UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 (State or Other Jurisdiction No. of Incorporation or Organization) | 52-2181734 (I.R.S. Employer Identification No.) |
200 Cottontail Lane Vantage Court North; Somerset, New Jersey 08873
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (800) 416-0555
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
Based on the closing sale price on the Nasdaq Global Select Market as of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non affiliates of the registrant was approximately $820,076,630. For the purposes of this calculation, shares owned by officers, directors and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not a determination for other purposes.
As of February 13, 2009, there were 33,362,913 outstanding shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's annual report to security holders for the fiscal year ended December 31, 2008, are incorporated by reference into Part II of this report. Certain portions of the Registrant's Definitive Proxy Statement to be filed with the Commission for use in connection with the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
| Item | Description | |
| PART I |
| 1 | | |
| 1A | | |
| 1B | | |
| 2 | | |
| 3 | | |
| 4 | | |
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| PART II |
| 5 | | |
| 6 | | |
| 7 | | |
| 7A | | |
| 8 | | |
| 9 | | |
| 9A | | |
| 9B | | |
| |
| PART III |
| 10 | | |
| 11 | | |
| 12 | | |
| 13 | | |
| 14 | | |
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| PART IV |
| 15 | | |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report 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. These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this report contains forward-looking statements regarding, among other things:
| | · | 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; |
| | · | changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing; and |
| | · | our ability 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 additional risk factors outlined in more detail in Item 1A, Risk Factors, in this report.
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 payors.
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.
The success of our business as a whole, and of our inVentiv Clinical, inVentiv Commercial and inVentiv Patient Outcomes segments in particular, is related significantly to the level of pharmaceutical spending and the portion of that spending 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 large 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.
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. Furthermore, although 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. Acquisitions have contributed meaningfully to our annual growth over the last few years.
Business Segments
We have organized our businesses into four operating segments: inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes. Each of our operating segments is composed of multiple businesses that are referred to as “business units” throughout this report. We apply aggregation criteria consistent with definitions under the related guidance in Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information as well as SFAS 142, Goodwill and Other Intangible Assets, for purposes of aggregating business units. Financial information about these segments for fiscal years 2008, 2007 and 2006 is contained in “Note 19 – Segment Information” of the “Notes to Consolidated Financial Statements” included in this Form 10-k and is incorporated herein by this reference. The following is a detailed description of our four operating segments:
inVentiv Clinical
inVentiv Clinical provides professional resourcing and services primarily 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, LLP (“Synergos”). inVentiv Clinical's service offerings include:
| | · | Clinical Staffing and Recruiting. Through SHCG and MedFocus, we meet the staffing and recruiting needs of more than 150 pharmaceutical and biotechnology clients, including 16 of the top 20 global pharmaceutical companies, for SAS™ programmers, data managers, statisticians, monitors and clinical research associates, study and project managers, clinical trials coordinators, safety/regulatory staff, medical writers, scientific and laboratory staff and other clinical personnel. Our clinical staffing services provide our clients with flexibility in managing and executing clinical trials internally and allow them to avoid the expense of hiring and training a full staff internally. We draw from a database of over 40,000 candidates that is continually expanded through new recruiting techniques that include search engines, job fairs, conferences and referral bonuses. |
| | · | Functional Outsourcing. We provide a variety of functional outsourcing services, including data management and statistical analysis services through HHI, through our dedicated facilities in Indiana and Pennsylvania, and monitoring and project management services through Synergos. We have performed these services for over 150 clinical trials. Our functional outsourcing services complement SHCG and MedFocus’s contract staffing pool with statistically-knowledgeable physicians and medically-knowledgeable statisticians to deliver well-organized research used in clinical trial and clinical program design, data management, data analysis, double data entry and validation, reporting and standard operating procedures writing. This bi-disciplinary expertise enables us to set up, manage and present data to help pharmaceutical clients move from the preclinical stage through the drug approval process and into post-commercialization oversight. |
| | · | Executive Placement. We provide executive placement services through SHA, which is one of the most experienced and respected executive placement organizations focused primarily on statisticians and data-related functions. |
inVentiv Communications
inVentiv Communications provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. This segment includes inVentiv Communications, Inc. (formerly known as inChord 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):
| · | Advertising and Communications Support. Advertising and communications support services are delivered to pharmaceutical industry clients through six separate agencies: |
| · | GSW Worldwide and Palio are full-service agencies that create marketing solutions through advertising, public relations, market access strategies, media and market research. GSW Worldwide has established international reach through a network of twelve international affiliate relationships. |
| · | Navicor specializes in oncology and immunology expertise. |
| · | Stonefly conducts advertising, marketing, and public relations services focused primarily on biotechnology and emerging pharmaceutical companies. |
| · | JSAI is a leading healthcare marketing and communications agency in Canada. |
| · | Angela Liedler GmbH (“Liedler”), is a leading healthcare marketing and communications agency in Germany. |
| · | Public Relations. Public relations services are delivered to pharmaceutical industry clients through two separate agencies: |
| · | CCA is a full service public relations firm that serves the healthcare sector by building and promoting brand value, providing leadership, protecting brand value and furthering public affairs agendas. CCA operates through three US-based and two Europe-based offices, and has established broad international reach through a network of fifteen international affiliate relationships. |
| · | Chamberlain is also a full-service public relations firm dedicated to creating enduring agendas that drive understanding and meaning for clients’ healthcare brands. |
| · | Branding. Addison Whitney focuses on creating unique corporate and product brands, and specializes in building powerful branding solutions for clients through unique and disciplined processes. Addison Whitney offers a range of capabilities to create, renew and strengthen brands, including an expertise in generating names that reflect the brand's identity and meet regulatory requirements. |
| · | Interactive Communications. Ignite specializes in medical advertising and interactive communications targeting patients, caregivers and healthcare professionals. |
| · | Patient and Physician education. Cadent Medical Communications, Selva Communications and Center for Biomedical Continuing Education (“CBCE”) provide education and communications services to build advocacy for pharmaceutical and biotech brands. CBCE is an accredited provider of continuing patient and physician education for physicians. |
inVentiv Commercial
inVentiv Commercial provides a wide range of commercialization support services, organized principally into two subdivisions:
| · | inVentiv Selling Solutions. inVentiv Selling Solutions encompasses the following group of companies that mainly relate to sales teams and sales support services: |
| · | inVentiv Pharma Teams: inVentiv Pharma Teams provides outsourced product commercialization programs for prescription pharmaceutical and other life sciences products. inVentiv Pharma Teams maintain and operate one of the largest pharmaceutical outsourced sales organizations in the United States, including systems, facilities, and support services necessary to recruit, train and deploy customized, full-service targeted sales forces. |
| | |
| | Life sciences companies, particularly pharmaceutical manufacturers, have traditionally relied upon product detailing as the primary means of influencing prescription writing patterns and promoting their products. Product detailing consists of a one-on-one meeting in a physician’s office where a sales representative reviews the medical profile of a product’s Food and Drug Administration approved indications. In order to engage in an effective dialogue, the salesperson must be well educated and highly trained. Recruiting qualified personnel and providing client and selling skills are both core competencies of inVentiv Selling Solutions. |
| · | Recruiting: To accomplish a coordinated recruiting effort, our regionally based recruiters coordinate through a national recruitment office that locates and hires potential sales representatives. Our in-house recruiting team adheres to selective hiring criteria and conducts detailed evaluations to ensure high quality of representation for our clients. inVentiv Selling Solutions’ recruiters maintain a fully automated database of qualified candidates for immediate hiring opportunities, and our website offers an online application for employment. We offer these recruitment services to clients as part of an integrated sales force recruitment, training and management program, as well as on a standalone basis. inVentiv Selling Solutions hires a mix of full-time and flex-time representatives in order to accommodate the detailing level required by clients and enhance cost efficiency. |
| · | Professional Development and Training: We have one of the largest dedicated training facilities of its type in the U.S. Topics such as sample accountability, negotiation tactics, personal writing skills, integrity selling, time and territory management, team productivity and pharma-manager leadership are covered extensively in order to prepare the representatives for their interactions with medical professionals. Our trainers have access to proprietary information about the prescription writing behavior of physicians. We provide this training both for our own and for our clients' sales forces and training and development services are essential to maintaining and building our relationships with pharmaceutical companies. Our training efforts are further enhanced through a proprietary voice-recognition software platform enabling remote training practices. These strengths are widely recognized as distinguishing inVentiv Selling Solutions from its competitors. |
| · | Regulatory Compliance Services: Through our PRS business unit, we provide independent oversight of Prescription Drug Marketing Act (“PDMA”) and Office of Inspector General compliance to clients and to internal inVentiv Pharma Teams. Our expertise in PDMA compliance issues is nationally recognized. We provide a number of processes, systems and services to help clients comply with federal and state regulations specific to sample accountability, including auditing of sample accountability compliance by field force professionals and “whole systems” sample accountability assessments. We also license software solutions for the implementation of sophisticated PDMA compliance strategies. |
| · | Non-Personal Promotion: We provide warehousing, assembly, mailing, fulfillment, teleservices and eServices through our Promotech business unit, which was augmented with the acquisition of Promotech Logistics Solutions LLC ("PLS") in December 2008. Promotech operates east coast and west coast divisions and maintains three facilities: a facility in New Jersey with approximately 130,000 square feet and two facilities in Colorado totaling approximately 190,000 square feet. Each of these facilities includes an environmentally controlled, FDA and Drug Enforcement Agency (“DEA”) certified and PDMA compliant warehouse and office space. The west coast facility includes a 64-station call center. |
| · | Virtual Event Services: MedConference is a leading provider of live and on-demand virtual event services to the pharmaceutical industry. MedConference’s flagship service, MedConferenceLive™, creates and manages live and on-demand web events for the healthcare industry. MedConference’s turnkey package of reliable technology and full-support services provides a flexible, easy-to-use online communication platform for pharmaceutical companies, medical education providers, professional medical associations and others who need to deliver timely information to physicians and healthcare practitioners. |
| · | Sales Force Automation/Data Analysis: Our Total Data Solutions (“TDS”) business unit collects and analyzes sales force level data necessary to make marketing resource allocation decisions. Sales representatives are equipped with an industry-leading palm-top and laptop sales force automation system developed for inVentiv Selling Solutions. This system enables our sales representatives to rapidly collect sales call and physician profiling information while in the field, which is compiled daily in a central data storage server. Our information processing system allows sales management teams to analyze data regularly, compare the results with targeted initiatives and historical data and make necessary adjustments to the sales strategy. TDS supports inVentiv Pharma Teams’ needs and also offers this sales force automation system on a standalone basis to clients. |
| · | inVentiv Strategy and Analytics. inVentiv Strategy and Analytics encompasses our consulting offerings focused on strategy, analytics, market research, managed care and commercialization planning: |
| · | Planning and Analytics: Health Products Research (“HPR”) is a leader in the development and implementation of advanced data analysis and market research technologies to support client decision making within pharmaceutical and biotechnology companies. HPR combines leading edge technology with advanced statistical techniques and empirical research to deliver strategic and tactical solutions that help pharmaceutical executives maximize their return on investment for promotional resources. HPR’s range of services includes a variety of quantitative and other tools that supports HPR’s clients in optimizing and continually improving the effectiveness of deployed promotional and sales force resources. |
| · | Strategic Consulting: Strategyx, acquired in June 2007, is a strategy consulting firm, focused on delivering effective and innovative approaches to participating in the emerging, managed healthcare marketplace. Strategyx specializes in three practice areas: managed markets strategy, product strategy and organization design. |
| · | Product Access and Managed Market Support: Ventiv Access Group provides the strategy and tactics to increase access to clients' products in managed markets, trade distribution channels, Medicaid, Medicare and other State and Federal outlets. |
| · | Consulting and Contract Marketing: Creative Healthcare Solutions, LLC (“CHS”) is a leading provider of contract marketing services for pharmaceutical and biotech companies. CHS supports product teams by adding expertise in brand management, new product planning, market research and business development. |
inVentiv Patient Outcomes
inVentiv Patient Outcomes provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute, AWAC (acquired in July 2007) and Patient Marketing Group, LLC (“PMG”) (acquired in August 2008).
| · | Patient Pharmaceutical Compliance Programs. Through Adheris, we provide a variety of patient support services with a proven history of improving medication adherence across nearly every chronic therapeutic category. By partnering with pharmacies around the country, Adheris’ programs build on the pharmacist-patient relationship and trust with personalized letters from pharmacists themselves. Adheris programs comply with the patient privacy provisions of the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and its OnSyte(TM) technology allows retail pharmacies to help patients stay on therapy while protecting their confidentiality and private medical information. |
| · | Patient Support Programs. We offer patient assistance programs and reimbursement counseling through our Franklin business unit. Franklin has established a leadership position in providing reliable and innovative patient assistance programs, reimbursement counseling, web-based programs, missions programs and proactive fulfillment. Franklin also provides a variety of additional patient support services to clients, including support in Medicare Part D education. |
| · | Clinical Nurse Educators, On-Call Specialists, and Medical Science Liaison Programs: The Therapeutics Institute offers highly qualified clinical and scientific professionals to build advocacy, educate healthcare professionals and sensitize markets to novel and exciting therapies. |
| · | Medical Cost Containment and Consulting Solutions. AWAC 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. AWAC provides unique data integration and access and analysis capabilities including real-time claims evaluation and intervention, disease management, demand management, risk assessment, wellness programs and pre-certification. |
| · | Patient Relationship Marketing. We design, develop and implement patient relationship marketing services through our PMG business unit. PMG's range of capabilities includes direct-to-patient strategy, patient research and insights mining, relationship marketing campaigns, online promotion, interactive tools and provider integration. |
Acquisitions
Strategic acquisitions have been a core element of our business strategy since 2004. While acquisitions have contributed meaningfully to our annual growth during this period, we expect to be more selective and execute fewer acquisitions going forward.
The following is a summary of our acquisitions to date:
Acquisition | Type of Business | Segment (“inVentiv”) | Headquarters Location | Month Acquired |
| Promotech Logistics Solutions LLC | Sample fulfillment, direct mail and document imaging | Commercial | New Jersey | December 2008 |
| 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 believe that our expertise in identifying potential acquisition targets, assessing their importance to our operational and growth objectives, performing due diligence and completing the acquisition of appropriate businesses and effectively integrating them with our existing operations is a competitive advantage.
Our acquisition activity adds complexity to the analysis of period-to-period financial results and makes direct comparison of those financial results difficult. The financial results of the acquired businesses are included in our consolidated financial statements from their acquisitions dates. The periods prior to an acquisition being completed do not include the corresponding financial results of the acquired business.
International Operations
Our inVentiv Communications division currently includes the most significant component of our international operations. As part of the acquisition of inVentiv Communications, Inc., we added operations in the United Kingdom. As part of the acquisition of CCA, we added operations in the United Kingdom and France. As of December 2008, we have an 85% ownership interest in Liedler, located in Germany, and in December 2008, we acquired a 19.9% interest in each of Haas and Health Partner Public Relations and SanCom Creative Communications Solutions GmbH (collectively, "Haas and Health"), leading healthcare public relations firms in Germany. As part of the Haas and Health agreement, we have an additional purchase option of 60.1% (for a total 80% ownership stake) within 90 days following calendar year 2010. The final 20% may be purchased by inVentiv for a period of 90 days following the third anniversary of the acquisition of inVentiv of the 60.1% equity interest. JSAI, which is included in our Communications division, is a leading healthcare marketing and communications agency in Canada. These units collectively provide advertising, marketing and public relations services to clients throughout Europe and Canada.
