The Credit Agreement provides for a secured term loan of $330 million which was made available to inVentiv in a single drawing, up to $20 million in additional term loans ("delayed draw term loans") that was to be advanced no later than January 6, 2008, which we elected not to draw, a $50 million revolving credit facility, of which $10 million is available for the issuance of letters of credit, and a swingline facilty. The Credit Agreement was used to:
| · | amend the existing October 2005 credit facility, with a remaining balance of $164 million, and |
| · | enter into a new $166 million loan to help fund the acquisitions of Chandler Chicco Agency and AWAC, and pay the fees associated with the new credit facility, with the balance retained by inVentiv as working capital. |
The term loan will mature on the seventh anniversary of the Credit Agreement, with scheduled quarterly amortization of 1% per year during years one through six and 94% during year seven. The delayed draw term loans will mature on the seventh anniversary of the Credit Agreement, with scheduled quarterly amortization of 0.25% per quarter and the balance becoming due on such seventh anniversary. The revolving loans will mature on the sixth anniversary of the Credit Agreement. Amounts advanced under the Credit Agreement must be prepaid with a percentage, determined based on a leverage test set forth in the Credit Agreement, of Excess Cash Flow (as defined in the Credit Agreement) and the proceeds of certain non-ordinary course asset sales, certain issuances of debt obligations and 50% of certain issuances of equity securities of inVentiv and its subsidiaries, subject to certain exceptions. inVentiv may elect to prepay the loans, in whole or in part at any time, in certain minimum principal amounts, without penalty or premium (other than normal LIBOR break funding costs). Amounts borrowed under the Credit Agreement in respect of term loans (including delayed draw term loans) that are repaid or prepaid may not be reborrowed. Amounts borrowed under the Credit Agreement in respect of revolving loans may be paid or prepaid and reborrowed.
Interest on the loans will accrue, at inVentiv's election, at either (1) the Alternate Base Rate (which is the greater of UBS's prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at inVentiv's option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based equal to 0.75% for Alternate Base Rate loans and 1.75% for Adjusted LIBOR Rate loans.
The Credit Agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends and transactions with affiliates. The Credit Agreement also includes a financial covenant under which inVentiv is required to maintain a total leverage ratio that does not exceed, as of the last day of any four consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0 thereafter.
Under certain conditions, the lending commitments under the Credit Agreement may be terminated by the lenders and amounts outstanding under the Credit Agreement may be accelerated. Such events of default include failure to pay any principal, interest or other amounts when due, failure to comply with covenants, breach of representations or warranties in any material respect, non-payment or acceleration of other material debt of inVentiv and its subsidiaries, bankruptcy, insolvency, material judgments rendered against inVentiv or certain of its subsidiaries or a 40% change of control of inVentiv, subject to various exceptions and notice, cure and grace periods.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company has the intent and ability to choose the three-month LIBOR base rate for the duration of the term of the Credit Agreement. The three-month LIBOR base rate as of September 30, 2008 and December 31, 2007 was 4.05% and 4.70%, respectively. As disclosed in Note 12, the Company has two derivative financial instruments, totaling $326 million, to hedge against the new $330 million term loan facility.
The Company accounts for amendments to its revolving credit facility under the provisions of EITF Issue No. 98-14, Debtor’s Accounting for the Changes in Line-of-Credit or Revolving-Debt Arrangements (EITF 98-14), and its term loan under the provisions of EITF Issue No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments (EITF 96-19). In amending its revolving credit facility, deferred financing costs are being amortized over the term of the new arrangement since the borrowing capacity increased in the new loan, per the guidance in EITF 98-14. In connection with an amendment of our existing $164 million term loan, under the terms of EITF 96-19, bank and any third-party fees were deferred and amortized over the term of the Credit Agreement since the old and new debt instruments were not substantially different. The unamortized portion of the deferred financing costs were approximately $4.0 million and $4.3 million and are included in Deposits and Other Assets on the balance sheet as of September 30, 2008 and December 31, 2007, respectively.
12. Capital Lease Obligations:
During 2000, the Company entered into a master lease agreement to provide a fleet of automobiles for sales representatives of its inVentiv Commercial Services operating segment. Subsequent to 2000, the Company entered into other lease agreements with multiple vendors. Based on the terms of the agreements, management concluded that the leases were capital leases based on the criteria established by SFAS No. 13, Accounting for Leases. The Company capitalized leased vehicles and recorded the related lease obligations totaling approximately $23.9 million (including rebates of $3.8 million) and $14.2 million (including rebates of $3.7 million) during the nine-months ended September 30, 2008 and 2007, respectively. The Company also incurred net disposals of $10.4 million and $4.6 million during the nine-months ended September 30, 2008 and 2007, respectively.
13. Derivative Financial Instrument:
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recording of all derivatives as either assets or liabilities on the balance sheet measured at estimated fair value and the recognition of the unrealized gains and losses. We record the fair market value of our derivatives as other assets and other liabilities within our consolidated balance sheet. Derivatives that are not part of hedge relationships are recorded at fair market value on our Consolidated Balance Sheet with the offsetting adjustment to interest expense on our Consolidated Income Statement. For hedge relationships designated as cash flow hedges under SFAS 133, changes in fair value of the effective portion of a designated cash flow hedge are recorded to other comprehensive income or loss; the ineffective portion is recorded to interest expense in our consolidated income statement.
We enter into interest rate swaps to manage interest rate risk associated with variable rate debt.
Effective October 2005, the Company entered into an amortizing three-year interest rate swap arrangement with a notional amount of $175 million to fix the interest rate on the six-year $175 million loan arrangement entered into to facilitate the acquisition of inVentiv Communications, Inc. The Company entered into this interest rate swap agreement to modify the interest rate characteristics of its outstanding long-term debt. From October 2005 to July 2006, the Company did not designate its original swap arrangement for hedge accounting and recorded an approximate $2.9 million reduction to interest expense relating to the mark-to-market adjustment, and a corresponding derivative asset for approximately $2.9 million, which was recorded in Deposits and Other Assets on the Condensed Consolidated Balance Sheet. The fair value of the swaps represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.
On July 17, 2006, the Company formally designated the interest rate swap as a cash flow hedge pursuant to SFAS No. 133. The Company employed the dollar offset method to assess effectiveness by performing a sensitivity analysis and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness. The hypothetical derivative contains the same terms and conditions as the debt agreement with an inception date of July 17, 2006. The hypothetical swap had a fair value of zero on the date of designation and the hedging swap had a fair value of $2.9 million on the date of designation. As the swap fair value will decline to zero at maturity, the $2.9 million of fair value will be recognized in earnings over the remaining life of the swap as part of the ineffectiveness calculation. During the nine months ended September 30, 2008, the fair market value of the original derivative asset increased by $0.7 million from a liability of approximately $1.0 million to approximately $0.3 million. Approximately $1.0 million was recorded as interest expense, attributable to the financing component embedded within the interest rate swap, while $1.7 million ($1.0 million, net of taxes) was recorded as an increase to Other Comprehensive Income. Due to the fact that this derivative ends on December 31, 2008, the fair value factors are not material, and as a result, no fair value adjustment was necessary at September 30, 2008.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
On September 6, 2007, the Company entered into a new amortizing five-year interest rate swap arrangement with a notional amount of $165 million at hedge inception, with an accretive notional amount increase to $325 million effective December 31, 2008 to hedge the total outstanding debt notional when the Company’s original 2005 three-year interest rate swap arrangement described above expires. At hedge inception, the Company employed the dollar offset method by performing a sensitivity analysis to assess effectiveness and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness. The hypothetical derivative contains the same terms and conditions as the debt agreement. As a result of the hypothetical derivative method, there was no ineffectiveness for the period ended September 30, 2008, and accordingly, $0.2 million ($0.1 million, net of taxes) was recorded as a decrease to Other Comprehensive Income and an increase to other non-current liabilities on the Company’s Condensed Consolidated Balance Sheet. This change in Other Comprehensive Income includes the $1.4 million credit value adjustment as discussed in Note 10.
Based on current assumptions regarding the interest rate environment and other market conditions at September 30, 2008, the estimated amount of accumulated other comprehensive income that is expected to be reclassified into interest expense under our hedge relationships within the next 12 months is $5.1 million, of which $4.7 million will be included as part of our fixed interest on the loan for 2008.
14. Commitments and Contingencies:
The Company is subject to lawsuits, investigations and claims arising out of the conduct of its business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain claims, suits and complaints have been filed or are pending against the Company. With the exception of the claims described below, all pending matters are of a kind routinely experienced in our business and are consistent with our historical experience.
Weisz v. Albertsons, Inc. (San Diego Superior Court Case No. GIC 830069): This action was filed on May 17, 2004 in San Diego Superior Court, California by Utility Consumer Action Network against Albertsons, Inc. and its affiliated drug store chains and seventeen pharmaceutical companies. This complaint alleged, among other claims, violation of the California Unfair Competition Law and the California Confidentiality of Medical Information Act (“CMIA”) arising from the operation of manufacturer-sponsored, pharmacy-based compliance programs similar to Adheris’ refill reminder programs. An amended complaint was filed on November 4, 2004 adding Adheris as a defendant to the lawsuit. A subsequent amendment to the complaint substituted Plaintiff Kimberly Weisz (“Plaintiff”) as the class representative to this purported class action.