We also seek to establish (sometimes through the acquisition of preexisting "shelf" companies) foreign affiliates to increase the international visibility and capabilities of our segments. During 2008, we established inVentiv Clinical Solutions Pesquisa Clinica Ltda. in Brazil and inVentiv Mexico, S. De R.L. de C.V. in Mexico. In 2005, we established inVentiv Pharma Services India Private Limited (formerly inVentiv-Siro Clinical Private Limited), which is currently operated as a joint venture with Sciformix Corp., to establish clinical trials capabilities in India. Sciformix Corp. has an option to acquire 20% of the joint venture entity. We anticipate establishing additional international entities in 2009 and beyond as our client's business requires our support in additional locations around the world.
We also have a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden and in December 2004 we acquired a 40% interest in DWA Health s.r.l. in Italy. This ownership interest was reduced to 37.5% in 2008 as the DWA Health Managing Director was awarded a 5% ownership stake (2.5% from each major shareholder) pursuant to the purchase agreement, based on performance. Foreign operations are accounted for using the functional currency of the country where the business is located, translated to US dollars in the inVentiv Health, Inc. consolidated financial statements. These investments are accounted for using various methods depending on ownership % and control. For investments below the 20% threshold where inVentiv does not have significant influence, these are maintained on the cost method.
For investment ownership that is between 20% and 50%, or in cases where a lower ownership percentage is owned but where we exercise significant influence, we use the equity method of accounting. For investments where we own greater than 50% and exercise significant influence over the entities, financial results are consolidated in our year-end financial statements. Although the financial results of our international operations are immaterial to the financial statements as a whole, their existence is an important component of our continued global approach and marketing strategy with our clients. 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.
Clients
We provide our services to leading pharmaceutical and life sciences companies and healthcare companies. For the years ended December 31, 2008 and 2007, no client individually exceeded 10% of our total revenues, and we served over 350 unique clients in 2008, while supporting over 850 client brands. Approximately 50% and 51% of our revenues in 2008 and 2007, respectively, were derived from our ten largest clients, which for 2008, listed alphabetically, were as follows: Allergan, Boehringer Ingelheim, Inc., Cephalon, Inc., Eli Lilly and Company, Johnson and Johnson, Merck and Company, Inc., Novartis Pharmaceuticals, Inc., Pfizer, sanofi-aventis Group, and Wyeth.
We consider the breadth of our client portfolio and our close relationships with leading pharmaceutical manufacturers to be an important competitive advantage, providing us with a source for recurring revenues, as well as sales growth opportunities as our clients launch new products and as we develop new offerings. Our services are typically sold to several target groups within the client organization, typically their clinical, marketing and sales departments and brand teams. This provides the basis for continuous interaction and feedback, allowing us to continuously improve our services and identify new business opportunities, a process augmented by the longevity of many of our client relationships. We have developed sustained relationships with large, mid-tier, emerging pharmaceutical and biotechnology clients that provide us with recurring revenue streams and cross-selling opportunities. Our ability to perform services and add value at every part of the product life cycle enhances our ability to develop new business opportunities and form long-lasting relationships with clients.
Our relationships with a client's clinical or marketing and sales organizations also benefit from high switching costs, as retaining another sales force or advertising agency and redesigning a marketing program creates substantial additional expense and causes losses in time and productivity for our clients. In addition, successful marketing and sales outsourcers have established their reputations due to sophisticated performance evaluation capabilities, and clients are unlikely to use vendors without widely recognized expertise, a strong track record and recognized brand names.
Competition
We operate in highly competitive industries. Our competitors include a variety of vendors providing services to the pharmaceutical, life sciences and healthcare industries, including outsourced sales organizations, medical communications agencies, contract research organizations and medical cost containment consultants. Each of our business segments faces distinct competitors in the individual markets in which each operates:
| · | inVentiv Clinical: The specialty staffing services industry is very competitive and fragmented with relatively few barriers to entry. We compete with several large nationwide temporary staffing companies. The primary clinical staffing competitors to our SHCG and MedFocus business units include ClinForce (a division of Cross Country Healthcare, Inc.), Managed Clinical Solutions (a division of ICON), ASG, Advanced Clinical Services, RPS, i3 Pharma Resourcing and Kforce Inc. Primary competitors in the permanent placement area include numerous smaller specialty permanent placement groups which compete with us, as well as to some degree larger national firms such as Korn/Ferry International, Russell Reynolds Associates and Heidrick & Struggles International, Inc.; however we are one of the only national firms that specializes primarily in professional clinical trials research personnel. In functional outsourcing (or Contract Research Organizations), the competition ranges from small specialty organizations to global CROs such as Quintiles Transnational Corp. (“Quintiles”) or Covance Inc. |
| · | inVentiv Communications: Marketing and communications services is a relatively fragmented and competitive market. Our Communications Services group competes with the healthcare offerings of the five large global advertising holding companies, which include WPP Group PLC, Omnicom Group Inc., Publicis Groupe S.A., IPG and Havas. In addition, we compete with a large number of smaller specialized agencies that have focused either on a therapeutic area or a particular service offering. |
| · | inVentiv Commercial: The majority of sales teams are currently managed internally by our clients, and we to some degree “compete” with our clients' alternative choices of managing their needs internally or co-promoting with another pharmaceutical company. In addition, a small number of providers comprise the market for outsourced sales teams, and we believe that inVentiv, Quintiles, Professional Detailing, Inc. and Publicis Groupe S.A. combined account for the majority of the U.S. outsourced sales team market share. The rest of the industry is fragmented, with a number of small providers focused on niche services. One or more of our large competitors in the outsourced sales team market could become significant competitors with regard to the other services we offer by either developing additional capabilities or acquiring these capabilities. For Strategy and Analytics, our competitors include IMS Health, TargetRx, ZS Associates and Trinity Pharma Solutions. |
| · | inVentiv Patient Outcomes: Adheris’ offerings compete with several third party companies that implement adherence programs through major chains, including Catalina Marketing Corporation and Mirixa Corporation, as well as less directly with a number of specialty agencies and specialist service providers that focus on various aspects of patient adherence and compliance. The Franklin Group competes with several other service companies and reimbursement specialists, including Express Scripts and the Lash Group. The Therapeutics Institute competes with Innovex (Quintiles Transnational Corp.) and several other specialty nurse educator companies. While payor cost containment services is a relatively fragmented and competitive market, we believe there is no single company providing AWAC’s range of services. AWAC competitors in the technology arena include Active Health (a subsidiary of Aetna Health), D2 Hawkeye, MedStat and MEDai. In the demand management area many companies provide pre-certification, utilization review and case management, and in the wellness area many companies provide wellness programs of varying types and focus. Among the competitors for PMG are large, and smaller specialized, communications agencies. |
We believe that our business units individually and our organization as a whole have a variety of competitive advantages that have allowed us to compete successfully in the marketplaces for our services. These advantages include the following:
| · | Leading Position Within Service Categories: We believe that our operating divisions, and the business units within each operating division, have achieved positions of leadership within their respective service areas. inVentiv Communications, through its well known agencies, such as GSW Worldwide, Palio and Chandler Chicco, is a major force in healthcare advertising, public relations and communications. Prior to our acquisition of inVentiv Communications, Inc., that company was the largest privately-held healthcare marketing organization in the world. inVentiv Clinical, through its Smith Hanley division, is recognized as a leader in clinical trials staffing and a leading provider of clinical trials-related SAS programmers, statisticians, data management and monitoring personnel to the major pharmaceutical and life sciences companies. inVentiv Pharma Teams is the leading provider of outsourced product detailing services in the pharmaceutical industry. InVentiv Patient Outcomes is a leader in proprietary patient compliance programs. Our business units have extensive experience and proven track records that support our business development efforts. |
| · | Comprehensive Service Offering: We are one of the largest providers of services to the pharmaceutical and life sciences industry in the U.S. and offer among the broadest range of services. These are important factors to our clients and potential clients, many of whom prefer to work with organizations that can provide a comprehensive suite of complementary services and have a proven track record of execution. |
| · | Broad and Diversified Client Base: In addition to serving most of the largest pharmaceutical companies, we also serve a large number of mid-size and smaller biotechnology and life sciences companies. As each of these companies uses our services, our relationship is expanded and the opportunity to cross-sell our services increases. Our client base of over 350 pharmaceutical and biotechnology clients is broad and diversified, and with many of these clients we have maintained long-term relationships that help us in continuing to win new business. |
| · | Well-Recognized Trade Names: We recognize that the established trade names with a long history possess a powerful and enduring nature that transcends general trade name recognition. One of the most valuable assets to inVentiv is the trade names of many of our business units. These names are a competitive advantage in the marketplace because they generate a favorable customer perception in brand name recognition in the pharmaceutical, life sciences and healthcare industries. Our focus on building a comprehensive suite of best-in-class service providers with strong marketplace awareness has been a key strategy in our acquisitions. A few examples of our strong brand names in their respective marketplaces include Smith Hanley, GSW Worldwide, Palio, Chandler Chicco, Chamberlain, Ignite, Adheris and AWAC. |
| · | Proprietary Technologies and Data: We maintain and operate a number of proprietary software programs and systems for marketing development and data gathering. We invest in technology and have developed and deployed cutting-edge marketing and sales force automation tools. Our technology advantages in the sales force automation and in the virtual events areas are important for the management of sales and marketing campaigns for pharmaceutical products throughout their life cycle, particularly during the product launch phase. Our patient compliance offerings rely on a broad network of retail pharmacies and our use of proprietary technologies to effectively manage the large amount of underlying data in a timely and targeted manner. Our medical cost containment business unit utilizes an electronic claims surveillance system to monitor medical claims data, prescriptions and pre-certification records, which are then reviewed by our expert physicians and case managers. |
| · | Experienced Management Team: Our management team includes executives with substantial expertise in pharmaceutical and healthcare services, as well as substantial background within pharmaceutical companies themselves, including managing pharmaceutical sales forces, establishing sales and marketing strategies, and product management industry experience. The team also has extensive experience in the areas of outsourced staffing, permanent placement and executive search services. We believe our mix of senior management with pharmaceutical and healthcare services experience, entrepreneurial talent and strategic perspective is unique in the industry. |
Seasonality
Although our business is subject to some variability as a result of the ongoing startup and completion of contracts, periodic receipt of incentive fees and the ramp up of product revenues in certain contracts, and select businesses do have some degree of seasonality, our business in aggregate is not generally subject to significant seasonal variation.
Employees
At December 31, 2008, we employed approximately 7,100 people in our operations. Many aspects of our business are very labor intensive and the turnover rate of employees in our industry, and in corresponding segments of the pharmaceutical industry, is generally high, particularly with respect to sales force employees. We believe our turnover rate is comparable to that of other outsourced service organizations and that turnover in our contract sales and communications businesses is comparable to turnover in internal pharmaceutical sales and marketing departments. We have no collective bargaining agreements covering any of our employees and are unaware of any current efforts or plans to organize any of our employees. We believe that our relations with our employees are satisfactory.
Government Regulation
Our inVentiv Communications segment is subject to all of the risks, including regulatory risks, that advertising companies generally experience as well as risks that relate specifically to the provision of advertising services to the pharmaceutical industry. Such regulatory risks may include enforcement by the Food and Drug Administration, the Federal Trade Commission as well as state agencies enforcing laws relating to drug advertising, false advertising, and unfair and deceptive trade practices. There has been an increasing tendency in the U.S. on the part of advertisers to resort to the courts and industry and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Through the years, there has been a continuing expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to the advertising for certain products.
Adheris, a part of our inVentiv Patient Outcomes segment, provides persistence and compliance programs, principally in the form of refill reminder communications, to pharmacy chains. These activities are subject to regulation under HIPAA, the Federal Health Care Programs Antikickback Law and corresponding state laws. We believe that Adheris's activities comply with all applicable federal and state laws in all material respects. Certain of these laws are subject to interpretation that is evolving. We could incur significant expenses or be prohibited from providing certain service offerings if Adheris's activities are determined to be non-compliant and, depending on the extent and scope of any such regulatory developments, our consolidated financial condition and results of operations could be materially and adversely affected.
Our inVentiv Commercial segment provides contract sales services to the pharmaceutical industry and employs sales representatives who handle and distribute samples of pharmaceutical products. We are required to obtain state prescription drug wholesaler and pharmacy permits in nearly all states where these drug samples are distributed or dispensed and are subject to extensive licensing and regulatory requirements for such activities. The handling and distribution of prescription drug products are subject to regulation under the Prescription Drug Marketing Act of 1987 and other applicable federal, state and local laws and regulations. These laws and regulations regulate the distribution of drug samples by mandating storage, handling, solicitation and record-keeping requirements for drug samples and by banning the purchase or sale of drug samples. These laws also subject in Ventiv to all of the regulatory requirements imposed on pharmacies for dispensing drug samples including patient confidentiality, recordkeeping, labeling and facility requirements.
Some of our physician education services in our inVentiv Commercial and inVentiv Communications segments are subject to a variety of federal and state regulations relating to both the education of medical professionals and the marketing and sale of pharmaceuticals. In addition, certain ethical guidelines promulgated by the American Medical Association (“AMA”) and state medical associations govern the receipt by physicians of gifts in connection with the marketing of healthcare products. These guidelines govern the honoraria and other items of value that AMA physicians may receive, directly or indirectly, from pharmaceutical companies. Any changes in such regulations or guidelines or their application could have a material adverse effect on inVentiv. Failure to comply with these requirements could result in the imposition of fines, loss of licenses and other penalties and could have a material adverse effect on our consolidated financial condition and results of operations.
From time to time, state and federal legislation are proposed with regard to the use of proprietary databases of consumer and health groups. The uncertainty of the regulatory environment is increased by the fact that we generate and receive data from many sources. As a result, there are many ways government might attempt to regulate our use of this data. Any such restriction could have a material adverse effect on our consolidated financial condition and results of operations.
Our pharmaceutical and life sciences clients are subject to extensive government regulation. Generally, compliance with these regulations is the responsibility of those clients. However, several of our businesses are themselves subject to the direct effect of government regulation. In addition, we may be liable under certain of our customer contracts for the violation of government regulations by the applicable customers to the extent those violations result from, or relate to, the services we have performed for such customers. We could be subject to a variety of enforcement or private actions for our failure or the failure of our clients to comply with such regulations.
Available Information
We make available on our website, located at www.inventivhealth.com, the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge. Information found on our website should not be considered part of this annual report on Form 10-K.
Risks Related to Our Business
inVentiv Health is a complex organization encompassing four segments, each with its own particular risks and uncertainties. A wide range of factors could materially affect our financial results and the performance of our stock price. The factors affecting our operations include the following:
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 a recession.
The U.S. is in the most significant economic downturn in at least several decades. Sustained downturns or sluggishness in the U.S. economy generally affect the markets in which we operate. Customers in certain of our businesses are reducing marketing expenditures, delaying decisions on new marketing initiatives and/or shifting their outsourced service activities to areas that represent lower margin business from inVentiv's perspective. The U.S. recession will likely continue to have a significant adverse impact on our clients and our business for the next several years.
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 Note 5 to our consolidated financial statements in Part II, Item 8 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.
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 charge clients 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 resulted in our bearing fuel costs under certain of our contract sales representative agreements that exceeded initial estimates for such costs. 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 these 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.
Our revenues are dependent on expenditures by companies in the pharmaceutical and life sciences industries, third party administrators, employee benefit plans, employer groups, managing general underwriters and insurance carriers and others, and a variety of factors could cause the overall levels of those expenditures to decline.
The revenues of our inVentiv Clinical, inVentiv Communications and inVentiv Commercial divisions and Patient Outcomes are highly dependent on expenditures by companies in the pharmaceutical industry (and, to a lesser extent, other life sciences industries) for advertising, promotional, marketing and sales, recruiting, clinical staffing, patient initiatives and compliance services. Any decline in aggregate demand for these services could negatively affect these businesses. In addition to the current recessionary environment, the following factors, among others, could cause such demand to decline.
| · | Advertising, promotional, marketing and sales expenditures by pharmaceutical manufacturers have in the past been, and could in the future be, negatively impacted by, among other things, governmental reform or private market initiatives intended to reduce the cost of pharmaceutical products or by governmental, medical association or pharmaceutical industry initiatives designed to regulate the manner in which pharmaceutical manufacturers promote their products. |
| · | Consolidation in the pharmaceutical industry could negatively affect certain of our business units by reducing overall outsourced expenditures, particularly in the sales, marketing and staffing areas. |
| · | Companies may elect to perform advertising, promotional, marketing, sales, compliance and other services internally based on industry and company-specific factors such as the rate of new product development and FDA approval of those products, number of sales representatives employed internally in relation to demand for or the need to promote new and existing products and competition from other suppliers. |
| · | Companies may elect to perform clinical tasks internally based on industry and company-specific factors such as the rate of new product development and FDA approval of those products, the number of clinical professionals employed internally in relation to the demand for or the need to develop new drug candidates, and competition from other suppliers. |
AWAC has not yet deeply penetrated the medical payor marketplace, particularly the third party administrator marketplace. Furthermore, any decline in aggregate demand for medical cost containment services could negatively affect AWAC's business. Consolidation among AWAC's customer base could negatively affect AWAC by reducing overall outsourced expenditures in the medical cost containment area. Furthermore, companies may elect to perform medical cost containment services internally based on industry and company-specific factors, including competition from other suppliers.
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.
Inflation may adversely affect our business operations in the future.
Given the current macroeconomic environment, the U.S. government has recently entered into plans to provide a monetary stimulus and a fiscal stimulus, 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 cost of services and 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.
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 and unbilled receivable from customers. Certain customers, such as start-ups and undercapitalized companies in the biotechnology industry, may experience difficulties in obtaining capital given the current credit environment. If customers responsible for a significant amount of accounts and unbilled 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 a delay 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.
We may experience further writedowns of our goodwill, intangibles and instruments and other losses related to volatile and illiquid market conditions.
During 2008, we recorded a non-cash pre-tax goodwill and other intangible assets impairment charge of approximately $268 million in accordance with Statement of Financial Accounting Standards (SFAS) 142 and SFAS 144. The non-cash impairment charge was primarily related to adverse economic and equity market conditions that caused a decrease in the current marketplace and related multiples and our stock price as of December 31, 2008 compared to the test performed as of June 30, 2008.
At December 31, 2008, we had $10.4 million of marketable securities on our Balance Sheet ($3.7 million disclosed in deposits and other assets). We recorded a $2.6 million impairment charge related to our marketable securities during 2008 as a result of fluctuation in the value of our investment in the Columbia Strategic Cash Portfolio (the "CSCP"). 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 and 2010. Future impairment charges may result until the fund is fully liquidated, depending on market conditions.
We continue to have exposure to markets and products and as market conditions continue to evolve, the fair value of our reporting units could further be negatively affected. The trading price of our common stock could continue to decline based on general market conditions or factors specific to us or the industries in which we operate. In addition, recent market volatility has made it extremely difficult to value certain of our securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require us to take further writedowns in the value of our goodwill, other intangibles and securities portfolio, which may have an adverse effect on our results of operations in future periods.
We are in the process of integrating certain acquisitions and expect to make future acquisitions, which will involve additional risks
For the past several years, a significant component of our growth strategy has been the addition through acquisitions of business units. We have and will continue to seek to address the need to offer additional services through acquisitions of other companies, including the personnel such acquisitions may bring to us, although we expect to be more selective and execute fewer acquisitions going forward.
Our acquisitions of PMG and PLS were completed during 2008. Operational and financial integration of the acquired businesses is not yet complete and we may experience difficulties in completing the integration processes. Among other things, we are generally required to document internal controls under Section 404 of the Sarbanes-Oxley Act for each of our acquired business units by the end of the first fiscal year following the year in which the acquisition occurs. We may not be successful in recognizing material weaknesses in internal controls over financial reporting for our acquired businesses and may have difficulty remedying any such material weaknesses on a timely basis. More generally, we may experience difficulties in the integration of personnel and technologies across diverse business platforms.
Acquisitions involve numerous risks in addition to integration risk, including the following:
| · | diversion of management’s attention from normal daily operations of the business; |
| �� | insufficient revenues to offset increased expenses associated with acquisitions; |
| · | assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare and tax regulations; |
| · | the potential loss of key customers or employees of the acquired companies; and |
| · | difficulties integrating acquired personnel and distinct cultures into our business. |
Acquisitions, and related acquisition earnouts, may also cause us to deplete our cash reserves and/or increase our leverage, and therefore increase the financial risk of our capital structure; assume liabilities of the acquired businesses; record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; incur amortization expenses related to certain intangible assets; or become subject to litigation.
Mergers and acquisitions of new businesses are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially and adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions we make could harm our operational and consolidated financial condition and results of operations in a material way.
Our future revenues may be affected by consolidation in the pharmaceutical industry
Due to a variety of factors in the pharmaceutical industry, our clients could potentially merge with another company or be acquired. A merger may result in a consolidation of outsourced or marketing services where inVentiv services may no longer be required by the client. At the same time, a client merger may present inVentiv an opportunity to expand its relationship with the client and provide additional services.
We may not be successful in managing our infrastructure and resources to support continued growth.
Our ability to grow also depends to a significant degree on our ability to successfully leverage our existing infrastructure to perform services for our clients, develop and successfully implement new sales channels for the services we offer and to enhance and expand the range of services that we can deliver to our customers. We have historically maintained a relatively flat management structure; as the sizes of our business units grow and the number of our acquired business units increases, the breadth and depth of the responsibilities of our senior management team has increased as well. Our growth will also depend on a number of other factors, including our ability to:
| · | maintain the high quality of the services we provide to our customers; |
| · | increase our penetration with existing customers; |
| · | recruit, motivate and retain qualified personnel; |
| · | economically train existing sales representatives and recruit new sales representatives; and |
| · | implement operational and financial systems and additional management resources to operate efficiently and effectively regardless of market conditions. |
We are dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations perform billing and accounts receivable functions. Additionally, we rely on our information systems in managing our accounting and financial reporting. Our information systems are protected through physical and software safeguards and we have backup remote processing capabilities. However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. In the event that critical information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, to bill for services efficiently and to maintain our accounting and financial reporting accurately.
We cannot assure you that we will be able to manage or expand our operations effectively to address current or future demand and market conditions, or that we will be able to do so without incurring increased costs in order to maintain appropriate infrastructure and senior management capabilities. If we are unable to manage our infrastructure and resources effectively, our business, consolidated financial condition and results of operations could be materially and adversely affected.
We employ sophisticated computer technology to deliver our services, and any failure of or damage to this technology could impair our ability to conduct our business.
We have invested significantly in sophisticated and specialized computer technology and have focused on the application of this technology to provide customized solutions to meet many of our clients' needs. We have also invested significantly in sophisticated end-user databases and software that enable us to market our clients' products to targeted markets. We anticipate 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. In addition, our business is dependent on our computer equipment and software systems, and the temporary or permanent loss of this equipment or systems, through casualty or operating malfunction, could have a material adverse effect on our consolidated financial condition and results of operations. Our property and business interruption insurance may not adequately compensate us for all losses that we may incur in any such event. Changes in the technology environment or our inability to update our technology to service clients could impact our financial performance.
We are subject to a high degree of government regulation.
We are subject to a high degree of government regulation. Significant changes in these regulations, or our failure to comply with them, could impose additional costs on us or otherwise negatively affect our operations. See the discussion under "Business – Government Regulation" above.
Our services are subject to evolving industry standards and rapid technological changes.
The markets for our services are characterized by rapidly changing technology, evolving industry standards and frequent introduction of new and enhanced services. To succeed, we must continue to enhance our existing services; introduce new services on a timely and cost-effective basis to meet evolving customer requirements; integrate new services with existing services; achieve market acceptance for new services; and respond to emerging industry standards and other technological changes.
We may be adversely affected by customer concentration.
We have no customers, individually, that accounted for in excess of 10% of our revenues for the year ended December 31, 2008, and our largest customer during such year accounted for 9% of revenues. Our top 10 customers account for 50% of our revenue. If any large customer decreases or terminates its relationship with us, our business and consolidated financial position and results of operations could be materially adversely affected.
We may lose or fail to attract and retain key employees and management personnel.
Our key managerial and other employees are among our most important assets. An important aspect of our competitiveness is our ability to attract and retain key employees and management personnel. A significant aspect of our acquisition strategy is the retention of key employees of target companies for significant periods of time. The loss of the services of any key executive for any reason could have a material adverse effect upon the Company.
Compensation for key employees and management personnel is an essential factor in attracting and retaining them, and there can be no assurance that we will offer a level of compensation sufficient to do so. Equity-based compensation, including compensation in the form of options and restricted stock, plays an important role in our compensation of new and existing employees. Because of limitations on the number of shares available for future grant under our equity incentive plan, we may be unable to meet the compensation requirements of our key employees and management personnel. In addition, as a result of our adoption of SFAS 123R effective January 1, 2006, equity-based compensation is reflected in our income statement and has a negative impact on earnings.
We may incur liability in connection with litigation.
We are subject to lawsuits, investigations and claims arising out of the conduct of our business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain claims, suits and complaints have been or may in the future be filed against us as described under "Legal Proceedings" in Part I, Item 3 below. Litigation is inherently uncertain and we cannot assure you that we will not suffer a material, adverse effect as a consequence of any pending or future claims. Moreover, new or adverse developments in existing litigation claims or legal proceedings involving us could require us to establish or increase litigation reserves.
We have been and may in the future become become a party to legal actions related to the design and management of our service offerings, including, among others, privacy-based actions and contract disputes. Adheris was the subject of a recently settled action (which settlement has not yet received final court approval) asserting, among other claims, violation of the California Confidentiality of Medical Information Act and has had asserted against it in the past other claims based on purported violations of privacy statutes and common law arising from its patient refill reminder programs. PRS was the subject of an indemnification claim based on a recently settled action (which settlement has not yet received final court approval) asserting, among other claims, violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005. Although it has not been the subject of litigation to date, AWAC could become the subject of medical malpractice claims based on the design and management of its service offerings. Adheris, PRS and AWAC each maintain errors and omissions insurance and other traditional business coverage. AWAC does not insure for medical malpractice since it does not deem itself to be practicing medicine. Although we believe that all of our businesses are adequately insured, certain types of claims, such as punitive damages, are not covered by insurance.
We could face substantial product liability claims in the event any of the pharmaceutical or other products we have previously marketed or market now or may in the future market are alleged to cause negative reactions or adverse side effects or in the event any of these products causes injury, is alleged to be unsuitable for its intended purpose or is alleged to be otherwise defective. We rely on contractual indemnification provisions with our customers to protect us against certain product liability related claims. There is no assurance that these provisions will be fully enforceable or that they will provide adequate protection against claims intended to be covered.
We could face liability for drug samples that we distribute to physicians or for drug samples that we dispense to patients which are alleged to be adulterated or misbranded, to have been negligently dispensed, to cause negative reactions or adverse side effects or in the event any of these products causes injury, is alleged to be unsuitable for its intended purpose or is alleged to be otherwise defective.
We may not be able to comply with the requirements of our credit facility.
On July 6, 2007, we entered into an Amended and Restated Credit Agreement with UBS AG, Stamford Branch and others. The outstanding balance under this facility was approximately $330 million as of the closing date under the facility, which is attributable to a $330 million secured term loan component. The Amended and Restated Credit Agreement also provided for up to $20 million in additional term loans ("delayed draw term loans") to be advanced no later than January 6, 2008 which we elected to not draw. The agreement also provides a $50 million revolving credit facility, of which $10 million is initially available for the issuance of letters of credit, and a swingline facility. The term loan will mature on the seventh anniversary of the Amended and Restated Credit Agreement, with scheduled quarterly 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 Amended and Restated Credit Agreement. Amounts advanced under the credit facility must be prepaid with a portion of our "Excess Cash Flow", as defined in the credit agreement. The credit facility contains numerous operating covenants that have the effect of reducing management's discretion in operating our businesses, including covenants limiting:
| · | the incurrence of indebtedness; |
| · | the creation of liens on our assets; |
| · | sale-leaseback transactions; |
| · | repurchase of company shares; |
| · | payment of dividends; and |
| · | fundamental changes and transactions with affiliates. |
The Amended and Restated 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. If we are unable to comply with the requirements of the credit facility, our lenders could refuse to advance additional funds to us and/or seek to enforce remedies against us. Any such developments would have a material adverse effect on inVentiv. As of the date of this report, we comply with the requirements of our credit facility.
Our future financial results may not be consistent with our guidance.
From time to time, we communicate to the market guidance relating to our revenue, earnings per share and other financial measures. These statements are intended to provide metrics against which to evaluate our performance, but they should not be understood as predictions or assurances of our future performance. Any downward variance in operating results as compared to announced guidance can be expected to result in a decline in our stock price. Our ability to meet any projected financial result milestone is subject to inherent risks and uncertainties, and we caution investors against placing undue reliance on our published guidance. See "Cautionary Statement Regarding Forward-Looking Disclosure" above.
The inability to generate sufficient cash flows to support operations and other activities could prevent future growth and success.
Our inability to generate sufficient cash flows to support capital expansion, business acquisition plans and general operating activities could negatively affect our operations and prevent our expansion into existing and new markets. Our ability to generate cash flows is dependent in part upon obtaining necessary financing at favorable interest rates. Interest rate fluctuations and other capital market conditions may prevent us from doing so.
Risks Related to our Common Stock
The trading price of our common stock may be volatile, and you may not be able to sell your shares at or above the price at which you acquire them.
The trading price of our common stock may fluctuate significantly. Factors affecting the trading price of our common stock include:
| · | variations in operating results; |
| · | the gain or loss of significant customers or suppliers; |
| · | announcements relating to our acquisition of other businesses; |
| · | changes in the estimates of our operating results or downward variances in operating results as compared to guidance; |
| · | changes in recommendations by any securities analysts that elect to follow our common stock; and |
| · | changes in regulations that impact our service offerings; and |
| · | market conditions in our industry, the industries of our customers and our suppliers and the economy as a whole. |
In addition, if the market for health care stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, consolidated operating results or consolidated financial condition.
In order for our securities to be eligible for continued listing on the Nasdaq Global Select Market, we must remain in compliance with certain listing standards, including corporate governance standards, specified shareholders’ equity and a market price above $1.00 per share. If we were to become noncompliant with the Nasdaq Global Select Market’s continued listing requirements, our common stock may be delisted which could have a material adverse effect on the liquidity of our common stock.
Anti-takeover provisions in our organizational documents make any change in control more difficult.