After several rounds of pleading challenges to Plaintiff’s various renditions of the complaint, all but one pharmaceutical manufacturing company, AstraZeneca, LP, were dismissed from the case, leaving only Albertsons, Inc., Adheris, and AstraZeneca as the remaining defendants (“Defendants”) in this action. In pleading challenge to Plaintiff’s Fifth Amended Complaint, the remaining defendants were successful in eliminating a number of claims, including fraud-based and breach of privacy claims. Plaintiff’s class allegations were stricken as improper with leave to amend. The operative Sixth Amended Complaint was filed on January 6, 2008. Defendants moved on or about February 28, 2008 to strike certain of Plaintiff’s claims and Plaintiff's class allegations as improper. These motions were denied. In conjunction therewith, Plaintiff’s Motion for Reconsideration as to her breach of privacy claim was granted. As a result, there are four live claims alleged against Adheris: (i) violation of the CMIA; (ii) breach of fiduciary duty; (iii) unjust enrichment; and (iv) breach of privacy.
On July 9, 2008, Albertsons filed a Motion for Summary Judgment on the grounds that all of Plaintiff’s claims were barred by the applicable statute of limitations. Adheris intends to join in these arguments. This motion currently is set to be heard on October 3, 2008.
On July 11, 2008, counsel for the parties entered into a 60-day litigation standstill to pursue settlement through mediation. The agreement included taking off calendar all pending motions, discovery and depositions for 60 days. The parties are continuing to engage in settlement discussions, and we believe that a settlement can be achieved on terms that would have no material financial impact on Adheris, although no assurance can be given that a settlement will be achieved on such terms or at all. Any settlement agreement will be subject to Court approval.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company's insurer, AIG, is defending this action under reservation of rights. The Company is unable to estimate the loss or range of loss that may result from this action if the proposed settlement is not consummated. Adheris intends to continue to defend this action vigorously, and the Company does do not believe that this action will have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. It is impossible to predict the outcome of litigation with certainty, however, and there can be no assurance that an adverse result in this proceeding would not have a potentially material adverse effect on the Company's consolidated balance sheets, results of operations or cash flows.
Indemnification Claim. In January 2008, PRS received a demand for indemnification from one of its customers relating to a lawsuit filed against the customer pursuant to the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, 47 U.S.C. § 227, a state consumer fraud statute and common law conversion; and seeks statutory and actual damages allegedly caused by the sending of unsolicited fax advertisements related to the customer’s product. PRS assisted the customer in sending the faxes in question, although the actual faxing was done by an unaffiliated entity. The customer based its demand for indemnification on an indemnification clause found in its services contract with PRS. PRS agreed to indemnify the customer on the condition that PRS and its appointed counsel would have control over the defense of this matter.
In January 2008, PRS received a demand for indemnification from one of its customers relating to a lawsuit filed against the customer pursuant to the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, 47 U.S.C. § 227, a state consumer fraud statute and common law conversion; and seeks statutory and actual damages allegedly caused by the sending of unsolicited fax advertisements related to the customer’s product. PRS assisted the customer in sending the faxes in question, although the actual faxing was done by an unaffiliated entity. The customer based its demand for indemnification on an indemnification clause found in its services contract with PRS. PRS agreed to indemnify the customer on the condition that PRS and its appointed counsel would have control over the defense of this matter.
The Company's insurer, Chubb Group, is defending this action under reservation of rights. The parties have engaged in settlement discussions, and we believe that a settlement can be achieved on terms that would have no material financial impact on PRS, although no assurance can be given that a settlement will be achieved on such terms or at all. Any settlement agreement will be subject to Court approval. The Company is unable to estimate the loss or range of loss that may result from this action if the proposed settlement is not consummated. PRS intends to continue to defend this action vigorously, and the Company does do not believe that this action will have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. It is impossible to predict the outcome of litigation with certainty, however, and there can be no assurance that an adverse result in this proceeding would not have a potentially material adverse effect on the Company's consolidated balance sheets, results of operations or cash flows.
15. Deferred Compensation:
The Ventiv Health, Inc. Deferred Compensation Plan (the "NQDC Plan") provides eligible management and other highly compensated employees with the opportunity to defer, on a pre-tax basis, their salary, bonus, and other specified cash compensation and to receive the deferred amounts, together with a deemed investment return (positive or negative), either at a pre-determined time in the future or upon termination of employment with the Company or an affiliated employer participating in the NQDC Plan. The compensation deferrals were initiated in 2005. The deferred compensation liability of approximately $7.4 million and $6.8 million were included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007. The NQDC Plan does not provide for the payment of above-market interest to participants.
To assist in the funding of the NQDC Plan obligation, the Company participates in a corporate-owned life insurance program in a rabbi trust whereby it purchases life insurance policies covering the lives of certain employees, with the Company named as beneficiary. Rabbi trusts are grantor trusts generally set up to fund compensation for a select group of management or highly paid executives. The cash value of the life insurance policy at September 30, 2008 and December 31, 2007 was approximately $6.2 million and $5.4 million, respectively, and is currently classified in Deposits and Other Assets on the Company’s Condensed Consolidated Balance Sheets. In addition, approximately $1.2 million and $1.4 million as of September 30, 2008 and December 31, 2007, respectively, were invested in mutual funds and classified in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. Income Taxes
The effective tax rate for the nine-month period ended September 30, 2008 was 39.5%. The rate included a tax benefit relating to state taxes settled of approximately $0.3 million, a tax detriment relating to interest on unrecognized tax benefits of approximately $0.1 million, $0.4 million of tax benefits relating to adjustments to amounts reflected in tax filings and $0.1 million of tax benefit relating to utilization of certain foreign net operating losses. The effective tax rate for the nine-month period ended September 30, 2007 was 37.0%. The rate included a tax benefit for federal and state taxes settled or statutes expired of approximately $0.8 million; $0.2 million of tax detriments relating to interest on unrecognized tax benefits and permanent item true- ups; $0.6 million of a tax benefit relating to state net operating losses; and $1.0 million of a tax benefit relating to federal tax benefits of state tax reserves. The Company’s current effective tax rate is based on current projections for earnings in the tax jurisdictions in which inVentiv does business and is subject to taxation. The Company’s effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. The gross amount of unrecognized tax benefit was $6.3 million as of December 31, 2007 and $5.6 million as of September 30, 2008. Included in this balance were positions totaling $1.0 million at December 31, 2007 and at September 30, 2008 that, if recognized, would affect the effective tax rate.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties recorded was $2.7 million at December 31, 2007 and at September 30, 2008.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2005 and generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2004.
Management has concluded that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $1.4 million within the next 12 months. The decrease is primarily related to federal and state taxes that may be settled or have expiring statutes of limitations.
17. Stockholders’ Equity
The following table describes the 2008 activity in the Company’s Stockholders’ Equity accounts for the nine-months ended September 30, 2008:
(in thousands, share amounts) | Common Stock | Additional Paid-In Capital | Accumulated earnings | Comprehensive Income | Accumulated Other Comprehensive Losses (1) | Total |
| Balance at December 31, 2007 | $32 | $362,116 | $121,811 | -- | $(6,493) | $477,466 |
| Net income | | | 34,536 | $34,536 | | 34,536 |
Net change in effective portion of derivative, net of taxes | | | | 856 | 856 | 856 |
Foreign currency translation Adjustment | | | | (848) | (848) | (848) |
| | | | | $34,544 | | |
| Restricted stock expense | | 4,843 | | | | 4,843 |
| Withholding shares for taxes | | (1,071) | | | | (1,071) |
Tax benefit from exercise of employee stock options and vesting of restricted stock | | 496 | | | | 496 |
| Consultant compensation | | 72 | | | | 72 |
Proceeds from exercise of stock Options | | 2,372 | | | | 2,372 |
| Stock option expense | | 3,478 | | | | 3,478 |
Issuance of shares in connection with Acquisitions | 1 | 18,920 | | | | 18,921 |
| Other | | 978 | | | | 978 |
| Balance at September 30, 2008 | $33 | $392,204 | $156,347 | | $(6,485) | $542,099 |
(1) As of September 30, 2008, the $6.5 million of Accumulated Other Comprehensive Losses relates to the effective portion, net of taxes, of the Company’s derivative instruments, as described in Note 13.
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
18. Discontinued Operations:
For the nine months ended September 30, 2008 and 2007, earnings from discontinued operations, net of taxes, were approximately $0.1 million and $0.3 million, respectively. The gains on disposals of discontinued operations consisted of contingency payments due from the Company’s previously-divested Germany-based unit.
19. Related Parties:
Prior to May 15, 2007, R. Blane Walter, the Company’s Chief Executive Officer (who is also a member of the Board of Directors) and his brothers held a 46% indirect interest in the Westerville, Ohio facility leased by inVentiv Communications. inVentiv Communications entered into the related lease prior to the time Mr. Walter became affiliated with the Company. The terms of the lease were disclosed to our Board of Directors in connection with its approval of the acquisition of inVentiv Communications.
The Company provided various services to Cardinal Health, Inc. ("Cardinal") during the first nine months of 2008 in the ordinary course of its and Cardinal's business. Revenues generated from services provided to Cardinal during the first nine months of 2008 were approximately $0.4 million. Robert Walter, who was Executive Chairman of Cardinal until November 2007 and an Executive Director thereafter, is Mr. Walter's father. Matthew Walter, who is Mr. Walter’s brother, was a director of Cardinal until his resignation in January 2008. Mr. Walter and his immediate family members collectively own less than 3% of the outstanding common stock of Cardinal. Mr. Walter was not involved in any transactions between the Company and Cardinal and has formally recused himself from such transactions.
inVentiv's Promotech business unit purchased warehouse consulting and procurement services from South Atlantic Systems ("SAS") during 2007. These contractual arrangements with SAS have been completed for 2008 and provided for total payments of approximately $0.8 million. Mark Teixeira, who is the brother-in-law of David Bassin, our Chief Financial Officer, is the General Manager for South Atlantic Systems and was granted an 11.6% equity interest in SAS as of December 31, 2007.