Our certificate of incorporation and by-laws contain provisions that may delay or prevent a change in control, may discourage bids at a premium over the market price of our common stock and may affect adversely the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:
| · | limitations on the ability of our shareholders to call a special meeting of shareholders; |
| · | our ability to issue additional shares of our common stock without shareholder approval; |
| · | our ability to issue preferred stock with voting or conversion rights that adversely affect the voting or other rights of holders of common stock without their approval; |
| · | provisions that provide that vacancies on the board of directors, including any vacancy resulting from an expansion of the board, may be filled by a vote of the directors in office at the time of the vacancy; and |
| · | advance notice requirements for raising matters of business or making nominations at shareholders’ meetings. |
Our acquisition activity may dilute your equity interest and negatively affect the trading price of our common stock.
We have historically chosen to satisfy a significant portion of the consideration paid for acquired businesses in the form of shares of our common stock, including by reserving the right to satisfy a portion of any contingent, or "earnout", consideration, by issuing additional shares of our common stock. The potential earnout obligations under the terms of our completed acquisitions may be material individually or in the aggregate. Acquisitions we make in the future, and any earnout consideration from completed acquisitions that we satisfy through the issuance of our common stock, may significantly dilute your equity interest and may negatively affect the trading price of our common stock.
A substantial number of our securities are eligible for future sale and this could affect the market price for our stock.
The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that these sales could occur. As of February 13, 2009, we had 33,362,913 shares of common stock outstanding. Of these shares, a total of approximately 1.8 million shares were subject to contractual resale restrictions under acquisition agreements and will become eligible for sale over the next several years. Shares issued in future acquisitions, and shares issued in satisfaction of earnout obligations under completed acquisitions, may add substantially to the number of shares available for future sale.
In addition, as of February 13, 2009, approximately 1,036,324 shares of our common stock were subject to outstanding stock options. Holders of our stock options are likely to exercise them, if ever, at a time when we otherwise could obtain a price for the sale of our securities that is higher than the exercise price per security of the options or warrants. This exercise, or the possibility of this exercise, may reduce the price of our common stock.
We have received no written comments regarding our periodic or current reports from the Staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2008 fiscal year and that remain unresolved.
As of December 31, 2008, we leased 56 office facilities totaling 1,187,605 square feet, including our principal executive offices located in Somerset, New Jersey. Eleven facilities totaling 99,147 square feet are leased by the inVentiv Clinical segment, 29 facilities totaling 377,890 square feet are leased by the inVentiv Communications segment and twelve facilities totaling 624,164 square feet are leased by the inVentiv Commercial segment, four facilities totaling 86,404 square feet are leased by the inVentiv Patient Outcomes segment. We believe that our facilities are adequate for our present and reasonably anticipated business requirements.
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 the latest 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. Defendants also successfully moved to strike Plaintiff’s class allegations as improper. The operative Sixth Amended Complaint, which was filed on January 6, 2008, alleges five causes of action against Defendants. Only three of these claims – violation of the CMIA, breach of fiduciary duty, and unjust enrichment – are alleged against Adheris.
On February 8, 2009, the remaining parties to the Weisz action entered into a Settlement Agreement and Release (the "Weisz Settlement"). Under the terms of the Weisz Settlement, which has been preliminarily approved by the court but remains subject to final court approval after a fairness hearing, Adheris would agree to refrain from knowing participation in any refill reminder programs, targeted mailings or notifications regarding medical conditions of specific California residents except those residents who have expressly opted in to the communication or as otherwise permitted by California law. Adheris currently does not conduct significant business in California of the type encompassed by Weisz Settlement. It is expected that Adheris’ financial contribution to the settlement in excess of its retention amount will be funded by insurance. Our insurer, AIG, is defending this action under reservation of rights.
The hearing to consider final approval of the Weisz Settlement is scheduled for June 5, 2009. If the settlement does not become final, Adheris intends to continue to defend this action vigorously, and we do not believe that this action will have a material adverse effect on our 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 our 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.
Our insurer, Chubb Group, is defending this action under reservation of rights. In December 2008, the parties to the action entered into a settlement agreement, which is subject to Court approval and requires notification to various state attorneys general. The hearing to consider final approval of the settlement is scheduled for June 10, 2009. If the settlement agreement becomes final, the amount to be paid to the settlement class in excess of the deductible amount is expected to be funded by Chubb Group. If the settlement does not become final, PRS intends to continue to defend this action vigorously, and we do not believe that this action will have a material adverse effect on our 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 our consolidated balance sheets, results of operations or cash flows.
Other We are subject to lawsuits, investigations and claims arising out of the conduct of our business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain such claims have been filed or are pending against us. All such matters are of a kind routinely experienced in our business and are consistent with our historical experience. We do not believe that any such routine action will have a material adverse effect on us.
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008.
The following table contains the high and low sales prices of our common stock traded on the Nasdaq Global Select Market (ticker symbol “VTIV”) during the periods indicated:
| | | High | | | Low | |
| Year ended December 31, 2008 | | | | | | |
| First Quarter | | $ | 34.00 | | | $ | 27.78 | |
| Second Quarter | | $ | 35.70 | | | $ | 26.99 | |
| Third Quarter | | $ | 28.39 | | | $ | 16.79 | |
| Fourth Quarter | | $ | 17.53 | | | $ | 8.49 | |
| | | | | | | | | |
| | | High | | | Low | |
| Year ended December 31, 2007 | | | | | | | | |
| First Quarter | | $ | 39.09 | | | $ | 34.49 | |
| Second Quarter | | $ | 40.00 | | | $ | 34.56 | |
| Third Quarter | | $ | 43.82 | | | $ | 35.17 | |
| Fourth Quarter | | $ | 46.01 | | | $ | 27.56 | |
On February 13, 2009, there were approximately 281 record holders of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
To date, we have not declared cash dividends on our common stock and are currently restricted from doing so under our credit agreement. We do not anticipate paying any cash dividends in the foreseeable future.
During the fourth quarter of 2008, we did not repurchase any of our outstanding equity securities and, to our knowledge, no “affiliated purchaser” of inVentiv repurchased any of our outstanding securities.
The transfer agent for our common stock is American Stock Transfer and Trust Company, 6201 Fifteenth Avenue, Brooklyn, New York, 11219.
Information with respect to securities authorized for issuance under equity compensation plans is set forth in “Note 14 – Common Stock and Stock Incentive Plans” of the “Notes to Consolidated Financial Statements” included in this Form 10-K and is incorporated herein by this reference.
The performance graph required by Regulation S-K Item 201(e) will be set forth in our annual report to security holders for the fiscal year ended December 31, 2008 and is incorporated herein by this reference.
SELECTED FINANCIAL DATA
The following table summarizes certain of our historical financial data and is qualified in its entirety by reference to, and should be read in conjunction with, our historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Historical financial information may not be indicative of our future performance. See also “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations”.
| | | For the Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | (in thousands, except per share data) | |
| Revenues | | $ | 1,119,812 | | | $ | 977,300 | | | $ | 766,245 | | | $ | 556,312 | | | $ | 352,184 | |
| Impairment of goodwill and other intangible assets | | $ | (267,849 | ) | | | -- | | | | -- | | | | -- | | | | -- | |
| (Loss) income from continuing operations | | $ | (128,685 | ) | | $ | 47,226 | | | $ | 49,198 | | | $ | 43,082 | | | $ | 30,130 | |
| Income from discontinued operations | | $ | 664 | | | $ | 258 | | | $ | 2,037 | | | $ | 781 | | | $ | 1,002 | |
| Net (loss) income | | $ | (128,021 | ) | | $ | 47,484 | | | $ | 51,235 | | | $ | 43,863 | | | $ | 31,132 | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic (losses) earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (3.89 | ) | | $ | 1.50 | | | $ | 1.69 | | | $ | 1.60 | | | $ | 1.26 | |
| Discontinued operations | | $ | 0.02 | | | $ | 0.00 | | | $ | 0.07 | | | $ | 0.03 | | | $ | 0.04 | |
| Basic (losses) earnings per share | | $ | (3.87 | ) | | $ | 1.50 | | | $ | 1.76 | | | $ | 1.63 | | | $ | 1.30 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted (losses) earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (3.89 | ) | | $ | 1.46 | | | $ | 1.64 | | | $ | 1.53 | | | $ | 1.18 | |
| Discontinued operations | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.06 | | | $ | 0.03 | | | $ | 0.04 | |
| Diluted (losses) earnings per share | | $ | (3.87 | ) | | $ | 1.47 | | | $ | 1.70 | | | $ | 1.56 | | | $ | 1.22 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shares used in computing basic (losses) earnings per share | | | 33,043 | | | | 31,578 | | | | 29,159 | | | | 26,875 | | | | 23,951 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shares used in computing diluted (losses) earnings per share | | | 33,043 | | | | 32,267 | | | | 30,058 | | | | 28,165 | | | | 25,437 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance sheet data: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 973,116 | | | $ | 1,110,856 | | | $ | 771,054 | | | $ | 583,894 | | | $ | 287,452 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term debt (a) | | $ | 346,838 | | | $ | 345,995 | | | $ | 184,717 | | | $ | 190,508 | | | $ | 24,898 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total equity | | $ | 367,514 | | | $ | 477,466 | | | $ | 358,462 | | | $ | 253,219 | | | $ | 172,444 | |
(a) Long-term debt includes the non-current portion of our credit arrangement (for 2005-2008) and capital lease obligations (for all years), but excludes the current portion of our credit agreement and capital lease obligations.
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 this Annual Report on Form 10-K.
Overview
inVentiv Health Inc. (together with its subsidiaries, “inVentiv, ” “we,” "us," or "our") 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 lifecycle. For payors, we provide 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 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”), Chamberlain Communications Group, Inc. (“Chamberlain”), Addison Whitney, Angela Liedler GmbH (“Liedler”) and Chandler Chicco Agency (“CCA”); |
| · | inVentiv Commercial, which consists of our 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, including Promotech Logistics Solutions LLC ("PLS"), acquired in December 2008; and |
| · | inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute, AWAC (acquired in July 2007) and Patient Marketing Group, LLC (“PMG”) (acquired in August 2008). |
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. Current economic conditions in the U.S. and abroad make it difficult for us to predict the near-term performance of our businesses. Although the pharmaceutical industry is generally regarded as non-cyclical, the current recessionary environment has impacted and can be expected to further impact virtually all economic activity in the United States and abroad, including in the pharmaceutical and life sciences industry, and is resulting in increased budget scrutiny and efforts to significantly reduce expenditures in all areas of our clients' businesses.
During 2008, our inVentiv Communications division was affected by the tentativeness of clients to make marketing spend decisions, and that trend appears to be continuing, and perhaps deepening, during 2009 as evidenced by, among other things, longer lead times by our clients in developing their marketing budgets. We believe that our clients are intently focused on their short-term spending and cost-cutting efforts, and are continuing to look for ways to streamline their operations. Some clients are reducing marketing expenditures through reducing the scopes of agency projects and delaying decisions on new marketing initiatives. The consequence, which we anticipate (but cannot assure) will be short- to medium-term in nature, is to shift the revenue opportunities for our inVentiv Communications division away from supporting in-market products, where margins have traditionally been the most attractive. We also believe that client budgeting constraints and reductions in overall pharmaceutical marketing expenditures may impact our inVentiv Patient Outcomes division during 2009. An offsetting and longer-term positive trend for us, however, is that our clients appear to be adopting clear strategies to outsource more of their pharmaceutical marketing expenditures in lower cost and more flexible solutions consistent with what inVentiv offers.
Management is addressing the challenges of the current environment by taking steps to reduce fixed costs and create more flexibility in our cost structure, maximize and conserve strong cash flow and be in a position to pay down debt over time. Cost management strategies employed by management include reducing fixed cost headcount; supplementing resources with talented flex time employees who are willing to be employed on an as-needed basis; creating a studio to manage project-based graphic design and production needs for 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 inVentiv to provide competitive pricing to its clients and to improve margins.
While the current transformation in the pharmaceutical industry presents challenges to us, it also presents opportunities. Our client base is moving to more extensive outsourcing of the services we provide. Furthermore, the industry's pipeline is strong, with 17% more compounds in phase III development in 2008 as compared to 2007. However, we also believe that, even if the FDA approval rate does not appreciably improve over time, the number of compounds awaiting approval will lead to increased overall outsourcing expenditures. As a result of our deep and long-standing relationships with our clients, we believe that we are well positioned to capture these opportunities.
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. 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.
Although delays in FDA approval rates have negatively impacted the pharmaceutical industry, and indirectly inVentiv, the new product pipeline in the industry remains strong, with many late-stage products awaiting FDA approval. Even if the FDA approval rate does not approve, we believe that the number of products awaiting approval, and the requirement for pharmaceutical manufacturers to support these products as they reach commercialization, represents an opportunity over the medium to longer-term for inVentiv to capture increasing levels of outsourced services engagements.
Business Strategy
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 have historically been a core element of our business strategy. Acquisitions contributed significantly to our annual revenue growth over the last few years. We expect to be more selective and execute fewer acquisitions going forward. 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 2008, revenues from 2008 acquisitions totaled approximately $7 million, of which $6 million was in our inVentiv Patient Outcomes segment and $1 million in our inVentiv Commercial segment. Revenues from 2007 acquisitions totaled $82 million, of which $68 million was in our inVentiv Communications segment, $9 million in our inVentiv Patient Outcomes segment and $5 million in our inVentiv Commercial segment.