20. Segment Information:
The Company currently manages four operating segments: inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes, and its non-operating reportable segment, “Other”, which is based on the way management makes operating decisions and assesses performance. The Company added a fourth segment after the acquisition of AWAC, realigned certain existing divisions, and has reclassified its segment reporting to conform to the current segment structure in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The following represents the Company’s reportable segments as of September 30, 2008:
| · | inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional service provision primarily in support of pharmaceutical clinical development. |
| · | inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. |
| · | inVentiv Commercial, which consists of the Company’s outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. |
| · | inVentiv Patient Outcomes, which provides services related to patient adherence, patient assistance and reimbursement, clinical educator teams and medical cost containment and disease management. |
| · | Other, which encompasses the activities of the corporate management group. |
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following segment information has been prepared as if our Patient Outcomes segment and the segment realignment described above had been in effect from January 1, 2007:
Three-months ended September 30, 2008 (in thousands):
| | inVentiv Clinical | inVentiv Communications | inVentiv Commercial | inVentiv Patient Outcomes | Other | Total |
| Revenues | $55,954 | $84,538 | $121,388 | $31,824 | $-- | $293,704 |
| Less: Intersegment revenues | -- | (443) | (4,088) | -- | -- | (4,531) |
| Reported Revenues | $55,954 | $84,095 | $117,300 | $31,824 | $-- | $289,173 |
| Depreciation and amortization | 591 | 2,508 | 4,991 | 1,490 | 9 | $9,589 |
| Interest expense | -- | 45 | 358 | 1 | 6,039 | 6,443 |
| Interest income | 15 | 146 | -- | 8 | 269 | 438 |
| Segment income (loss) (1) | $4,166 | $9,382 | $11,268 | $6,801 | $(10,023) | $21,594 |
Three-months ended September 30, 2007 (in thousands):
| | InVentiv Clinical | inVentiv Communications | inVentiv Commercial | inVentiv Patient Outcomes | Other | Total |
| Revenues | $50,799 | $74,317 | $106,416 | $26,078 | $-- | $257,610 |
| Less: Intersegment revenues | (144) | (547) | (2,006) | -- | -- | (2,697) |
| Reported Revenues | $50,655 | $73,770 | $104,410 | $26,078 | $-- | $254,913 |
| Depreciation and amortization | 484 | 2,215 | 4,125 | 1,262 | 12 | 8,098 |
| Interest expense | -- | 32 | 607 | 1 | 5,934 | 6,574 |
| Interest income | 6 | 222 | 23 | 28 | 448 | 727 |
| Segment income (loss) (1) | $4,870 | $11,049 | $12,060 | $4,510 | $(9,490) | $22,999 |
Nine-months ended September 30, 2008 (in thousands):
| | InVentiv Clinical | inVentiv Communications | inVentiv Commercial | inVentiv Patient Outcomes | Other | Total |
| Revenues | $162,592 | $269,093 | $328,535 | $91,467 | $-- | $851,687 |
| Less: Intersegment revenues | (169) | (1,024) | (13,958) | -- | -- | (15,151) |
| Reported Revenues | $162,423 | $268,069 | $314,577 | $91,467 | $-- | $836,536 |
| Depreciation and amortization | 1,690 | 7,579 | 13,111 | 4,086 | 32 | 26,498 |
| Interest expense | -- | 96 | 1,083 | 2 | 17,953 | 19,134 |
| Interest income | 82 | 492 | -- | 32 | 1,078 | 1,684 |
| Segment income (loss) (1) | $12,072 | $32,869 | $27,789 | $16,518 | $(31,229) | $58,019 |
Nine-months ended September 30, 2007 (in thousands):
| | inVentiv Clinical | inVentiv Communications | inVentiv Commercial | inVentiv Patient Outcomes | Other | Total |
| Revenues | $139,209 | $202,025 | $306,712 | $69,182 | $-- | $717,128 |
| Less: Intersegment revenues | (147) | (966) | (6,712) | -- | -- | (7,825) |
| Reported Revenues | $139,062 | $201,059 | $300,000 | $69,182 | $-- | $709,303 |
| Depreciation and amortization | 1,381 | 4,772 | 11,977 | 2,332 | 45 | 20,507 |
| Interest expense | -- | 25 | 1,661 | 4 | 12,330 | 14,020 |
| Interest income | 42 | 526 | 56 | 76 | 1,368 | 2,068 |
| Segment income (loss) (1) | $9,512 | $28,342 | $23,956 | $11,582 | $(22,840) | $50,552 |
(1) Income from continuing operations before income tax provision, minority interest in income of subsidiary and gain (loss) from equity investments
| | | | | | |
| | | | |
| inVentiv Clinical | | $ | 134,649 | $ | $127,426 | |
| | | 507,608 | | 513,079 | |
| inVentiv Commercial | | | 193,283 | | 183,787 | |
inVentiv Patient Outcomes | | | 214,825 | | 198,141 | |
| | | 84,812 | | 88,423 | |
| Total assets | | $ | 1,135,177 | $ | 1,110,856 | |
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements, accompanying notes and other financial information included in the Annual Report on Form 10-K for the year ended December 31, 2007.
Overview
inVentiv Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”) is a leading provider of value-added services to the pharmaceutical, life sciences and healthcare industries. We support a broad range of clinical development, communications and commercialization activities that are critical to our customers' ability to complete the development of new drug products and medical devices and successfully commercialize them. In addition, we provide medical cost containment services to payors in our patient outcomes business. Our goal is to assist our customers in meeting their objectives by providing our services in each of our operational areas on a flexible and cost-effective basis. We provide services to over 350 client organizations, including all top 20 global pharmaceutical companies, numerous emerging and specialty biotechnology companies and third party administrators.
Our service offerings reflect the changing needs of our clients as their products move through the late-stage development and regulatory approval processes and into product launch and then throughout the product lifecycle. We have established expertise and leadership in providing the services our clients require at each of these stages of product development and commercialization and seek to address their outsourced service needs on a comprehensive basis throughout the product life cycle. For payors, the Company provides a variety of services that enhance savings and improve patient outcomes including opportunities to address billing errors, additional discounts and treatment protocols for patients.
Business Segments
We currently serve our clients primarily through four business segments, which correspond to our reporting segments for 2008:
| · | inVentiv Clinical, which provides professional resourcing and services to the pharmaceutical, biotech and device companies. Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing, and strategic resource teams. In addition, inVentiv Clinical provides its clinical research clients with outsourced functional services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (which includes Smith Hanley Associates (“SHA”), Smith Hanley Consulting Group (“SHCG”) and MedFocus), HHI Clinical & Statistical Research Services (“HHI”), and Synergos; |
| · | inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. This segment includes inVentiv Communications, Inc., Jeffrey Simbrow Associates (“JSAI”), Ignite Health and Incendia Health Studios (collectively, “Ignite”) (acquired in March 2007), Chamberlain Communications Group, Inc. (“Chamberlain”) (acquired in March 2007), Addison Whitney (acquired in June 2007) and Chandler Chicco Agency (“CCA”) (acquired in July 2007); |
| · | inVentiv Commercial, which consists of the Company’s outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. This segment includes inVentiv Strategy & Analytics (including its Strategyx business unit acquired in June 2007) and inVentiv Selling Solutions; and |
| · | inVentiv Patient Outcomes, which provides services related to patient adherence, patient assistance and reimbursement, clinical educator teams and medical cost containment and disease management. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute (“TTI”), AWAC (acquired in July 2007) and Patient Marketing Group, Inc. (“PMG”) (acquired in August 2008). |
International Operations
As part of the acquisition of inVentiv Communications, Inc. in October 2005, we added that company's United Kingdom-based operations. As part of the acquisition of CCA in July 2007, we added CCA’s operations in the United Kingdom and France. These units collectively provide advertising, marketing and public relations services to clients throughout Europe. In April 2006, we acquired JSAI, a leading healthcare marketing and communications agency in Canada.
In December 2007, we increased our investment interest from 44% to 85% in Angela Liedler GmbH (“Liedler”), a provider of communication and marketing services for medical and pharmaceutical products, located in Germany. We accounted for Liedler as an equity investment until the date of the acquisition of the additional interest, and then consolidated its results thereafter. We also have a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden, which we account for by using the equity method of accounting. Neither investment is material to the overall consolidated financial statements.
In addition to our fully-owned international operations and our minority ownership interests, we have within GSW Worldwide and within CCA an established network of over a dozen international affiliate relationships, which do not involve any equity interest in those affiliates, that help support our client needs in additional international markets.
Business Strategy
Our strategy relies on both internal growth and acquisitions to meet our growth objectives. Our businesses have generated strong revenue growth for the past several years. Our internal revenue growth reflects our strong track record in winning new business, which in turn is enhanced by our pursuit of cross-servicing opportunities within and across our business segments. Our revenues are generally received under contracts with limited terms and that can be terminated at the client’s option on short notice. We have been successful historically in obtaining increasing amounts of repeat business from many of our clients and in expanding the scope of the services we provide to them and thereby sustaining multi-year relationships with many of our clients. When relationships do not renew, we have been successful in redeploying personnel quickly and efficiently.
Strategic acquisitions are one core element of our business strategy. We believe that our expertise in identifying potential acquisition targets, assessing their importance to our operational and growth objectives, diligencing and completing the acquisition of appropriate businesses and effectively integrating them with our existing operations is a significant competitive advantage. The following is a summary of our acquisitions to date:
Acquisition | Type of Business | Segment (“inVentiv”) | Headquarters Location | Month Acquired |
| Patient Marketing Group | Patient relationship marketing | Patient Outcomes | New Jersey | August 2008 |
| Chandler Chicco Agency | Public relations | Communications | New York | July 2007 |
| AWAC | Medical cost containment services | Patient Outcomes | Georgia | July 2007 |
| Addison Whitney | Global branding consultancy | Communications | North Carolina | June 2007 |
| Strategyx | Strategic consulting | Commercial | New Jersey | June 2007 |
| Ignite Health | Interactive communications agency | Communications | California | March 2007 |
| Chamberlain | Public relations | Communications | New York | March 2007 |
| MedConference | Virtual event services | Commercial | Pennsylvania | November 2006 |
| DialogCoach | Education and training | Commercial | Pennsylvania | November 2006 |
| JSAI | Marketing and communications agency | Communications | Ontario, Canada | April 2006 |
| Synergos | Clinical trial management services | Clinical | Texas | April 2006 |
| Adheris | Patient pharmaceutical compliance | Patient Outcomes | Massachusetts | February 2006 |
| inVentiv Communications, Inc. | Advertising and communications services | Communications | Ohio | October 2005 |
| PRS | Regulatory compliance | Commercial | Pennsylvania | August 2005 |
| HHI | Data management and statistical analyses | Clinical | Maryland | November 2004 |
| Smith Hanley | Contract staffing and clinical trial support | Clinical | Connecticut | October 2004 |
| Franklin | Patient support programs | Patient Outcomes | New Jersey | June 2004 |
We seek out acquisitions in order to fill strategic gaps, selectively strengthen existing franchises, further strengthen and broaden our clinical, communications, commercial and/or patient outcomes capabilities, add complementary client relationships and bring on board additional management talent. We believe that our track record to-date in identifying, negotiating, closing and integrating strategic, accretive acquisitions has been successful. Acquisitions contributed significantly to our quarter-over-quarter revenue growth for the nine-month periods ended September 30, 2008 and 2007.
While we have reduced our level of acquisition activity during 2008, we will continue to evaluate our strategic position and intend to make opportunistic acquisitions that enable us to expand the scope of our service offerings and drive shareholder value.
Our acquisition activity adds complexity to the analysis of period-to-period financial results and makes direct comparison of those financial results difficult. Our acquisitions are accounted for using purchase accounting and the financial results of the acquired businesses are included in our consolidated financial statements from their acquisitions dates. A prior year period that ended before an acquisition was completed, however, will not include the corresponding financial results of the acquired business.
During the three and nine-month periods ended September 30, 2008, revenues from 2008 acquisitions totaled $2.0 million, all of which was in our inVentiv Patient Outcomes segment.
Trends and Uncertainties
The Company is subject to a variety of risks, trends and uncertainties, which are a consequence of the macroeconomic environment, developments within our or our clients' industries and circumstances particular to inVentiv. The risks to which we are subject include the risks described in Item 1A of our Form 10-K for the year ended December 31, 2007 and in Part II, Item 1A of this report.
Outsourcing Trends and the Current Economic Environment
Our business as a whole, and of our inVentiv Clinical, inVentiv Commercial and inVentiv Patient Outcomes segments in particular, is related significantly to the degree to which pharmaceutical companies outsource services that have traditionally been performed internally by fully integrated manufacturers. We believe that our business has been positively affected by a trend of pharmaceutical manufacturers toward utilizing outsourcing arrangements as a means of controlling variable unit cost and increasing flexibility. We also believe that the significant percentage of New Drug Application (“NDA”) and New Molecular Entity (“NME”) approvals attributable to small and mid-tier pharmaceutical and biotechnology companies presents an opportunity for companies providing outsourced services because these companies often prefer to employ high-quality, third party service providers (either directly or in co-promotion situations with pharmaceutical partners) to effect critical late-stage developmental and commercialization functions. We therefore target a broad spectrum of companies within the pharmaceutical industry in seeking to develop business opportunities. We are also engaged in a continuous process of expanding and refining our service offerings, and pursuing cross-servicing opportunities within and across our business segments, in order to respond more flexibly to the market and address broader revenue opportunities with existing and new clients.
Current economic conditions in the U.S. and abroad make it extremely difficult for the Company to predict the near-term performance of its businesses, all of which are dependent in large part upon the performance of clients in the pharmaceutical and life sciences industries. Although the pharmaceutical industry is generally regarded as anticyclical, a sustained recession, particularly a severe one, would be expected to result in increased budget scrutiny and efforts to significantly reduce expenditures in all areas of our clients' businesses. During 2008, our inVentiv Communications division has been affected by the tentativeness of clients to make marketing spend decisions. Some clients are reducing marketing expenditures through reducing the scopes of agency projects and delaying decisions on new marketing initiatives. Management is addressing these challenges by taking steps to reduce fixed costs and create more flexibility in the Company’ s cost structure. In the inVentiv Communications division in particular, we are: (1) reducing our fixed cost headcount; (2) supplementing resources with talented flex employees who work for us on an as-needed basis; and (3) creating a studio in our Columbus office to manage project-based graphic design and production needs for all of the agencies across the Communications division, which will enable us to reduce overhead, improve the quality and speed of service to our clients, and reduce our dependence on external vendors.
We believe that these steps will allow the Company to manage resources efficiently and to improve margins. We also believe that as a result of the Company’s cost initiatives and the flexibility of it service offerings, the Company has an opportunity to capture increased market share in certain of its business segments..
Regulatory Uncertainty
Because most of our revenues are generated by businesses involved in the commercialization of pharmaceutical products, uncertainties surrounding the approval of our clients' pharmaceutical products directly affect us. The pace at which a pharmaceutical product moves through the FDA approval process, and the application by the FDA of standards and procedures related to clinical testing, manufacturing, labeling claims and other matters are difficult to predict and may change over time. One of our large-scope new clients received non-approvals during the second quarter of 2008 on two major drugs, and other clients also faced FDA non-approvals. FDA non-approvals and delays in approval can significantly impact revenue, particularly in the inVentiv Communications segment, because of the relationship between the approval process and the amount and timing of client marketing expenditures to support the affected pharmaceutical products.
Critical Accounting Estimates
Most of our contract sales agreements in the inVentiv Commercial division include fixed price components. When pricing these contracts, we estimate the future costs of these fixed price components. While we are the beneficiary of any savings we are able to achieve as compared to this estimated pricing, we also bear the risk of loss if costs prove to be higher than anticipated and those increased costs cannot be offset by savings in other areas. Accordingly, our financial condition and results of operations could be adversely impacted by any unanticipated increase in the general level of inflation or in pricing of specific products.
During 2008, unanticipated increases in the price of gasoline have resulted in our bearing fuel costs under certain of our contract sales representative agreements that exceeded contractual reimbursement rates. In addition, as a result of disruptions in the credit markets, we expect the leasing rates under new leases for fleet vehicles provided to our contract sales representatives to increase. Although we are not able to adjust our contracts with our clients to absorb the additional costs in the short term, we expect over time to adjust our contracts, to minimize the exposure and incremental costs.
Critical Accounting Policies
The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2007. There has been no change, update or revision to the Company’s critical accounting policies subsequent to the filing of the Company’s Form 10-K for the year ended December 31, 2007.
Fair Value Measurement
The Company adopted SFAS 157 on January 1, 2008 which requires enhanced disclosures about assets and liabilities measured at fair value. Our adoption of SFAS 157 was limited to financial assets and liabilities, which primarily relate to our marketable securities, deferred compensation plan and derivative contracts. SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| | | | | |
| Level 1 | | - | | Inputs are quoted prices in active markets for identical assets or liabilities. |
| Level 2 | | - | | Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. |
| Level 3 | | - | | Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 and the basis for that measurement:
(in thousands) | Total Fair Value Measurement September 30, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| ASSETS | | | | |
| Marketable Securities | $16,221 (1) | $-- | $16,221 (1) | $-- |
Deferred Compensation Plan Assets | 7,404 | -- | 7,404 | -- |
| TOTAL ASSETS | $23,625 | -- | $23,625 | -- |
| | | | | |
| LIABILITIES | | | | |
Deferred Compensation Plan Liabilities | $7,418 | -- | $7,418 | -- |
| Derivative Liabilities | 10,830 | -- | 339 | 10,491 |
| TOTAL LIABILITIES | $18,248 | $-- | $7,757 | $10,491 |
(1) – As described in Note 5, the marketable securities balance of $16.2 million includes $11.1 million classified as restricted cash and marketable securities and $5.1 million as deposits and other assets, respectively, on the Company’s September 30, 2008 Balance Sheet.
As a result of recent market conditions, the Company updated its valuation of its five-year interest rate derivative as of September 30, 2008, resulting in a credit value adjustment of $1.4 million to the derivative liability, with a corresponding offset to Other Comprehensive Income as a result of cash flow hedge accounting. This valuation, which involved current and future probability-adjusted risk factors, included inputs derived from valuation techniques in which one or more significant inputs were unobservable, thus changing the classification of the $10.5 million derivative liability from a Level 2 input to a Level 3 input. The significant inputs in this valuation included credit market spread, estimated exposure and company and counterparty default risk.