Critical Accounting Policies
Revenue Recognition
The following is a summary of our revenue recognition policy, based on the segment and services we provide:
inVentiv Clinical
| · | Clinical Staffing and Recruiting- Revenues are recognized and recorded when services are rendered. |
| · | Functional Outsourcing- Revenues are recognized and recorded when milestones are achieved, in accordance with the terms of the contracts. |
| · | Executive Placement- Revenues are recognized and recorded at the time a candidate begins full-time employment. Any write-offs due to cancellations and/or billing adjustments historically have been insignificant. |
inVentiv Communications
| · | Advertising and Communication support- Revenues are recognized and recorded under the proportional performance method, by relating the actual hours of work performed to date to the current estimated total hours of the respective projects. Any anticipated losses on projects are recognized when such losses are anticipated. Time and production billings are billed as incurred for actual time and expenses. |
| · | Public Relations- Revenues are recognized and recorded as time and production billings are billed as incurred for actual time and expenses. |
| · | Branding- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts; and revenues for certain contracts are recorded based on completed contract method. |
| · | Interactive Communications- Revenues are recognized and recorded under the proportional performance method based on services performed. |
| · | Patient and Physician Education- Revenues are recognized and recorded using either the completed contract method or when milestones are achieved, depending on the terms of the specific contracts. |
inVentiv Commercial
inVentiv Selling Solutions
| · | inVentiv Pharma Teams- Revenues and associated costs are recognized and recorded under pharmaceutical detailing contracts based on the number of physician calls made or the number of sales representatives utilized. Most of our Sales and Marketing Teams’ contracts involve two phases, an “Implementation phase", formerly referred to as "Deployment phase", typically one to three months, in which we perform initial recruiting, training and preparation for deployment of the field force at the start of a new contract, and the “Deployment phase", formerly referred to as “Promotion phase”, in which our deployed field force actively promotes specified products for clients through face-to-face interactions with physicians or other targets referred to as “detailing”. |
| | |
| | Our inVentiv Pharma Teams contracts specify a separate fee for the initial “Implementation phase” of a project. We consider the implementation phase to be a separate and distinct earnings process and recognize the related revenues throughout the implementation phase, which typically spans a period of one to three months at the beginning of the first year of a contract. We generally recognize revenue during the "Deployment phase" of our inVentiv Pharma Teams contracts on a straight-line basis based on the size of the deployed field force. The accounting for the two phases is based on our analysis of Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, in which we have concluded that the deployment and promotion phases are being sold separately and therefore qualify as separate units of accounting within the meaning of paragraph 9 of EITF 00-21. |
| | |
| | Many of the product detailing contracts allow for additional periodic incentive fees to be earned once agreed upon performance benchmarks have been attained. Revenue from incentive fees is recognized and recorded when we are reasonably assured that payment will be made, and is typically based upon verification through calculation of achievement, third party data or client verification. Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. These penalties are recognized upon verification of performance shortfalls. |
| | |
| | Non-refundable conversion fees are recognized and recorded as revenue when one of our sales professionals accepts a firm offer of permanent employment from a customer during the term of a contract. |
| · | Recruiting- Revenues are recognized based on placement of candidates. |
| · | Professional Development and Training- Revenues are generally recognized and recorded as training courses are completed. |
| · | Regulatory Compliance Services- Regulatory compliance revenues for both fixed fees services and fees for specific compliance related services are recognized and recorded when monthly services are performed. |
| · | Non-Personal Promotion- Revenues are recognized and recorded based on time incurred and fulfillment requirements in accordance with the terms of the contracts. |
| · | Virtual Event Services- Revenues are recognized based on the frequency and upon completion of live events. |
| · | Sales Force Automation/Data Analysis- A majority of revenues are recognized based on straight-line basis. For certain analytics projects, revenues are recognized upon completion. |
inVentiv Strategy and Analytics
| · | Planning and Analytics- Revenues for HPR generally include fixed fees, which are recognized and recorded when monthly services are performed based on the proportional performance method and when payment is reasonably assured. HPR’s initial contracts typically range from one month to one year. Revenues for additional services are recognized and recorded when the services are provided and payment is reasonably assured. |
| · | Strategic Consulting- For most contracts, revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts. Certain contracts are also recorded based on the proportional performance method. |
| · | Product Access and Managed Market Support- Consulting fee revenues are recognized and recorded when services are rendered. Other services are based on milestones. |
| · | Consulting and Contract Marketing- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts. |
inVentiv Patient Outcomes
| · | Patient Pharmaceutical Compliance Programs- Revenues are mainly recognized based on the volume of correspondence sent to patients. |
| · | Patient Support Programs- Patient assistance programs revenues depend on the number of patients served and are recognized and recorded as each service is performed. |
| · | Clinical Nurse Educators, On-Call Specialists, and Medical Science Liaison Programs- Revenue recognition is the same as inVentiv Pharma Teams, as the two services are similar in the business arrangement and fee structure. |
| · | Medical Cost Containment and Consulting Solutions- The majority of revenues are recognized on a completed contract basis, based on an analysis of claims as a percentage of savings realized by our clients. Certain services are performed on a fee-for-services basis and recognized when the service is rendered. |
| · | Patient Relationship Marketing- Revenues are recognized and recorded as time and production billings are billed as incurred for actual time and expenses. |
General Revenue Recognition
Reimbursable Costs
Reimbursable costs, including those relating to travel and out-of pocket expenses, sales force bonuses tied to individual or product revenues, and other similar costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which such amounts have been finalized. In certain cases, based on our analysis of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and related accounting literature, we may also record certain reimbursable transactions, such as the placement of media advertisements where we act as an agent, as net revenues.
Loss Contracts
We periodically analyze our contracts to determine the likelihood and amount of any potential loss on a contract resulting from lower than anticipated product, field force or other performance. In the event that current information illustrates a loss is likely to be incurred over the remaining life of the contract, we accrue that loss at the time it becomes probable. We did not have any material loss contracts in 2008 or 2007.
Billing
Customers are invoiced according to agreed upon billing terms. Contracts that are invoiced prior to performance of related services are recorded as client advances and unearned revenue and are not recognized as revenues until earned, in accordance with our revenue recognition policies. Amounts earned for revenues recognized before the agreed upon invoicing terms have been met are recorded as revenue and included in unbilled services. Upon billing, these amounts are transferred to billed accounts receivable.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-life intangibles are assessed for potential impairment pursuant to the guidelines of SFAS No. 142, Goodwill and Other Intangible Assets, on an annual basis (at June 30) or when management determines that the carrying value of goodwill or an indefinite-lived intangible asset may not be recoverable based upon the existence of certain indicators of impairment. We applied aggregation criteria consistent with the definitions under SFAS 142, as well as the related guidance in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, for purposes of aggregating business units in our goodwill impairment testing. Goodwill is tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. We calculate and compare the fair value of each reporting unit to its carrying value. If the carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to the difference. If we deem the useful life to be no longer indefinite after testing for impairment in accordance with the applicable rules stated above, we amortize the intangible asset over its remaining estimated useful life, following the pattern in which the expected benefits will be consumed or otherwise used up and we continue to review for impairment on an annual basis.
We performed annual impairment tests as of June 30, 2008 and concluded that the existing goodwill and indefinite lived intangible tradename balances were not impaired. In conjunction with the preparation, review and audit of financial statements for our 2008 fiscal year, as a result of adverse economic and equity market conditions that caused a decrease in the current marketplace and related multiples and our stock price, we concluded that a triggering event had occurred indicating potential impairment, and accordingly we performed an impairment test of our goodwill and other intangible assets at December 31, 2008. This interim impairment test resulted in pre-tax noncash goodwill and intangible asset impairment charges of approximately $268 million, including $238 million of indefinite-lived assets under SFAS No. 142, Goodwill and Other Intangible Assets, and $30 million of definite-lived assets under SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets.
Claims and Insurance Accruals
We maintain self-insured retention limits for certain insurance policies. The liabilities associated with the risk we retain are estimated in part based on historical experience, third-party actuarial analysis, demographics, nature and severity, past experience and other assumptions, which have been consistently applied. The liabilities for self-funded retention are included in claims and insurance reserves based on claims incurred, with liabilities for unsettled claims and claims incurred but not yet reported being actuarially determined with respect to workers’ compensation and auto liability claims and estimated based on management’s evaluation of the nature and severity of individual claims and historical experience with respect to all other liabilities. A significant number of these claims typically take several years to develop and even longer to ultimately settle. These estimates tend to be reasonably accurate over time; however, the actual liabilities could vary materially from management's estimates and assumptions regarding severity of claims, medical cost inflation, as well as specific case facts can create short-term volatility in estimates. Management believes that these reserves are adequate.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized. Realization is dependent on generating sufficient taxable income of a specific nature prior to the expiration of any loss carryforwards or capital losses. The asset may be reduced if estimates of future taxable income during the carryforward period are reduced. In addition, we maintain reserves for certain tax items, which are included in income taxes payable on our consolidated balance sheet. We periodically review these reserves to determine if adjustments to these balances are necessary.
Derivative Financial Instruments
We enter into interest rate swap agreements to modify the interest rate characteristics of our outstanding long-term debt. At hedge inception, and at least quarterly thereafter, we assess whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense). The fair values of our interest rate swaps are obtained from dealer quotes. These values represent the estimated amount we 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.
Recent Accounting Pronouncements
In October 2008, the FASB issued Staff Position No. FSP FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3) which amends FAS 157 to include guidance on how to determine the fair value of a financial asset in an inactive market and which is effective immediately on issuance, including prior periods for which financial statements have not been issued. The implementation of FSP FAS 157-3 did not have a material impact on our financial position and results of operations.
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." We do not believe that SFAS 162 will have a material impact on our 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. We are currently evaluating the impact of this standard on our 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. We are currently evaluating the impact of this standard on our 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. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
In February 2007, 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 implementation of SFAS 159 did not have a material effect on our consolidated balance sheets, results of operations and cash flows.
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. The implementation of SFAS 157 did not have a material effect on our consolidated balance sheets, results of operations and cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our 2006 annual financial statements. The adoption of SAB No. 108 did not have a material impact on our consolidated results of operations or consolidated financial position.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, we adopted FIN 48 as of January 1, 2007, as required. Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The adoption of FIN 48 did not have a material impact on our consolidated statements of operations, financial position, cash flows, and other significant matters, such as debt covenants or our normal business practices.
Results of Operations
The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as a percentage of revenues:
| | | For the Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands, except for per share data) | |
| Revenues: | | | | | Percentage* | | | | | | Percentage* | | | | | | Percentage * | |
| inVentiv Clinical | | $ | 216,934 | | | | 19.4 | % | | $ | 186,927 | | | | 19.1 | % | | $ | 149,786 | | | | 19.5 | % |
| inVentiv Communications | | | 341,887 | | | | 30.5 | % | | | 289,113 | | | | 29.6 | % | | | 207,398 | | | | 27.1 | % |
| inVentiv Commercial | | | 435,066 | | | | 38.9 | % | | | 400,786 | | | | 41.0 | % | | | 347,117 | | | | 45.3 | % |
| inVentiv Patient Outcomes | | | 125,925 | | | | 11.2 | % | | | 100,474 | | | | 10.3 | % | | | 61,944 | | | | 8.1 | % |
| Total revenues | | | 1,119,812 | | | | 100.0 | % | | | 977,300 | | | | 100.0 | % | | | 766,245 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services: | | | | | | | | | | | | | | | | | | | | | | | | |
| inVentiv Clinical | | | 149,531 | | | | 68.9 | % | | | 127,492 | | | | 68.2 | % | | | 100,632 | | | | 67.2 | % |
| inVentiv Communications | | | 199,160 | | | | 58.3 | % | | | 175,801 | | | | 60.8 | % | | | 131,991 | | | | 63.6 | % |
| inVentiv Commercial | | | 347,611 | | | | 79.9 | % | | | 317,693 | | | | 79.3 | % | | | 271,651 | | | | 78.3 | % |
| inVentiv Patient Outcomes | | | 76,140 | | | | 60.5 | % | | | 60,576 | | | | 60.3 | % | | | 42,475 | | | | 68.6 | % |
| Total cost of services | | | 772,442 | | | | 69.0 | % | | | 681,562 | | | | 69.7 | % | | | 546,749 | | | | 71.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| inVentiv Clinical | | | 50,617 | | | | 23.3 | % | | | 45,223 | | | | 24.2 | % | | | 37,593 | | | | 25.1 | % |
| inVentiv Communications | | | 99,186 | | | | 29.0 | % | | | 71,329 | | | | 24.7 | % | | | 49,201 | | | | 23.7 | % |
| inVentiv Commercial | | | 43,288 | | | | 10.0 | % | | | 45,505 | | | | 11.4 | % | | | 29,628 | | | | 8.5 | % |
| inVentiv Patient Outcomes | | | 26,940 | | | | 21.4 | % | | | 21,638 | | | | 21.5 | % | | | 12,293 | | | | 19.8 | % |
| Other | | | 21,653 | | | | -- | | | | 17,250 | | | | -- | | | | 12,703 | | | | -- | |
| Total Selling, general and administrative expenses: | | | 241,684 | | | | 21.6 | % | | | 200,945 | | | | 20.6 | % | | | 141,418 | | | | 18.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment of goodwill and other intangible assets | | | 267,849 | | | | 23.9 | % | | | -- | | | | | | | | -- | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating (loss) income | | | (162,163 | ) | | | (14.5 | )% | | | 94,793 | | | | 9.7 | % | | | 78,078 | | | | 10.2 | % |
| Interest expense | | | (25,464 | ) | | | (2.3 | )% | | | (20,717 | ) | | | (2.1 | )% | | | (11,361 | ) | | | (1.5 | )% |
| Interest income | | | 1,983 | | | | 0.2 | % | | | 3,039 | | | | 0.3 | % | | | 2,694 | | | | 0.4 | % |
| (Loss) income from continuing operations before income tax provision, minority interest in income of subsidiary and income from equity investments | | | (185,644 | ) | | | (16.6 | )% | | | 77,115 | | | | 7.9 | % | | | 69,411 | | | | 9.1 | % |
| Income tax benefit (provision) | | | 58,207 | | | | 5.2 | % | | | (29,401 | ) | | | (3.0 | )% | | | (19,166 | ) | | | (2.5 | )% |
| (Loss) income from continuing operations before minority interest in income of subsidiary and income from equity investments | | | (127,437 | ) | | | (11.4 | )% | | | 47,714 | | | | 4.9 | % | | | 50,245 | | | | 6.6 | % |
| Minority interest in income of subsidiary | | | (1,146 | ) | | | (0.1 | )% | | | (1,070 | ) | | | (0.1 | )% | | | (1,207 | ) | | | (0.2 | )% |
| Equity (losses) earnings in investments | | | (102 | ) | | | -- | | | | 582 | | | | -- | | | | 160 | | | | -- | |
| (Loss) income from continuing operations | | | (128,685 | ) | | | (11.5 | )% | | | 47,226 | | | | 4.8 | % | | | 49,198 | | | | 6.4 | % |
| Income from discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains on disposals of discontinued operations, net of taxes | | | 664 | | | | 0.1 | % | | | 258 | | | | 0.1 | % | | | 2,037 | | | | 0.3 | % |
| Income from discontinued operations | | | 664 | | | | 0.1 | % | | | 258 | | | | 0.1 | % | | | 2,037 | | | | 0.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (128,021 | ) | | | (11.4 | )% | | $ | 47,484 | | | | 4.9 | % | | $ | 51,235 | | | | 6.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Loss) earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (3.89 | ) | | | | | | $ | 1.50 | | | | | | | $ | 1.69 | | | | | |
| Diluted | | $ | (3.89 | ) | | | | | | $ | 1.46 | | | | | | | $ | 1.64 | | | | | |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.02 | | | | | | | $ | 0.00 | | | | | | | $ | 0.07 | | | | | |
| Diluted | | $ | 0.02 | | | | | | | $ | 0.01 | | | | | | | $ | 0.06 | | | | | |
| Net (loss) income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (3.87 | ) | | | | | | $ | 1.50 | | | | | | | $ | 1.76 | | | | | |
| Diluted | | $ | (3.87 | ) | | | | | | $ | 1.47 | | | | | | | $ | 1.70 | | | | | |
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues: Revenues increased by approximately $143 million, or 15%, to $1.12 billion during 2008, from $977 million during 2007. Net revenues increased by approximately $155 million, or 19%, to $952 million during 2008, from $797 million during 2007. During the year ended December 31, 2008, revenues related to acquisitions consummated during 2008 approximated $7 million from our inVentiv Patient Outcomes and inVentiv Commercial segments. Revenues from 2007 acquisitions totaled $82 million in our inVentiv Communications segment, inVentiv Patient Outcomes segment and inVentiv Commercial segment.
inVentiv Clinical’s revenues were $217 million during 2008, an increase of $30 million, or 16%, compared to $187 million during 2007. Revenues in inVentiv Clinical were higher in 2008 predominantly due to expansion of our inVentiv Clinical Solutions Group with new client wins, in addition to expansion of our dedicated team with a large top 20 Client. Our staffing group had a modest increase for the year.
inVentiv Communications’ revenues were $342 million during 2008, an increase of $53 million, or 18%, from 2007. inVentiv Communications’ revenues accounted for 31% of total inVentiv revenues during 2008. Revenues from acquisition growth represented 96% of this increase. The remainder of this variance mainly relates to recent business wins in various advertising and communications’ agencies.
inVentiv Commercial’s revenues were $435 million during 2008, an increase of $34 million, or 8%, from 2007. Approximately 7% of the increase related to acquisition growth, with the remainder relating to new business wins and expansion of its embedded teams, which more than offset revenues from contracts that wound down in the ordinary course.
inVentiv Patient Outcomes’ revenues were $126 million during 2008, up $26 million from 2007. Revenues from acquisition growth represented 57% of this increase, with the remainder relating to organic growth from Adheris and TTI. 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, The Therapeutics Institute’s clinical education services which was formerly reported in the Commercial segment, AWAC and PMG.