Three-Months Ended September 30, 2008 Compared to Three-Months Ended September 30, 2007
Results of Operations
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
| (in thousands, except for per share data) | For the Three-Months Ended September 30, |
| | 2008 | 2007 |
| Revenues: | | Percentage (1) | | Percentage(1) |
| inVentiv Clinical | $55,954 | 19.3% | $50,655 | 19.9% |
| inVentiv Communications | 84,095 | 29.1% | 73,770 | 28.9% |
| inVentiv Commercial | 117,300 | 40.6% | 104,410 | 41.0% |
| inVentiv Patient Outcomes | 31,824 | 11.0% | 26,078 | 10.2% |
| Total revenues | 289,173 | 100.0% | 254,913 | 100.0% |
| | | | | |
Cost of services (1) (2): | | | | |
| inVentiv Clinical | 38,083 | 68.1% | 33,725 | 66.6% |
| inVentiv Communications | 50,267 | 59.8% | 42,577 | 57.7% |
| inVentiv Commercial | 95,553 | 81.5% | 82,622 | 79.1% |
| inVentiv Patient Outcomes | 18,173 | 57.1% | 15,628 | 59.9% |
| Total cost of services | 202,076 | 69.9% | 174,552 | 68.5% |
| | | | | |
| Selling, general and administrative expenses | 59,498 | 20.6% | 51,515 | 20.2% |
| | | | | |
| Total operating income | 27,599 | 9.5% | 28,846 | 11.3% |
| Interest expense | (6,443) | (2.2)% | (6,574) | (2.6)% |
| Interest income | 438 | 0.2% | 727 | 0.3% |
Income from continuing operations before income tax provision, minority interest in income of subsidiary and income from equity investments | 21,594 | 7.5% | 22,999 | 9.0% |
| Income tax provision | (8,125) | (2.8%) | (8,711) | (3.4)% |
Income from continuing operations before minority interest in income of subsidiary and income from equity investments | 13,469 | 4.7% | 14,288 | 5.6% |
| Minority interest in income of subsidiary | (130) | (0.1%) | (246) | (0.1%) |
| Income from equity investments | (13) | -- | 92 | -- |
| Income from continuing operations | 13,326 | 4.6% | 14,134 | 5.5% |
| | | | | |
| Income from discontinued operations: | | | | |
| Gains on disposals of discontinued operations, net of taxes | (3) | -- | 90 | 0.1% |
| Income from discontinued operations | (3) | -- | 90 | 0.1% |
| | | | | |
| Net income | $13,323 | 4.6% | $14,224 | 5.6% |
| | | | | |
| Earnings per share: | | | | |
| Continuing operations: | | | | |
| Basic | $0.40 | | $0.44 | |
| Diluted | $0.40 | | $0.43 | |
| Discontinued operations: | | | | |
| Basic | $0.00 | | $0.00 | |
| Diluted | $0.00 | | $0.00 | |
| Net earnings: | | | | |
| Basic | $0.40 | | $0.44 | |
| Diluted | $0.40 | | $0.43 | |
| (1) | Cost of services is expressed as a percentage of segment revenue. All other line items are displayed as a percentage of total revenues. |
| (2) | Cost of services includes reimbursed out of pocket expenses. |
Revenues: Revenues increased by approximately $34 million, or 13%, to $289 million during the three months ended September 30, 2008, from $255 million during the three months ended September 30, 2007. Net revenues increased by approximately $30 million, or 14%, to $243 million during the three months ended September 30, of 2008, from $213 million in the three months ended September 30, 2007. During the three months ended September 30, 2008, revenues related to acquisitions consummated during 2008 approximated $2 million exclusively in inVentiv Patient Outcomes.
inVentiv Clinical’s revenues were $56 million during the third quarter of 2008, an increase of $5 million compared to third quarter of 2007. inVentiv Clinical revenues accounted for 19% of total inVentiv revenues during the third quarter of 2008. Revenues in inVentiv Clinical were higher in 2008 predominantly due to increased placement of temporary personnel and increased traction in functional outsourcing.
inVentiv Communications’ revenues were $84 million during the third quarter of 2008, an increase of $10 million or 14% from the third quarter of 2007. inVentiv Communications’ revenues accounted for 29% of total inVentiv revenues during the third quarter of 2008. This increase is due to organic revenue growth, primarily in our public relations and advertising and communication support businesses.
inVentiv Commercial’s revenues were $117 million during the third quarter of 2008, an increase of 13% from the third quarter of 2007. inVentiv Commercial revenues accounted for 41% of total inVentiv revenues for the third quarter of 2008. The Company benefited from several new wins and expansions from certain sales contracts in 2008. inVentiv Commercial continues to benefit from the industry trend towards cost efficient solutions, and is positioned as a market leader in flexible sales force solutions.
inVentiv Patient Outcomes’ revenues were $32 million during the third quarter of 2008, up $6 million from the third quarter of 2007. Acquisition revenues represented 37% of this increase, with additional organic growth in the segment from our patient pharmaceutical compliance programs and clinical nurse educators, on-call specialists and medical science liaison programs. The inVentiv Patient Outcomes segment, which was formed during the third quarter of 2007, more closely links our various patient-oriented business units, including Adheris, which was formerly reported in the Communications’ segment, Franklin’s patient assistance and reimbursement offerings, which was formerly reported in the Commercial segment, The Therapeutics Institute’s clinical education services which was formerly reported in the Commercial segment, AWAC, which the Company acquired in July 2007, and PMG, which the Company acquired in August 2008.
Cost of Services: Cost of services increased by approximately $27 million or 15%, to $202 million during the third quarter of 2008 from $175 million in the third quarter of 2007. Most of this variance is due to organic growth as described above in Revenues. Cost of services as a percentage of revenues was 70% and 69% during the third quarter of 2008 and 2007, respectively.
inVentiv Clinical’s cost of services increased by approximately 12%, to $38 million during the third quarter of 2008 from $34 million during the third quarter of 2007. Cost of services as a percentage of revenues was 68% and 67% during the third quarter of 2008 and 2007, respectively.
inVentiv Communications’ cost of services increased by 16% to $50 million during the third quarter of 2008 when compared to the third quarter of 2007, mainly due to the increase in Revenues. Most of this variance is due to organic growth as described above in Revenues. Cost of services as a percentage of the segment’s revenues was 60% and 58% during the third quarter of 2008 and 2007, respectively.
Cost of services at inVentiv Commercial increased by approximately $14 million, or 17%, to $96 million in the third quarter of 2008, mainly due to the increase in revenues. Cost of services was 82% of inVentiv Commercial’s revenues during the third quarter of 2008 and 79% of revenues during the third quarter of 2007. This increased percentage of cost of services is primarily due to a change in the mix of business from full scope to limited scope teams.
inVentiv Patient Outcomes cost of services increased by approximately $2 million, or 13%, to $18 million in the third quarter of 2008 from $16 million during the third quarter of 2007, mainly due to the acquisition of PMG, and increased organic business at Adheris and TTI.
Selling, General and Administrative Expenses (“SG&A”): SG&A expenses increased by approximately $7 million, or 13%, to $59 million during the third quarter of 2008 from $52 million during the third quarter of 2007, mainly due to incremental increase from 2007 acquisitions and overall compensation across our segments, as described below.
SG&A expenses at inVentiv Clinical increased by 17% from the third quarter of 2007 to the third quarter of 2008. This increase was primarily attributed to higher selling costs due to increased revenues, as well as additional costs related to infrastructure expansion in terms of people and technology.
SG&A expenses at inVentiv Communications increased $5 million to $25 million during the third quarter of 2008. The increase was, in large part, directly related to the increased revenues in our public relations and advertising and communication support businesses as described in Revenues, as well as increased compensation across our other Communications businesses.
SG&A expenses at inVentiv Commercial increased by approximately $1 million to $10 million during the third quarter of 2008 from $9 million during the third quarter of 2007, which was mainly due to increased compensation across the segment relative to the respective periods.
SG&A expenses at inVentiv Patient Outcomes increased by $1 million to $7 million during the third quarter of 2008, mainly due to the acquisition of PMG.
Other SG&A was approximately $4 million for the third quarter of 2008, which was relatively consistent with the respective prior year period.
Net Interest Expense: Net interest expense increased by approximately $0.2 million from the third quarter of 2008 to the third quarter of 2007 due to the lower interest income from our current investments.
Provision for Income Taxes: The effective tax rate for the third quarter of 2008 was 37.9%, versus 38.1% during the third quarter of 2007. The rate for the third quarter of 2008 included approximately $0.4 million of tax benefits relating to adjustments to amounts reflected in tax filings and $0.1 million of tax benefit relating to utilization of certain foreign net operating losses, and the rate for 2007 included approximately $0.4 million of a tax benefit relating to the utilization of certain state net operating losses. The Company’s current effective tax rate is based on current projections for earnings in the tax jurisdictions in which inVentiv does business and is subject to taxation. The Company’s effective tax rate could fluctuate due to changes in earnings between operating entities and differences in tax rates in the related tax jurisdictions.
Net Income and Earnings Per Share (“EPS”): inVentiv’s net income decreased by approximately $1 million to $13 million during the third quarter of 2008 when compared to the third quarter of 2007. Diluted earnings per share decreased to $0.40 per share during the third quarter of 2008 from $0.43 per share during the third quarter of 2007. Overall EPS and net income decreased between quarters because of a change in business mix and increased costs.
Nine-months Ended September 30, 2008 Compared to Nine-months Ended September 30, 2007
Results of Operations
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
| (in thousands, except for per share data) | For the Nine-months Ended September 30, |
| | 2008 | 2007 |
| Revenues: | | Percentage(1) | | Percentage(1) |
| inVentiv Clinical | $162,423 | 19.4% | $139,062 | 19.6% |
| InVentiv Communications | 268,069 | 32.1% | 201,059 | 28.3% |
| InVentiv Commercial | 314,577 | 37.6% | 300,000 | 42.3% |
| inVentiv Patient Outcomes | 91,467 | 10.9% | 69,182 | 9.8% |
| Total revenues | $836,536 | 100.0% | $709,303 | 100.0% |
| | | | | |
Cost of services (1)(2): | | | | |
| inVentiv Clinical | 112,007 | 69.0% | 94,301 | 67.8% |
| inVentiv Communications | 159,628 | 59.6% | 125,072 | 62.2% |
| inVentiv Commercial | 253,146 | 80.5% | 238,609 | 79.5% |
| inVentiv Patient Outcomes | 55,303 | 60.5% | 42,272 | 61.1% |
| Total cost of services | 580,084 | 69.3% | 500,254 | 70.5% |
| | | | | |
| Selling, general and administrative expenses | 180,983 | 21.7% | 146,545 | 20.7% |
| | | | | |
| Total operating income | 75,469 | 9.0% | 62,504 | 8.8% |
| Interest expense | (19,134) | (2.3)% | (14,020) | (2.0)% |
| Interest income | 1,684 | 0.2% | 2,068 | 0.3% |
Income from continuing operations before income tax provision, minority interest in income of subsidiary and (loss) income from equity investments | 58,019 | 6.9% | 50,552 | 7.1% |
| Income tax provision | (22,518) | (2.7)% | (18,569) | (2.6)% |
Income from continuing operations before minority interest in income of subsidiary and (loss) income from equity investments | 35,501 | 4.2% | 31,983 | 4.5% |
| Minority interest in subsidiary | (1,022) | (0.1)% | (736) | (0.1)% |
| (Loss) income from equity investments | (47) | -- | 438 | 0.1% |
| Income from continuing operations | 34,432 | 4.1% | 31,685 | 4.5% |
| | | | | |
| Income from discontinued operations: | | | | |
| Gains on disposals of discontinued operations, net of taxes | 104 | -- | 266 | -- |
| Income from discontinued operations | 104 | -- | 266 | -- |
| | | | | |
| Net income | $34,536 | 4.1% | $31,951 | 4.5% |
| | | | | |
| Earnings per share: | | | | |
| Continuing operations: | | | | |
| Basic | $1.04 | | $1.01 | |
| Diluted | $1.03 | | $0.99 | |
| Discontinued operations: | | | | |
| Basic | $0.01 | | $0.01 | |
| Diluted | $0.00 | | $0.00 | |
| Net earnings: | | | | |
| Basic | $1.05 | | $1.02 | |
| Diluted | $1.03 | | $0.99 | |
| (1) | Cost of services is expressed as a percentage of segment revenue. All other line items are displayed as a percentage of total revenues. |
| (2) | Cost of services includes reimbursed out of pocket expenses. |
Revenues: Revenues increased by approximately $128 million, or 18%, to $837 million during the nine-months ended September 30, 2008, from $709 million during the nine-months ended September 30, 2007. Net revenues increased by approximately $122 million, or 21%, to $704 million during the nine-months ended September 30, 2008, from $582 million during the nine-months ended September 30, 2007. During the nine months ended September 30, 2008, revenues related to acquisitions consummated during 2008 approximated $2 million exclusively in inVentiv Patient Outcomes.
inVentiv Clinical’s revenues were $162 million during the nine months ended September 30, 2008, an increase of $23 million compared to $139 million during the nine months ended September 30, 2007. Revenues in inVentiv Clinical were higher in 2008 predominantly due to increased placement of temporary personnel and new business wins to provide functional outsourcing services.
inVentiv Communications’ revenues were $268 million during the nine months ended September 30, 2008, an increase of $67 million or 33% from the nine months ended September 30, 2007. inVentiv Communications’ revenues accounted for 32% of total inVentiv revenues during the nine months ended September 30, 2008. Revenues from acquisition growth represented 76% of the increase, with the remaining increase due to the organic growth across all of the Communications’ revenue streams.
Revenues in our inVentiv Commercial segment were $315 million during the nine months ended September 30, 2008, an increase of approximately 5% from the nine months ended September 30, 2007. Approximately 17% of this increase was due to acquisition growth, with the remainder relating to organic growth from several new wins and expansions from certain sales contracts in 2008. inVentiv Commercial continues to benefit from the industry trend towards cost efficient solutions, and are positioned as a market leader in flexible sales force solutions.
inVentiv Patient Outcomes’ revenues were $91 million during the nine months ended September 30, 2008, up $22 million from the nine months ended September 30, 2007. Revenues from acquisition growth represented 49% of the increase, with the remainder due to organic growth from our patient pharmaceutical compliance programs and clinical nurse educators, on-call specialists and medical science liaison programs. The inVentiv Patient Outcomes segment, which was formed in August 2007, more closely links our various patient-oriented business units, including Adheris, which was formerly reported in the Communications’ segment, Franklin’s patient assistance and reimbursement offerings, which was formerly reported in the Commercial segment, and The Therapeutics Institute’s clinical education services which was formerly reported in the Commercial segment, AWAC, which the Company acquired in July 2007 and PMG, which the Company acquired in August 2008.
Cost of Services: Cost of services increased by approximately $80 million or 16%, to $580 million for the nine months ended September 30, 2008 from $500 million in the nine months ended September 30, 2007. Cost of services as a percentage of revenues decreased from 71% to 69% between the nine months ended September 30, 2007 and 2008, respectively.
inVentiv Clinical’s cost of services increased by approximately $18 million, or 19%, to $112 million during the nine months ended September 30, 2008 from $94 million during the nine months ended September 30, 2007. Cost of services as a percentage of revenues increased from 68% to 69% during the nine months ended September 30, 2007 and 2008.
inVentiv Communications’ cost of services increased by approximately $35 million, or 28%, to $160 million during the nine months ended September 30, 2008 from $125 million during the nine months ended September 30, 2007. Cost of services as a percentage of revenues decreased from 62% to 60% during these respective periods as a result of acquisitions with larger gross margins, but higher SG&A.
Cost of services at inVentiv Commercial increased by approximately 6% from the nine months ended September 30, 2007, in line with the increase in revenues as explained above. Cost of services as a percentage of revenues remained fairly consistent at 80% during these respective periods.
inVentiv Patient Outcomes’ cost of services increased by approximately $13 million, or 31%, to $55 million during the nine months ended September 30, 2008 from $42 million during the nine months ended September 30, 2007, mainly due to the acquisitions of AWAC and PMG and increased organic business at Adheris and TTI.
SG&A: SG&A expenses increased by approximately $34 million, or 23%, to $181 million from $147 million in the nine months ended September 30, 2008 and 2007, respectively, mainly due to increased acquisitions in 2007 and increased compensation across our segments, offset by a receivables reserve arising from a client bankruptcy as described below.
SG&A expenses at inVentiv Clinical increased by approximately 9% for the nine months ended September 30, 2007 to the nine months ended September 30, 2008 primarily attributed to higher selling costs due to increased revenues, in addition to additional costs related to infrastructure expansion in terms of people and technology.
SG&A expenses at inVentiv Communications increased $28 million to $76 million during the nine months ended September 30, 2008. New acquisitions constituted the majority of this increase.
SG&A expenses at inVentiv Commercial decreased by approximately $3 million to $33 million during the nine months ended September 30, 2008 from the nine months ended September 30, 2007. The majority of this decrease was due to a receivables reserve recorded during the second quarter of 2007 relating to a client that declared Chapter 11 bankruptcy. Prior to the client bankruptcy in 2007, we have not historically had a collections issue as a result of client bankruptcy, with virtually all of our clients having excellent payment histories. This decrease was offset by an increase in compensation across the Commercial businesses relative to the respective periods.
SG&A expenses at inVentiv Patient Outcomes increased by $5 million to $20 million during the nine months ended September 30, 2008, mainly due to the acquisitions of AWAC and PMG.
Other SG&A increased by approximately 17% to $14 million from the nine months ended September 30, 2007 to the same period in 2008 The increase was mainly related to annual increases in equity and non-equity compensation expense from the previous year, inclusive of changes resulting from additional corporate personnel transferring from the operating units.
Interest Expense: Interest expense increased by approximately $5 million, or 36%, from the nine months ended September 30, 2007 to the nine months ended September 30, 2008, mainly due to higher interest on the additional $166 million borrowed in the new Credit Agreement entered into in July 2007, as more fully explained in Liquidity and Capital Resources.
Provision for Income Taxes: The effective tax rate for the nine-month period ended September 30, 2008 was 39.6%, versus an effective tax rate of 37.0% for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, the rate included a tax benefit relating to state taxes settled of approximately $0.3 million ($0.2 million after federal tax effect), a tax detriment relating to interest on unrecognized tax benefits of approximately $0.1 million, $0.4 million of tax benefits relating to adjustments to amounts reflected in tax filings and $0.1 million of tax benefit relating to utilization of certain foreign net operating losses. The rate at nine months 2007 included a tax benefit for federal and state taxes settled or statutes expired of approximately $0.8 million ($0.6 million after federal tax effect); $0.2 million of tax detriments relating to interest on unrecognized tax benefits and permanent item true- ups; $0.6 million of a tax benefit relating to state net operating losses; and $1.0 million of a tax benefit relating to federal tax benefits of state tax reserves. The Company’s current effective tax rate is based on current projections for earnings in the tax jurisdictions in which inVentiv does business and is subject to taxation. The Company’s effective tax rate could fluctuate due to changes in earnings between operating entities and differences in tax rates in the related tax jurisdictions.
Net Income and EPS: inVentiv’s net income increased by approximately $3 million to $35 million during the nine months ended September 30, 2008 when compared to the same period in 2007. Diluted earnings per share increased to $1.03 per share during the nine months ended September 30, 2008 from $0.99 per share during the nine months ended September 30, 2007. Overall EPS and net income increased between the periods because of increased business wins, new acquisitions and the impact of the increase in the uncollectible receivable reserve during the second quarter of 2007, which lowered EPS during the prior period.