Cost of Services: Cost of services increased by approximately $90 million or 13%, to $772 million for 2008 from $682 million in 2007. Cost of services decreased slightly as a percentage of revenues from 70% in 2007 to 69% in 2008.
inVentiv Clinical’s cost of services increased by approximately $23 million, or 18%, to $150 million during 2008 from $127 million during 2007. Cost of services as a percentage of revenues slightly increased from 68% during 2007 to 69% during 2008 mainly due to inVentiv Clinical Solutions’ headcount additions to support the increased wins related to our Solutions business and our dedicated team.
inVentiv Communications’ cost of services increased by approximately $23 million, or 13%, to $199 million during 2008 from $176 million during 2007. Cost of services as a percentage of revenues decreased from 61% in 2007 to 58% in 2008, mainly due to increased contribution of higher gross margins from newly-acquired businesses, such as CCA.
inVentiv Commercial’s cost of services increased by approximately $30 million, or 9%, to $348 million during 2008 from $318 million during 2007. Cost of services as a percentage of revenues slightly increased from 79% during 2007 to 80% during 2008. The increase in the cost of sales percentage was driven by the increase in limited scope sales force services, including the embedded program with a top 20 pharmaceutical company.
inVentiv Patient Outcomes’ cost of services increased by approximately $15 million, or 25%, to $76 million during 2008 from $61 million during 2007, mainly due to increased business at Adheris, Franklin and AWAC as well as the acquisition of PMG, as mentioned above.
Selling, General and Administrative ("SG&A"): SG&A expenses, which also encompasses the activities of the corporate management group, increased by approximately $41 million, or 20%, to $242 million in 2008 from $201 million 2007, mainly due to additional acquisitions in 2007 and 2008.
SG&A expenses at inVentiv Clinical was approximately $51 million in 2008, compared to $45 million in 2007. The $6 million increase in Clinical’s SG&A is related to an expansion of our Business Development effort and additional costs as it relates to the growth of our Solutions and Teams businesses, specifically costs related to supporting initiatives in IT, Accounting, Quality Assurance and Project Management.
SG&A expenses at inVentiv Communications increased $28 million to $99 million in 2008. 2007 acquisitions contributed to the majority of this increase.
SG&A expenses at inVentiv Commercial decreased by approximately $3 million to $43 million during 2008 from 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. This decrease was slightly offset by a general increase in compensation across the Commercial business.
SG&A expenses at inVentiv Patient Outcomes increased by $5 million to $27 million during 2008, mainly due to the additions of AWAC and PMG over the last two years.
Other SG&A increased by approximately 29%, or $5 million from 2007 to 2008. This increase relates 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; and $2.6 million of other than temporary impairment of marketable securities. See Liquidity and Capital Resources section for further discussion on other than temporary impairment of marketable securities.
Impairment of Goodwill and Other Intangible Assets: In conjunction with the preparation, review and audit of financial statements for our 2008 fiscal year, as a result of adverse equity market conditions that caused a decrease in the current market multiples and our stock price, we concluded that a triggering event had occurred indicating potential impairment, and accordingly performed an impairment test of our goodwill and other intangible assets at December 31, 2008. This interim impairment test resulted in pre-tax noncash goodwill and intangible asset impairment charges of approximately $268 million, including $238 million of indefinite-lived assets under SFAS No. 142, Goodwill and Other Intangible Assets, and $30 million of definite-lived assets under SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets.
Interest Expense: Interest expense increased to approximately $25 million in 2008 from 2007. The difference was due to higher interest on the additional $166 million borrowed under our amended credit agreement entered into in July 2007, as more fully explained in Liquidity and Capital Resources.
Provision for Income Taxes: Our 2008 annual effective tax rate was 31.1%, which includes an 8% rate reduction relating to the impairment of $268 million of goodwill and other intangible assets. Our 2007 annual effective tax rate was 38.4%, including a first quarter 2007 tax benefit of approximately $1.0 million related to the net tax benefit of state tax reserves.
Our current effective tax rate is based on current projections for earnings in the tax jurisdictions in which we do business and is subject to taxation. Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.
Net (Loss) Income and Earnings Per Share ("EPS"): inVentiv’s net loss decreased by approximately $175 million to a net loss of $128 million during 2008 when compared to 2007, and earnings per share decreased to $(3.87) per share in 2008 from $1.47 per share during 2007. The aforementioned impairment charge, which did not affect inVentiv’s current operations, liquidity or cash position, contributed to the loss in 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues: Revenues increased by approximately $211 million, or 28%, to $977 million during 2007, from $766 million during 2006. Net revenues increased by approximately $165 million, or 26%, to $797 million during 2007, from $632 million during 2006.
inVentiv Clinical’s revenues were $187 million during 2007, an increase of $37 million, or 25%, compared to $150 million during 2006. Revenues in inVentiv Clinical were higher in 2007 predominantly due to increased placement of temporary personnel and new business wins to provide functional outsourcing services. Also, in April 2006, we acquired Synergos, which complements the segment by strengthening the functional outsourcing service.
inVentiv Communications’ revenues were $289 million during 2007, an increase of $82 million, or 39%, from 2006. inVentiv Communications’ revenues accounted for 30% of total inVentiv revenues during 2007. Approximately $70 million of this increase relates to incremental revenue relating to the timing of the 2007 acquisitions of Ignite, Chamberlain, Addison Whitney and CCA, and the 2006 acquisition of JSAI. The remainder of this variance mainly relates to recent business wins in various advertising and communications’ agencies.
inVentiv Commercial’s revenues were $401 million during 2007, an increase of $54 million, or 15%, from 2006. Most of the variance relates to new business wins, which more than offset revenues from contracts that wound down in the ordinary course. The remaining increase predominately relates to the acquisition of Medconference, DialogCoach, and Strategyx.
inVentiv Patient Outcomes’ revenues were $100 million during 2007, up $38 million from 2006. Growth in the segment was both organic as well as from the addition of AWAC. 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, The Therapeutics Institute’s clinical education services which was formerly reported in the Commercial segment, and AWAC, which we acquired in July 2007.
Cost of Services: Cost of services increased by approximately $135 million or 25%, to $682 million for 2007 from $547 million in 2006. Cost of services decreased as a percentage of revenues from 71% in 2006 to 70% in 2007.
inVentiv Clinical’s cost of services increased by approximately $26 million, or 26%, to $127 million during 2007 from $101 million during 2006. Cost of services as a percentage of revenues slightly increased from 67% during 2006 to 68% during 2007 as we made infrastructure investments in preparation for a material functional outsourcing win with a top 20 pharmaceutical company.
inVentiv Communications’ cost of services increased by approximately $44 million, or 33%, to $176 million during 2007 from $132 million during 2006. Cost of services as a percentage of revenues decreased from 64% in 2006 to 61% in 2007, mainly due to the addition of higher margin businesses in 2007.
inVentiv Commercial’s cost of services increased by approximately $46 million, or 17%, to $318 million during 2007 from $272 million during 2006. Cost of services as a percentage of revenues slightly increased from 78% during 2006 to 79% during 2007. The increase in the cost of sales percentage was driven by the increase in limited scope sales force services, including the new on-boarding program with a top 20 pharmaceutical company.
inVentiv Patient Outcomes’ cost of services increased by approximately $19 million, or 45%, to $61 million during 2007 from $42 million during 2006, mainly due to increased business at Adheris and Franklin as well as the acquisition of AWAC, as mentioned above.
Selling, General and Administrative: SG&A expenses, which also encompasses the activities of the corporate management group, increased by approximately $60 million, or 43%, to $201 million in 2007 from $141 million 2006, mainly due to additional acquisitions in 2006 and 2007.
SG&A expenses at inVentiv Clinical was approximately $45 million in 2007, compared to $38 million in 2006 due to increased selling expense and commissions from additional business; additional staffing requirements; and SG&A expense from Synergos, which was acquired on April 1, 2006.
SG&A expenses at inVentiv Communications increased $22 million to $71 million in 2007. New acquisitions contributed to the majority of this increase.
SG&A expenses at inVentiv Commercial increased by approximately $16 million to $46 million during 2007 from 2006. Approximately 50% of this increase was due to recording a receivables reserve relating to two accounts, including a client that declared Chapter 11 bankruptcy subsequent to the end of the second quarter of 2007. We have previously never had a collections issue as a result of client bankruptcy, with virtually all of our clients having excellent payment histories, and do not believe the circumstances giving rise to these receivables reserves are likely to reoccur in future periods. SG&A also increased due to annual increases in equity and non-equity compensation, and SG&A from the new inVentiv Commercial divisions acquired during the fourth quarter of 2006 and second quarter of 2007.
SG&A expenses at inVentiv Patient Outcomes increased by $10 million to $22 million during 2007, mainly due to the additions of Adheris and AWAC over the last two years.
Other SG&A increased by approximately 36%, or $5 million from 2006 to 2007. This increase mainly relates to $2.1 million of additional stock compensation expense and $0.8 million of other than temporary impairment of marketable securities. See Liquidity and Capital Resources section for further discussion on other than temporary impairment of marketable securities.
Interest Expense: Interest expense almost doubled to approximately $21 million in 2007 from 2006. Approximately $6 million of the difference was due to higher interest on the additional $166 million borrowed under our amended credit agreement entered into in July 2007, as more fully explained in Liquidity and Capital Resources. In addition, as mentioned in Item 7a, Quantitative and Qualitative Disclosures About Market Risk, we did not designate our initial hedge for hedge accounting until July 2006, which resulted in a $2.1 million net reduction to interest expense relating to the mark-to-market adjustment during the 2006 versus $1.2 million of interest expense due to the financing element embedded in the interest rate swap during 2007.
Provision for Income Taxes: In March 2007, we recognized a tax benefit of approximately $1.0 million related to the net tax benefits of state tax reserves. Including these tax benefits, our annual effective tax rate was 38.4% in 2007.
In June 2006, we recognized a tax benefit of approximately $9.1 million related to net operating losses associated with a previously-divested unit, as management determined that it is more likely than not that this deferred tax asset will be realized. Including these tax benefits, our annual effective tax rate was 28.0% in 2006.
Our current effective tax rate is based on earnings in the tax jurisdictions in which we do business and is subject to taxation. Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, we adopted FIN 48 as of January 1, 2007, as required. Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The adoption of FIN 48 did not have a material impact on our consolidated statements of operations, financial position, cash flows, and other significant matters, such as debt covenants or our normal business practices.
Net Income and Earnings Per Share: inVentiv’s net income decreased by approximately $4 million to $47 million during 2007 when compared to the same period in 2006, and diluted earnings per share decreased to $1.47 per share in 2007 from $1.70 per share during the 2006. However, excluding the impact of the increase in the uncollectible receivable reserve during the second quarter of 2007 and the distinct tax benefits in 2007 and 2006, overall EPS and net income increased over the respective periods, driven by increased wins and new acquisitions.
Liquidity and Capital Resources
At December 31, 2008, we had $90 million of unrestricted cash and equivalents, an increase of $39 million from December 31, 2007. For the year ended December 31, 2007 compared to 2008, cash provided by operations increased by $28 million from $59 million to $87 million. Cash used in investing activities decreased from $246 million to $28 million for the year ended December 31, 2007 and 2008, respectively. Cash from financing activities decreased from a source of $159 million to a use of $18 million over the same comparative periods.
Cash provided by operations was $87 million during the year ended December 31, 2008, while cash provided by operations was $59 million in the year ended December 31, 2007. The increase was primarily due to the improved collections and timing of unbilled services across our segments in 2008 as compared to 2007. In 2008, we focused more on strengthening our collections process as the credit environment has worsened.
Cash used in investing activities decreased by $218 million from $246 million to $28 million for the years ended December 31, 2007 and 2008, respectively. We paid $170 million for the 2007 acquisitions of Ignite, Chamberlain, Strategyx, Addison Whitney, Advogent, CCA and AWAC, while spending $26 million for the 2008 acquisitions of PMG and PLS and post-closing adjustments from our 2007 acquisitions. We also paid $24 million in acquisition earnouts in 2007, while paying $22 million in acquisition earnouts in 2008. In 2008, we liquidated approximately $32 million of marketable securities from CSCP into cash as further described in Item 1A. Finally, our capital expenditures increased by $7 million due to the inclusion of 2007 acquisitions for a full year in 2008 and the investment in technology to support back office functions.
Cash from financing activities decreased from a source of $159 million in 2007 to a use of $18 million in 2007, mainly due to our Amended and Restated Credit Agreement, resulting in a $166 million net cash inflow during 2007, as more fully described below. In addition, stock option exercise proceeds and related excess tax benefits were lower by $12 million in 2008 as a result of dramatically lower stock prices in 2008, as evidenced by the summary of historical stock prices in Item 5.
Our principal external source of liquidity is our syndicated, secured credit agreement, which we entered into with UBS AG, Stamford Branch, 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, Stamford Branch 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 amended 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, 2007. We elected not to draw additional amounts under the agreement. The agreement also contains a $50 million revolving credit facility, of which $10 million is available for the issuance of letters of credit (of which $7 million has been used) and a swingline facility. The term loan will mature on the seventh anniversary of the Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 II, Item 7A 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 Amended and Restated 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, 2007 and 2008 acquisitions generally include earnout 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 3 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Commitments and Contractual Obligations
A summary of our current contractual obligations and commercial commitments is as follows:
| (Amounts in thousands) | | | | | Amounts Due In | |
| Contractual Obligations | | Total Obligation | | | Less than 1 Year | | | 1 – 3 years | | | 3 -5 years | | | More than 5 years | | | Other | |
| Long term debt obligations (a) | | | 433,116 | | | | 24,834 | | | | 49,009 | | | | 200,305 | | | | 158,968 | | | | -- | |
| Capital lease obligations (b) | | | 40,565 | | | | 14,328 | | | | 22,914 | | | | 3,323 | | | | -- | | | | -- | |
| Operating leases (c) | | | 140,917 | | | | 22,289 | | | | 38,009 | | | | 27,538 | | | | 53,081 | | | | -- | |
| Acquisition-related incentive (d) | | | 2,153 | | | | 2,153 | | | | -- | | | | -- | | | | -- | | | | -- | |
| Unrecognized tax benefits (e) | | | 7,881 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 7,881 | |
Total obligations | | | 624,632 | | | | 63,604 | | | | 109,932 | | | | 231,166 | | | | 212,049 | | | | 7,881 | |
| | (a) | These future commitments represent the principal and interest payments under the $330 million term loan under our credit facility. |
| | | |
| | (b) | These future commitments include interest and management fees, which are not recorded on the Consolidated Balance Sheet as of December 31, 2008 but will be recorded as incurred. |
| | (c) | Operating leases include facility lease obligations in which the lease agreement may expire during the five-year period, but are expected to continue on a monthly basis beyond the lease term, as provided for in the leasing arrangements. |
| | (d) | This liability to the former stockholders of inVentiv Communications, Inc. is included in accrued payroll, accounts payable and accrued expenses on our December 31, 2008 consolidated balance sheet. |
| | (e) | The timing of future cash outflows associated with these unrecognized tax benefits is highly uncertain and accordingly have been excluded from this table. |
The acquisition agreements entered into in connection with all of our acquisitions include earnout 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 3 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Effect of Inflation
Because of the relatively low level of inflation experienced in the United States, inflation did not have a material impact on our consolidated results of operations for 2008, 2007 or 2006, except for fluctuations in gas prices in 2008.