Liquidity and Capital Resources
At September 30, 2008, inVentiv had $87 million of unrestricted cash and equivalents, an increase of $36 million from December 31, 2007. For the nine-months ended September 30, 2008 compared to September 30, 2007, cash provided by operations increased by $56 million from a source of $15 million to $71 million. Cash used in investing activities decreased from $193 million to $22 million for the nine-months ended September 30, 2007 and 2008, respectively. Cash provided by financing activities decreased from a source of $165 million to a use of $13 million over the same comparative periods.
Cash provided by operations was $71 million during the nine-months ended September 30, 2008, while cash provided by operations was $15 million in the nine-months ended September 30, 2007. This increase was, in large part, due to improved collections on accounts receivable, timing of our unbilled services and unearned revenue, increased depreciation and amortization from capital expenditures and acquisition activity, as well as reduced excess tax benefits from stock based compensation. In addition, $5 million of a former shareholder receivable was satisfied pursuant to the inVentiv Communications, Inc. acquisition related incentive plan.
Cash used in investing activities was $22 million for the nine-months ended September 30, 2008 compared to $193 million used during the same period in 2007. During the nine months ended September 30, 2007, approximately $165 million of cash related to the acquisitions of Ignite, Chamberlain, Addison Whitney, Strategyx, CCA and AWAC, while approximately $23 million of cash related to earnout contingency payments from previous acquisitions. During the nine months ended September 30, 2008, only $40 million was paid for acquisitions and earnouts. During the nine months ended September 30, 2008, the Company also received proceeds of $28 million from our investment in the Columbia Strategic Cash Portfolio (“CSCP”), with a balance remaining of $16 million at September 30, 2008. As described in Note 5 of Part 1, Item 1, the $16 million balance includes $11 million classified as restricted cash and marketable securities and $5 million as deposits and other assets, respectively, on our September 30, 2008 Balance Sheet.
Cash used in financing activities was $13 million for the nine-months ended September 30, 2008, compared to $165 million provided by financing activities for the nine-months ended September 30, 2007. Approximately $166 million was borrowed as a result of our amended credit facility, as further described below. Stock options proceeds were lower in 2008 than 2007 due to the continued trend by the Company from stock options to restricted stock as well as lower exercises due to a decrease in stock price. As noted in cash provided by operations above, there were reduced excess tax benefits from stock based compensation, which has an offsetting effect on cash flows from financing activities.
Our principal external source of liquidity is our syndicated, secured credit agreement, which we entered into with UBS AG, and others in connection with the inVentiv Communications, Inc. acquisition. On July 6, 2007, we amended this credit facility and in connection therewith entered into an Amended and Restated Credit Agreement with UBS AG and the other lenders party to the credit facility. The key features of the Amended and Restated Credit Agreement are as follows:
| · | A $330 million term loan facility was made available to inVentiv in a single drawing, which was used to |
| · | refinance the existing October 2005 credit facility, which had a remaining balance of $164 million, and |
| · | fund the acquisitions of CCA and AWAC and pay the fees associated with the new credit facility, with the balance retained by inVentiv as working capital. |
The credit agreement also included up to $20 million in additional term loans (“delayed draw term loans”) that was to be advanced no later than January 6, 2008. The Company elected not to draw additional amounts under the agreement. The credit agreement also contains a $50 million revolving credit facility, of which $10 million is available for the issuance of letters of credit, and a swingline facility. The term loan will mature on the seventh anniversary of the credit agreement, with scheduled amortization of 1% per year during years one through six and 94% during year seven. The revolving loans will mature on the sixth anniversary of the credit agreement.
| · | Amounts advanced under the credit agreement must be prepaid with a percentage, determined based on a leverage test set forth in the credit agreement, of Excess Cash Flow (as defined in the credit agreement) and the proceeds of certain non-ordinary course asset sales and certain issuances of debt obligations and 50% of certain issuances of equity securities of inVentiv and its subsidiaries, subject to certain exceptions. We may elect to prepay the loans, in whole or in part at any time, in certain minimum principal amounts, without penalty or premium (other than normal LIBOR break funding costs). Amounts borrowed under the credit agreement in respect of term loans (including delayed draw term loans) that are repaid or prepaid may not be reborrowed. Amounts borrowed under the credit agreement in respect of revolving loans may be paid or prepaid and reborrowed. |
| · | Interest on the loans accrue, at our election, at either (1) the Alternate Base Rate (which is the greater of UBS’s prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at our option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based on the type of loan and method of interest rate determination elected. |
| · | The credit agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends and transactions with affiliates. The credit agreement also includes a financial covenant under which inVentiv is required to maintain a total leverage ratio that does not exceed, as of the last day of any four consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0 thereafter. |
Effective October 2005, we entered into a three- year swap arrangement for $175 million to hedge against the original $175 million loan arrangement entered into to facilitate the acquisition of inVentiv Communications, Inc. As more fully described in Part I, Item 3 below, effective September 6, 2007, we entered into a five-year swap arrangement for $165 million to hedge against the additional credit exposure under the credit agreement.
We believe that our cash and equivalents, cash to be provided by operations and available credit under our credit facility will be sufficient to fund our current operating requirements over the next 12 months. However, we cannot assure you that these sources of liquidity will be sufficient to fund all internal growth initiatives, investments and acquisition activities 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. The acquisition agreements entered into in connection with our 2006 and 2007 acquisitions and our acquisition of PMG include earn-out provisions pursuant to which the sellers will become entitled to additional consideration, which may be material, if the acquired businesses achieve specified performance measurements. See Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Long-Term Debt Exposure
At September 30, 2008, the Company had $326 million debt outstanding under its secured term loan as described under “Liquidity and Capital Resources” in Item 2 above. The Company will incur variable interest expense with respect to our outstanding loan. This interest rate risk may be partially offset by our derivative financial instrument, as described below. Based on our debt obligation outstanding at September 30, 2008, a hypothetical increase or decrease of 10% of our variable interest rate would have an immaterial effect on interest expense due to the fixed rate associated with our derivative financial instruments.
Derivative Financial Instrument
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recording of all derivatives as either assets or liabilities on the balance sheet measured at estimated fair value and the recognition of the unrealized gains and losses. We record the fair market value of our derivatives as other assets and other liabilities within our consolidated balance sheet. Derivatives that are not part of hedge relationships are recorded at fair market value on our Consolidated Balance Sheet with the offsetting adjustment to interest expense on our Consolidated Income Statement. For hedge relationships designated as cash flow hedges under SFAS 133, changes in fair value of the effective portion of a designated cash flow hedge are recorded to other comprehensive income or loss; the ineffective portion is recorded to interest expense in our consolidated income statement.
We enter into interest rate swaps to manage interest rate risk associated with variable rate debt.
Effective October 2005, the Company entered into an amortizing three-year interest rate swap arrangement with a notional amount of $175 million to fix the interest rate on the six-year $175 million loan arrangement entered into to facilitate the acquisition of inVentiv Communications, Inc. The Company entered into this interest rate swap agreement to modify the interest rate characteristics of its outstanding long-term debt. From October 2005 to July 2006, the Company did not designate its original swap arrangement for hedge accounting and recorded an approximate $2.9 million reduction to interest expense relating to the mark-to-market adjustment, and a corresponding derivative asset for approximately $2.9 million, which was recorded in Deposits and Other Assets on the Condensed Consolidated Balance Sheet. The fair value of the swaps represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.
On July 17, 2006, the Company formally designated the interest rate swap as a cash flow hedge pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company employed the dollar offset method to assess effectiveness by performing a sensitivity analysis and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness. The hypothetical derivative contains the same terms and conditions as the debt agreement with an inception date of July 17, 2006. The hypothetical swap had a fair value of zero on the date of designation and the hedging swap had a fair value of $2.9 million on the date of designation. As the swap fair value will decline to zero at maturity, the $2.9 million of fair value will be recognized in earnings over the remaining life of the swap as part of the ineffectiveness calculation. During the nine months ended September 30, 2008, the fair market value of the original derivative asset increased by $0.7 million from a liability of approximately $1.0 million to approximately $0.3 million. Approximately $1.0 million was recorded as interest expense, attributable to the financing component embedded within the interest rate swap, while $1.7 million ($1.0 million, net of taxes) was recorded as an increase to Other Comprehensive Income.
On September 6, 2007, the Company entered into a new amortizing five-year interest rate swap arrangement with a notional amount of $165 million at hedge inception, with an accretive notional amount increase to $325 million effective December 31, 2008 to hedge the total outstanding debt notional when the Company’s original 2005 three-year interest rate swap arrangement described above expires. At hedge inception, the Company employed the dollar offset method by performing a sensitivity analysis to assess effectiveness and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness. The hypothetical derivative contains the same terms and conditions as the debt agreement. As a result of the hypothetical derivative method, there was no ineffectiveness for the period ended September 30, 2008, and accordingly, $0.2 million ($0.1 million, net of taxes) was recorded as an decrease to Other Comprehensive Income and an increase to other non-current liabilities on the Company’s Condensed Consolidated Balance Sheet. This change in Other Comprehensive Income includes the $1.4 million credit value adjustment as discussed in Note 10.
Foreign Currency Exchange Rate Exposure
The Company is not currently affected by foreign currency exchange rate exposure, except for any fluctuations in the foreign bank accounts remaining from the divestitures of our European business units, from continuing operations of our UK, France and Canadian subsidiaries and equity investments and minority interests in our foreign business units, which are not material to its consolidated financial statements. Our treatment of foreign subsidiaries is consistent with the guidelines set forth in SFAS 52, Foreign Currency Translations. The financial statements of our subsidiaries expressed in foreign currencies are translated from the respective functional currencies to U.S. Dollars, with results of operations and cash flows translated at average exchange rates during the period, and assets and liabilities translated at end of the period exchange rates. At September 30, 2008, there were no accumulated other comprehensive earnings related to foreign currency translations. Foreign currency transaction gains and (losses) are included in the results of operations and are not material.