Off-Balance Sheet Arrangements
As of December 31, 2008, we did not have any off-balance-sheet arrangements, as defined in Item 303(a) (4)(ii) of SEC Regulation S-K.
Long-Term Debt Exposure
At December 31, 2008, we had $325.1 million debt outstanding under our secured term loan as described in “Liquidity and Capital Resources” in Item 7 above. We 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 December 31, 2008, a hypothetical increase or decrease of 10% in the variable interest rate would have an immaterial effect on interest expense due to the fixed rate associated with the derivative financial instrument.
Derivative Financial Instrument
Effective October 2005,we 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. We 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, we did not designate our 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 Consolidated Balance Sheet. The fair value of the swaps represent the estimated amount we 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, we formally designated the interest rate swap as a cash flow hedge pursuant to SFAS No. 133. We 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 declined to zero at maturity, which was December 31, 2008, the $2.9 million of fair value was recognized in earnings over the remaining life of the swap as part of the ineffectiveness calculation. During the year ended December 31, 2008, the fair market value of the original derivative asset increased from a liability of approximately $1.0 million to the maturity value of $0. Approximately $1.1 million was recorded as interest expense, attributable to the financing component embedded within the interest rate swap, while $2.1 million ($1.2 million, net of taxes) was recorded as an increase to Other Comprehensive Income.
On September 6, 2007, we 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, as our original 2005 three-year interest rate swap arrangement described above expired. At hedge inception, we 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 December 31, 2008, and accordingly, $20.5 million ($12.2 million, net of taxes) was recorded as a decrease to Other Comprehensive Income and an increase to other non-current liabilities on our Consolidated Balance Sheet. This change in Other Comprehensive Income includes the $4.8 million credit value adjustment as discussed in Note 10.
Foreign Currency Exchange Rate Exposure
We are 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 our 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 December 31, 2008, the accumulated other comprehensive losses related to foreign currency translations was approximately $2.6 million. Foreign currency transaction gains and (losses) are included in the results of operations and are not material.
INDEX TO FINANCIAL STATEMENTS
| | |
| Report of Management | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets as of December 31, 2008 and 2007 | |
| Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006 | |
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 | |
| Notes to Consolidated Financial Statements | |
Management's Report on Financial Statements
Our management is responsible for the preparation, integrity and fair presentation of information in our consolidated financial statements, including estimates and judgments. The consolidated financial statements presented in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. Our management believes the consolidated financial statements and other financial information included in this report fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and consolidated cash flows as of and for the periods presented in this report. The consolidated financial statements have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; |
| · | provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. |
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that 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, within the company 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. Our system contains self monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Our management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our assessment excludes the PMG and Promotech Logistics Solutions businesses we acquired in 2008 as allowed under the rules and clarifications provided by the Securities and Exchange Commission and the Public Company Accounting Oversight Board (United States). The financial statements of these acquired businesses constitute 2% and 1% of total assets and revenues, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2008. Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2008. Deloitte & Touche LLP has issued its report, which is part of its report set forth below, on our management's assessment of the effectiveness of our internal control over financial reporting.
Deloitte & Touche LLP
100 Kimball Drive
Parsippany, NJ 07054
USA
Tel: (973) 602.6000
Fax: (973) 602.5050
www.deloitee.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
inVentiv Health, Inc.
Somerset, New Jersey
We have audited the accompanying consolidated balance sheets of inVentiv Health, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15 (a). We also have audited the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Patient Marketing Group (“PMG”) and Promotech Logistics Solutions (“PLS”) which were acquired in 2008, and whose financial statements reflect total assets and revenues constituting 2.21% and 0.61% of the related consolidated financial statement as of and for the year ended December 31, 2008. Accordingly, our audit did not include the internal control over financial reporting at the aforementioned PMG and PLS. The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of inVentiv Health, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Parsippany New Jersey
/s/ Deloitte & Touche, LLP
February 27, 2009
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| | | December 31, | |
| | | 2008 | | | 2007 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and equivalents | | $ | 90,463 | | | $ | 50,973 | |
| Restricted cash and marketable securities | | | 8,069 | | | | 47,164 | |
| Accounts receivable, net of allowances for doubtful accounts of $4,787 and $3,098 at | | | | | | | | |
| December 31, 2008 and 2007, respectively | | | 158,689 | | | | 162,198 | |
| Unbilled services | | | 86,390 | | | | 89,384 | |
| Prepaid expenses and other current assets | | | 16,880 | | | | 19,836 | |
| Current tax assets | | | 595 | | | | -- | |
| Current deferred tax assets | | | 9,198 | | | | 4,279 | |
| Total current assets | | | 370,284 | | | | 373,834 | |
| | | | | | | | | |
| Property and equipment, net | | | 63,382 | | | | 54,740 | |
| Investments in affiliates | | | 1,423 | | | | 309 | |
| Goodwill | | | 215,526 | | | | 383,714 | |
| Other intangibles, net | | | 226,509 | | | | 281,122 | |
| Non-current deferred tax assets | | | 75,172 | | | | -- | |
| Deposits and other assets | | | 20,820 | | | | 17,137 | |
| Total assets | | $ | 973,116 | | | $ | 1,110,856 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current portion of capital lease obligations | | $ | 13,417 | | | $ | 17,464 | |
| Current portion of long-term debt | | | 4,279 | | | | 3,300 | |
| Accrued payroll, accounts payable and accrued expenses | | | 129,009 | | | | 138,708 | |
| Current income tax liabilities | | | 2,736 | | | | 6,814 | |
| Client advances and unearned revenue | | | 57,223 | | | | 76,696 | |
| Total current liabilities | | | 206,664 | | | | 242,982 | |
| | | | | | | | | |
| Capital lease obligations, net of current portion | | | 25,010 | | | | 20,945 | |
| Long-term debt | | | 321,828 | | | | 325,050 | |
| Non-current income tax liabilities | | | 5,636 | | | | 7,323 | |
| Deferred tax liabilities | | | -- | | | | 13,164 | |
| Other non-current liabilities | | | 46,334 | | | | 23,766 | |
| Total liabilities | | | 605,472 | | | | 633,230 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Minority interests | | | 130 | | | | 160 | |
| | | | | | | | | |
| Stockholders’ Equity: | | | | | | | | |
| Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding at | | | | | | | | |
| December 31, 2008 and 2007, respectively | | | -- | | | | -- | |
| Common stock, $.001 par value, 50,000,000 shares authorized; 33,272,543 and 32,325,109 | | | | | | | | |
| Shares issued and outstanding at December 31, 2008 and 2007, respectively | | | 33 | | | | 32 | |
| Additional paid-in-capital | | | 394,560 | | | | 362,116 | |
| Accumulated other comprehensive losses | | | (20,869 | ) | | | (6,493 | ) |
| Accumulated (deficit) earnings | | | (6,210 | ) | | | 121,811 | |
| Total stockholders’ equity | | | 367,514 | | | | 477,466 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 973,116 | | | $ | 1,110,856 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVENTIV HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | For the Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Net Revenues | | $ | 951,656 | | | $ | 796,659 | | | $ | 631,620 | |
| Reimbursable out-of-pockets | | | 168,156 | | | | 180,641 | | | | 134,625 | |
| Revenues | | | 1,119,812 | | | | 977,300 | | | | 766,245 | |
| Operating expenses: | | | | | | | | | | | | |
| Cost of services | | | 598,465 | | | | 498,106 | | | | 410,184 | |
| Reimbursed out-of-pocket expenses | | | 173,977 | | | | 183,456 | | | | 136,565 | |
| Selling, general and administrative expenses | | | 241,684 | | | | 200,945 | | | | 141,418 | |
| Impairment of goodwill and other intangible assets | | | 267,849 | | | | -- | | | | -- | |
| Total operating expenses | | | 1,281,975 | | | | 882,507 | | | | 688,167 | |
| Operating (loss) income | | | (162,163 | ) | | | 94,793 | | | | 78,078 | |
| Interest expense | | | (25,464 | ) | | | (20,717 | ) | | | (11,361 | ) |
| Interest income | | | 1,983 | | | | 3,039 | | | | 2,694 | |
| (Loss) income from continuing operations before income tax provision, minority interest in income of subsidiary and income from equity investments | | | (185,644 | ) | | | 77,115 | | | | 69,411 | |
| Income tax benefit (provision) | | | 58,207 | | | | (29,401 | ) | | | (19,166 | ) |
| (Loss) income from continuing operations before minority interest in income of subsidiary and income from equity investments | | | (127,437 | ) | | | 47,714 | | | | 50,245 | |
| Minority interest in income of subsidiary | | | (1,146 | ) | | | (1,070 | ) | | | (1,207 | ) |
| (Loss) income from equity investments | | | (102 | ) | | | 582 | | | | 160 | |
| (Loss) income from continuing operations | | | (128,685 | ) | | | 47,226 | | | | 49,198 | |
| | | | | | | | | | | | | |
| Income from discontinued operations: | | | | | | | | | | | | |
Gains on disposals of discontinued operations, net of tax benefit (expense) of $73, $(131) and $749 for the years ended December 31, 2008, 2007 and 2006, respectively | | | 664 | | | | 258 | | | | 2,037 | |
| Income from discontinued operations | | | 664 | | | | 258 | | | | 2,037 | |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (128,021 | ) | | $ | 47,484 | | | $ | 51,235 | |
| | | | | | | | | | | | | |
| (Loss) earnings per share: | | | | | | | | | | | | |
| Continuing operations: | | | | | | | | | | | | |
| Basic | | $ | (3.89 | ) | | $ | 1.50 | | | $ | 1.69 | |
| Diluted | | $ | (3.89 | ) | | $ | 1.46 | | | $ | 1.64 | |
| Discontinued operations: | | | | | | | | | | | | |
| Basic | | $ | 0.02 | | | $ | 0.00 | | | $ | 0.07 | |
| Diluted | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.06 | |
| Net (loss) income: | | | | | | | | | | | | |
| Basic | | $ | (3.87 | ) | | $ | 1.50 | | | $ | 1.76 | |
| Diluted | | $ | (3.87 | ) | | $ | 1.47 | | | $ | 1.70 | |
| Weighted average common shares outstanding: | | | | | | | | | | | | |
| Basic | | | 33,043 | | | | 31,578 | | | | 29,159 | |
| Diluted | | | 33,043 | | | | 32,267 | | | | 30,058 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVENTIV HEALTH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2008, 2007 and 2006
(in thousands)
| | Common Stock | Additional Paid-In Capital | Accumulated earnings (deficit) | Deferred Compen- Sation | Compre-hensive Income (Losses) | Accumulated Other Comprehen-sive Income (Losses) | Total |
| Balance at December 31, 2005 | 28 | $233,441 | $23,092 | $(3,563) | | $221 | $253,219 |
| Net income | -- | -- | 51,235 | -- | $51,235 | -- | 51,235 |
Foreign currency translation Adjustment | -- | -- | -- | -- | 225 | 225 | 225 |
| Net change in effective portion of derivative, net of taxes | -- | -- | -- | -- | (672) | (672) | (672) |
| | | | | | $50,788 | | |
| Reclassification of unvested restricted shares to additional paid in capital | -- | (3,563) | -- | 3,563 | | -- | -- |
| Vesting of restricted shares | -- | 3,089 | -- | -- | | -- | 3,089 |
| Withhold shares for taxes | -- | (190) | -- | -- | | -- | (190) |
| Consultant compensation | -- | 728 | -- | -- | | -- | 728 |
| Exercise of stock options | 1 | 6,525 | -- | -- | | -- | 6,526 |
| Stock option expense | -- | 4,450 | -- | -- | | -- | 4,450 |
| Tax benefit from exercise of employee stock options and vesting of restricted stock | -- | 8,959 | -- | -- | | -- | 8,959 |
| Issuance of shares in connection with acquisitions | 1 | 30,892 | -- | -- | | -- | 30,893 |
| Balance at December 31, 2006 | 30 | 284,331 | 74,327 | -- | | (226) | 358,462 |
| Net income | | | 47,484 | | 47,484 | | 47,484 |
Foreign currency translation Adjustment | | | | | 396 | 396 | 396 |
| Net change in effective portion of derivative, net of taxes | | | | | (6,663) | (6,663) | (6,663) |
| | | | | | 41,217 | | |
| Vesting of restricted shares | | 5,222 | | | | | 5,222 |
| Withhold shares for taxes | | (873) | | | | | (873) |
| Consultant compensation | | 796 | | | | | 796 |
| Exercise of stock options | 1 | 6,908 | | | | | 6,909 |
| Stock option expense | | 4,494 | | | | | 4,494 |
| Tax benefit from exercise of employee stock options and vesting of restricted stock | | 8,066 | | | | | 8,066 |
| Issuance of shares in connection with acquisitions | 1 | 53,172 | | | | | 53,173 |
| Balance at December 31, 2007 | 32 | 362,116 | 121,811 | -- | | (6,493) | 477,466 |
| Net loss | | | (128,021) | | (128,021) | | (128,021) |
Foreign currency translation Adjustment | | | | | (3,445) | (3,445) | (3,445) |
| Net change in effective portion of derivative, net of taxes | | | | | (10,931) | (10,931) | (10,931) |
| | | | | | (142,397) | | |
| Vesting of restricted shares | | 6,832 | | | | | 6,832 |
| Withhold shares for taxes | | (1,111) | | | | | (1,111) |
| Consultant compensation | | 127 | | | | | 127 |
| Exercise of stock options | | 2,387 | | | | | 2,387 |
| Stock option expense | | 3,752 | | | | | 3,752 |
| Tax benefit from exercise of employee stock options and vesting of restricted stock | | 387 | | | | | 387 |
| Issuance of shares in connection with acquisitions | 1 | 18,920 | | | | | 18,921 |
| Other | | 1,150 | | | | | 1,150 |
| Balance at December 31, 2008 | 33 | $394,560 | ($6,210) | | | $(20,869) | $367,514 |
The accompanying notes are an integral part of these consolidated financial statements.