Based on their evaluation as of September 30, 2008, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC, and that material information relating to the Company and its consolidated subsidiaries is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Weisz v. Albertsons, Inc. (San Diego Superior Court Case No. GIC 830069): This action was filed on May 17, 2004 in San Diego Superior Court, California by Utility Consumer Action Network against Albertsons, Inc. and its affiliated drug store chains and seventeen pharmaceutical companies. This complaint alleged, among other claims, violation of the California Unfair Competition Law and the California Confidentiality of Medical Information Act (“CMIA”) arising from the operation of manufacturer-sponsored, pharmacy-based compliance programs similar to Adheris’ refill reminder programs. An amended complaint was filed on November 4, 2004 adding Adheris as a defendant to the lawsuit. A subsequent amendment to the complaint substituted Plaintiff Kimberly Weisz (“Plaintiff”) as the class representative to this purported class action.
After several rounds of pleading challenges to Plaintiff’s various renditions of the complaint, all but one pharmaceutical manufacturing company, AstraZeneca, LP, were dismissed from the case, leaving only Albertsons, Inc., Adheris, and AstraZeneca as the remaining defendants (“Defendants”) in this action. In pleading challenge to Plaintiff’s Fifth Amended Complaint, the remaining defendants were successful in eliminating a number of claims, including fraud-based and breach of privacy claims. Plaintiff’s class allegations were stricken as improper with leave to amend. The operative Sixth Amended Complaint was filed on January 6, 2008. Defendants moved on or about February 28, 2008 to strike certain of Plaintiff’s claims and Plaintiff's class allegations as improper. These motions were denied. In conjunction therewith, Plaintiff’s Motion for Reconsideration as to her breach of privacy claim was granted. As a result, there are four live claims alleged against Adheris: (i) violation of the CMIA; (ii) breach of fiduciary duty; (iii) unjust enrichment; and (iv) breach of privacy.
On July 9, 2008, Albertsons filed a Motion for Summary Judgment on the grounds that all of Plaintiff’s claims were barred by the applicable statute of limitations. Adheris intends to join in these arguments. This motion currently is set to be heard on October 3, 2008.
On July 11, 2008, counsel for the parties entered into a 60-day litigation standstill to pursue settlement through mediation. The agreement included taking off calendar all pending motions, discovery and depositions for 60 days. The parties are continuing to engage in settlement discussions, and we believe that a settlement can be achieved on terms that would have no material financial impact on Adheris, although no assurance can be given that a settlement will be achieved on such terms or at all. Any settlement agreement will be subject to Court approval.
The Company's insurer, AIG, is defending this action under reservation of rights. The Company is unable to estimate the loss or range of loss that may result from this action if the proposed settlement is not consummated. Adheris intends to continue to defend this action vigorously, and the Company does do not believe that this action will have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. It is impossible to predict the outcome of litigation with certainty, however, and there can be no assurance that an adverse result in this proceeding would not have a potentially material adverse effect on the Company's consolidated balance sheets, results of operations or cash flows.
Indemnification Claim.
In January 2008, PRS received a demand for indemnification from one of its customers relating to a lawsuit filed against the customer pursuant to the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, 47 U.S.C. § 227, a state consumer fraud statute and common law conversion; and seeks statutory and actual damages allegedly caused by the sending of unsolicited fax advertisements related to the customer’s product. PRS assisted the customer in sending the faxes in question, although the actual faxing was done by an unaffiliated entity. The customer based its demand for indemnification on an indemnification clause found in its services contract with PRS. PRS agreed to indemnify the customer on the condition that PRS and its appointed counsel would have control over the defense of this matter.
The Company's insurer, Chubb Group, is defending this action under reservation of rights. The parties have engaged in settlement discussions, and we believe that a settlement can be achieved on terms that would have no material financial impact on PRS, although no assurance can be given that a settlement will be achieved on such terms or at all. Any settlement agreement will be subject to Court approval. The Company is unable to estimate the loss or range of loss that may result from this action if the proposed settlement is not consummated. PRS intends to continue to defend this action vigorously, and the Company does do not believe that this action will have a material adverse effect on its consolidated balance sheets, results of operations or cash flows. It is impossible to predict the outcome of litigation with certainty, however, and there can be no assurance that an adverse result in this proceeding would not have a potentially material adverse effect on the Company's consolidated balance sheets, results of operations or cash flows.
With the exception of the above claims, all pending matters are of a kind routinely experienced in our business and are consistent with our historical experience.
Other than as described below, there have been no material changes in the risk factors discussed in Item 1A of our Form 10-K for the year ended December 31, 2007.
The rate of growth of gross domestic product in the U.S. has declined in the last few quarters indicating that the U.S. economy is in or nearing a recession.
Sustained downturns or sluggishness in the U.S. economy generally affect the markets in which we operate. Some customers of our inVentiv Communications division are reducing marketing expenditures or delaying decisions on new marketing initiatives. While the economic uncertainties in which we operate make it challenging for us to predict the near-term future of our operations, a U.S. recession would likely have a significant adverse impact on our clients and our business.
Recent disruptions in the credit markets may negatively impact our liquidity and our ability to obtain financing, and may increase our financing costs.
We have a $50 million working capital line under our secured credit facility that provides us with a source of liquidity beyond cash generated from operations. We also have an unsecured line of credit with an affiliate of Bank of America, N.A., that provides liquidity in respect of our holdings in the Columbia Strategic Cash Portfolio. See footnote 5 to our consolidated financial statements in Part I, Item 1 of this report. If one of our lenders suffers liquidity issues, we may be unable to access these anticipated sources of liquidity if and when they are required. The credit market turmoil could negatively impact our ability to obtain additional sources of financing. An impairment of our access to credit facilities when required could have a material adverse effect on our ability to execute our operating strategy, and could also prevent us from executing our acquisition strategy or taking advantage of other business expansion opportunities. Furthermore, to the extent the counterparties to our interest rate swap agreements suffer liquidity issues, we could be exposed to interest rate risk that is intended to be eliminated by our hedging arrangements.
Inflation may adversely affect our business operations in the future.
Given the current macroeconomic environment, it is possible that the U.S. government may attempt in the near future to provide a monetary stimulus, a fiscal stimulus, or both, to the U.S. economy. Such actions may lead to inflationary conditions in our cost base, particularly resulting in an increase in the commissions and compensation and benefits components of our SG&A expenses. This may harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base.
Many of the contracts under which we provide services are subject to termination on short notice, which may make our revenues less predictable.
We provide services to many of our most significant clients under contracts that our clients may cancel on short notice (generally 10 to 120 days, depending on the specific business unit). In addition, many of our pharmaceutical sales contracts provide our clients with the opportunity to internalize the sales forces under contract. Although we have been successful in a number of cases in negotiating longer-term commitments and a non-cancelable initial period for pharmaceutical sales contracts, we cannot be assured that clients will renew relationships beyond the expiration date of existing contracts in any of our business units. Furthermore, while we have been successful in originating new business opportunities and in replacing revenues attributable to contracts that are terminated or not renewed, our stock price may fluctuate significantly in response to announcements of contract terminations or nonrenewals.
Certain of our customer contracts contain fixed price components that are not subject to adjustment in the short term and expose us to pricing risk.
Under the terms of certain of our customer agreements, we pass through costs on a fixed price basis based on our cost estimates at the beginning of the contract term. During 2008, unanticipated increases in the price of gasoline have resulted in our bearing fuel costs under certain of our contract sales representative agreements that exceeded contractual reimbursement rates. In addition, as a result of disruptions in the credit markets, we expect the leasing rates under new leases for fleet vehicles provided to our contract sales representatives to increase as a result of the current disruptions in the credit market. Although we seek to adjust pass-through costs as contracts are renewed, we are subject to pricing risk on fixed cost items for the duration of the contracts under which they are provided.
If the costs to us of providing fixed priced items increases, we may be exposed to reduced profits, or losses, under the relevant agreements, which could have a material adverse effect on our consolidated financial condition and results of operations.
Substantial defaults by our customers on our accounts receivable could have a significant negative impact on our business, results of operations, financial condition or liquidity.
A significant portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, our business, consolidated results of operations, consolidated financial position or liquidity could be materially and adversely affected. In the event of an economic or industry downturn, such downturn could have an adverse effect on the servicing of these accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations, particularly in relation to smaller or more thinly capitalized clients. Without limitation, current recessionary economic conditions in the U.S. and disruptions in the credit market could cause delays in collection or defaults, including as a result of declines in the creditworthiness of our customers, business failures and increased conservatism in our customers' cash management strategies.
The information contained in Part II, Item 5 of this report is incorporated by reference.
As of July 28, 2008, in connection with the payment of the earnout obligation for the twelve months ended March 31, 2008 under the purchase agreement relating to our acquisition of Ignite, we issued for the account of Ignite a total of 48,026 unregistered shares of common stock.
As of August 22, 2008, in connection with the payment of the earnout obligation for the period ending December 31, 2007 under the purchase agreement relating to our acquisition of inVentiv Communications, Inc., we issued for the account of inVentiv Communications, Inc. a total of 22,876 unregistered shares of common stock.
The common stock issuance described above was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. There was no general solicitation or advertising and the recipients of such unregistered shares were limited in number and/or sophisticated.
| 31.1 | | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 31.2 | | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32.1 | | 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 |
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| 32.2 | | 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 |
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.
INVENTIV HEALTH, INC.
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| Date: November 7, 2008 | By: | /s/ David S. Bassin | |
| | | Name : David S. Bassin | |
| | | Title: Chief Financial Officer and Secretary | |
| | | (Principal financial officer and principal accounting officer) | |