INVENTIV HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | For the Years Ended | |
| | | December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Cash flows from operating activities: | | | | | | | | | |
| Net (loss) income | | $ | (128,021 | ) | | $ | 47,484 | | | $ | 51,235 | |
| Income from discontinued operations | | | (664 | ) | | | (258 | ) | | | (2,037 | ) |
| (Loss) income from continuing operations | | | (128,685 | ) | | | 47,226 | | | | 49,198 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 20,870 | | | | 18,169 | | | | 15,130 | |
| Amortization | | | 15,118 | | | | 10,939 | | | | 5,610 | |
| Loss (income) from equity investments | | | 102 | | | | (582 | ) | | | (160 | ) |
| Minority interest in income of subsidiary | | | 1,146 | | | | 1,070 | | | | 1,207 | |
| Fair market value adjustment on derivative financial instrument | | | 1,121 | | | | 1,218 | | | | (2,069 | ) |
| Deferred taxes | | | (93,255 | ) | | | (6,384 | ) | | | 13,379 | |
| Impairment of goodwill and other intangible assets | | | 267,849 | | | | -- | | | | -- | |
| Impairment of marketable securities | | | 2,561 | | | | 841 | | | | -- | |
| Stock compensation expense | | | 10,584 | | | | 9,716 | | | | 7,539 | |
| Tax benefit from stock option exercises and vesting of restricted shares | | | 3,225 | | | | 9,801 | | | | 9,831 | |
| Changes in assets and liabilities, net of effects from discontinued operations: | | | | | | | | | | | | |
| Accounts receivable, net | | | 7,097 | | | | (12,765 | ) | | | 2,257 | |
| Unbilled services | | | 4,585 | | | | (10,508 | ) | | | (32,576 | ) |
| Prepaid expenses and other current assets | | | 3,399 | | | | (8,673 | ) | | | (197 | ) |
| Accrued payroll, accounts payable and accrued expenses | | | (10,300 | ) | | | (3,472 | ) | | | 7,154 | |
| Net tax liabilities | | | (9,200 | ) | | | 10,928 | | | | (6,754 | ) |
| Client advances and unearned revenue | | | (19,782 | ) | | | 3,186 | | | | 21,715 | |
| Excess tax benefits from stock based compensation | | | (252 | ) | | | (7,928 | ) | | | (8,641 | ) |
| Other | | | 10,234 | | | | (3,893 | ) | | | 2,403 | |
| Net cash provided by continuing operations | | | 86,417 | | | | 58,889 | | | | 85,026 | |
| Net cash provided by (used in) discontinued operations | | | 508 | | | | (221 | ) | | | 624 | |
| Net cash provided by operating activities | | | 86,925 | | | | 58,668 | | | | 85,650 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Restricted cash balances and marketable securities | | | 524 | | | | (46,343 | ) | | | 3,828 | |
| Investment in cash value of life insurance policies | | | 270 | | | | (2,440 | ) | | | (2,911 | ) |
| Investment in marketable securities | | | 32,286 | | | | -- | | | | -- | |
| Cash paid for acquisitions, net of cash acquired | | | (25,506 | ) | | | (169,739 | ) | | | (61,461 | ) |
| Acquisition earnout cash payments | | | (22,126 | ) | | | (23,556 | ) | | | (8,267 | ) |
| Investment in affiliates | | | (1,203 | ) | | | 37 | | | | 267 | |
| Purchases of property and equipment | | | (17,449 | ) | | | (10,446 | ) | | | (6,704 | ) |
| Proceeds from manufacturers rebates on leased vehicles | | | 5,453 | | | | 5,574 | | | | 3,630 | |
| Net cash used in continuing operations | | | (27,751 | ) | | | (246,913 | ) | | | (71,618 | ) |
| Net cash provided by discontinued operations | | | 156 | | | | 479 | | | | 1,413 | |
| Net cash used in investing activities | | | (27,595 | ) | | | (246,434 | ) | | | (70,205 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Borrowings on credit agreement | | | -- | | | | 166,250 | | | | -- | |
| Borrowings on line of credit | | | 948 | | | | -- | | | | -- | |
| Repayments on credit agreement | | | (3,191 | ) | | | (2,484 | ) | | | (9,979 | ) |
| Repayments of capital lease obligations | | | (15,685 | ) | | | (15,538 | ) | | | (12,948 | ) |
| Fees to establish credit agreement | | | -- | | | | (2,154 | ) | | | -- | |
| Withholding shares for taxes | | | (1,111 | ) | | | (873 | ) | | | (190 | ) |
| Proceeds from exercise of stock options | | | 2,387 | | | | 6,908 | | | | 6,525 | |
| Excess tax benefits from stock-based compensation | | | 252 | | | | 7,928 | | | | 8,641 | |
| Distributions to minority interests in affiliated partnership | | | (1,178 | ) | | | (1,216 | ) | | | (1,087 | ) |
| Net cash (used in) provided by continuing operations | | | (17,578 | ) | | | 158,821 | | | | (9,038 | ) |
| Net cash provided by discontinued operations | | | -- | | | | -- | | | | -- | |
| Net cash (used in) provided by financing activities | | | (17,578 | ) | | | 158,821 | | | | (9,038 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes | | | (2,262 | ) | | | 83 | | | | 326 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and equivalents | | | 39,490 | | | | (28,862 | ) | | | 6,733 | |
| Cash and equivalents, beginning of year | | | 50,973 | | | | 79,835 | | | | 73,102 | |
| Cash and equivalents, end of year | | $ | 90,463 | | | $ | 50,973 | | | $ | 79,835 | |
| | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 23,610 | | | $ | 19,549 | | | $ | 12,798 | |
| Cash paid for income taxes | | $ | 33,076 | | | $ | 17,972 | | | $ | 8,077 | |
| Supplemental disclosure of non-cash activities: | | | | | | | | | | | | |
| Vehicles acquired through capital lease agreements | | $ | 18,475 | | | $ | 13,532 | | | $ | 21,871 | |
| Stock issuance related to acquisitions | | $ | 18,921 | | | $ | 53,173 | | | $ | 30,893 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVENTIV HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business:
inVentiv Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”) is a leading provider of value-added services to the pharmaceutical and life sciences 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 bring them to market. The Company’s goal is to assist its customers in meeting their objectives in each of its operational areas by providing our services on a flexible and cost-effective basis that permits the Company to provide discrete service offerings in focused areas as well as integrated multidisciplinary solutions. The Company provides services to over 350 client organizations, including all top 20 global pharmaceutical companies and numerous emerging and specialty biotechnology companies.
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. 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 through both standalone and integrated solutions.
Business Segments
The Company currently serves its clients primarily through four business segments, which correspond to its 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”), Chamberlain Communications Group, Inc. (“Chamberlain”), Addison Whitney and Chandler Chicco Agency (“CCA”); |
| · | inVentiv Commercial, which consists of our 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), inVentiv Selling Solutions and inVentiv's Promotech sample management business, which was augmented with the acquisition of Promotech Logistics Solutions LLC ("PLS") in December 2008; and |
| · | inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute, AWAC (acquired in July 2007) and Patient Marketing Group, LLC (“PMG”) (acquired in August 2008). |
The Company’s services are designed to develop, execute and monitor strategic and tactical sales and marketing plans and programs for the promotion of pharmaceutical, biotechnology and other life sciences products. For third party administrators and other 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.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the accounts of inVentiv Health, Inc., its wholly owned subsidiaries and its 53% 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. 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 acquisition date, and then included its results in our consolidated 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.
Cash and Equivalents
Cash and equivalents are comprised principally of amounts in operating accounts, money market investments and other short-term instruments. These accounts are stated at cost, which approximates market value, and have original maturities of three months or less. See Note 5 for a description of restricted cash balances and marketable securities.
Revenue Recognition
The following is a summary of the Company’s revenue recognition policy, based on the segment and services the Company provides:
inVentiv Clinical
| · | Clinical Staffing and Recruiting- Revenues are recognized and recorded when services are rendered. |
| · | Functional Outsourcing- Revenues are recognized and recorded when milestones are achieved, in accordance with the terms of the contracts. |
| · | Executive Placement- Revenues are recognized and recorded at the time a candidate begins full-time employment. Any write-offs due to cancellations and/or billing adjustments historically have been insignificant. |
inVentiv Communications
| · | Advertising and Communication support- Revenues are recognized and recorded under the proportional performance method, by relating the actual hours of work performed to date to the current estimated total hours of the respective projects. Any anticipated losses on projects are recognized when such losses are anticipated. Time and production billings are billed as incurred for actual time and expenses. |
| · | Public Relations- Revenues are recognized and recorded as time and production billings are billed as incurred for actual time and expenses. |
| · | Branding- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts; and revenues for certain contracts are recorded based on completed contract method. |
| · | Interactive Communications- Revenues are recognized and recorded under the proportional performance method based on services performed. |
| · | Patient and Physician Education- Revenues are recognized and recorded using either the completed contract method or when milestones are achieved, depending on the terms of the specific contracts. |
INVENTIV HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
inVentiv Commercial
inVentiv Selling Solutions
| · | inVentiv Pharma Teams- Revenues and associated costs are recognized and recorded under pharmaceutical detailing contracts based on the number of physician calls made or the number of sales representatives utilized. Most of our Sales and Marketing Teams’ contracts involve two phases, an “Implementation phase", formerly referred to as "Deployment phase", typically one to three months, in which we perform initial recruiting, training and preparation for deployment of the field force at the start of a new contract, and the “Deployment phase", formerly referred to as “Promotion phase”, in which our deployed field force actively promotes specified products for clients through face-to-face interactions with physicians or other targets referred to as “detailing”. |
Our inVentiv Pharma Teams contracts specify a separate fee for the initial “Implementation phase” of a project. We consider the implementation phase to be a separate and distinct earnings process and recognize the related revenues throughout the implementation phase, which typically spans a period of one to three months at the beginning of the first year of a contract. We generally recognize revenue during the "Deployment phase" of our inVentiv Pharma Teams contracts on a straight-line basis based on the size of the deployed field force. The accounting for the two phases is based on our analysis of Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, in which we have concluded that the deployment and promotion phases are being sold separately and therefore qualify as separate units of accounting within the meaning of paragraph 9 of EITF 00-21.
Many of the product detailing contracts allow for additional periodic incentive fees to be earned once agreed upon performance benchmarks have been attained. Revenue from incentive fees is recognized and recorded when we are reasonably assured that payment will be made, and is typically based upon verification through calculation of achievement, third party data or client verification. Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met. These penalties are recognized upon verification of performance shortfalls.
Non-refundable conversion fees are recognized and recorded as revenue when one of our sales professionals accepts a firm offer of permanent employment from a customer during the term of a contract.
| · | Recruiting- Revenues are recognized based on placement of candidates. |
| · | Professional Development and Training- Revenues are generally recognized and recorded as training courses are completed. |
| · | Regulatory Compliance Services- Regulatory compliance revenues for both fixed fees services and fees for specific compliance related services are recognized and recorded when monthly services are performed. |
| · | Non-Personal Promotion- Revenues are recognized and recorded based on time incurred and fulfillment requirements in accordance with the terms of the contracts. |
| · | Virtual Event Services- Revenues are recognized based on the frequency and upon completion of live events. |
| · | Sales Force Automation/Data Analysis- A majority of revenues are recognized based on straight-line basis. For certain analytics projects, revenues are recognized upon completion. |
inVentiv Strategy and Analytics
| · | Planning and Analytics- Revenues for HPR generally include fixed fees, which are recognized and recorded when monthly services are performed based on the proportional performance method and when payment is reasonably assured. HPR’s initial contracts typically range from one month to one year. Revenues for additional services are recognized and recorded when the services are provided and payment is reasonably assured. |
| · | Strategic Consulting- For most contracts, revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts. Certain contracts are also recorded based on the proportional performance method. |
| · | Product Access and Managed Market Support- Consulting fee revenues are recognized and recorded when services are rendered. Other services are based on milestones. |
| · | Consulting and Contract Marketing- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts. |
inVentiv Patient Outcomes
| · | Patient Pharmaceutical Compliance Programs- Revenues are mainly recognized based on the volume of correspondence sent to patients. |
| · | Patient Support Programs- Patient assistance programs revenues depend on the number of patients served and are recognized and recorded as each service is performed. |
| · | Clinical Nurse Educators, On-Call Specialists, and Medical Science Liaison Programs- Revenue recognition is the same as inVentiv Pharma Teams, as the two services are similar in the business arrangement and fee structure. |
| · | Medical Cost Containment and Consulting Solutions- The majority of revenues are recognized on a completed contract basis, based on an analysis of claims as a percentage of savings realized by our clients. Certain services are performed on a fee-for-services basis and recognized when the service is rendered. |
| · | Patient Relationship Marketing- Revenues are recognized and recorded as time and production billings are billed as incurred for actual time and expenses. |
General Revenue Recognition
Reimbursable Costs
Reimbursable costs, including those relating to travel and out-of pocket expenses, sales force bonuses tied to individual or product revenues, and other similar costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which such amounts have been finalized. In certain cases, based on the Company’s analysis of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and related accounting literature, the Company may also record certain reimbursable transactions, such as the placement of media advertisements where the Company acts as an agent, as net revenues.
Loss Contracts
The Company periodically analyzes its contracts to determine the likelihood and amount of any potential loss on a contract resulting from lower than anticipated product, field force or other performance. In the event that current information illustrates a loss is likely to be incurred over the remaining life of the contract, the Company accrues that loss at the time it becomes probable. The Company did not have any material loss contracts in 2008 or 2007.
Billing
Customers are invoiced according to agreed upon billing terms. Contracts that are invoiced prior to performance of related services are recorded as client advances and unearned revenue and are not recognized as revenues until earned, in accordance with our revenue recognition policies. Amounts earned for revenues recognized before the agreed upon invoicing terms have been met are recorded as revenue and included in unbilled services. Upon billing, these amounts are transferred to billed accounts receivable.
Receivables
Receivables consist of amounts billed and currently due from customers and unbilled amounts which have been earned but not yet billed. With the exception of amounts relating to certain contracts with pre-determined billing intervals, all amounts that are unbilled at the end of each monthly period are billed during the immediately succeeding monthly period.
Property and Equipment
Property and equipment is stated at cost. The Company depreciates furniture, fixtures and office equipment on a straight-line basis over three to seven years; computer equipment over two to five years; leasehold improvements over the shorter of the term of the lease or the estimated useful lives of the improvements. The Company amortizes the cost of vehicles under capital leases on a straight-line basis over the term of the lease.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-life intangibles are assessed for potential impairment pursuant to the guidelines of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on an annual basis (at June 30) or when management determines that the carrying value of goodwill or an indefinite-lived intangible asset may not be recoverable based upon the existence of certain indicators of impairment. The Company applied aggregation criteria consistent with the definitions under SFAS 142 as well as the related guidance in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information for purposes of aggregating the Company’s reporting units in goodwill impairment testing. Goodwill is tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step screens for potential impairment, and the second step measures the amount of impairment, if any. The Company calculates the fair value of each reporting unit and compares this to its carrying value. If the carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to the difference. If the Company deems the useful life to be no longer indefinite after testing for impairment in accordance with the applicable rules stated above, the Company amortizes the intangible asset over its remaining estimated useful life, following the pattern in which the expected benefits will be consumed or otherwise used up and the Company continues to review for impairment on an annual basis.
The Company performed annual impairment tests as of June 30, 2008 and concluded that the existing goodwill and indefinite lived intangible tradename balances were not impaired. During the fourth quarter of 2008, as a result of adverse equity market conditions that caused a decrease in the current market multiples and the company’s stock price, the Company concluded that a triggering event had occurred indicating potential impairment, and accordingly performed an impairment test of its goodwill and other intangible assets at December 31, 2008. This interim impairment test resulted in pre-tax noncash goodwill and intangible asset impairment charges of approximately $268 million , including $238 million of indefinite-lived assets and $30 million of definite-lived assets under SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets. See Note 7 for further details of these noncash goodwill and intangibles impairment charges.
Impairment of Long-Lived Assets
SFAS No. 144 establishes accounting standards for the impairment of long-lived assets. The Company reviews its long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting sustained losses or a significant change in the use of an asset. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. As explained above, the Company performed an impairment test of its goodwill and intangible assets as of December 31, 2008, and recorded $30 million of pre-tax noncash impairment of certain definite-lived intangible assets. There were no material impairment losses in 2007 or 2006.
Claims and Insurance Accruals
The Company maintains self-insured retention limits for certain insurance policies. The liabilities associated with the risk retained by us are estimated in part based on historical experience, third-party actuarial analysis, demographics, nature and severity, past experience and other assumptions, which have been consistently applied. The liabilities for self-funded retention are included in claims and insurance reserves based on claims incurred, with liabilities for unsettled claims and claims incurred but not yet reported being actuarially determined with respect to workers’ compensation and auto liability claims and with respect to all other liabilities, estimated based on management’s evaluation of the nature and severity of individual claims and historical experience. However, these estimated accruals could be significantly affected if the Company’s actual costs differ from these assumptions. A significant number of these claims typically take several years to develop and even longer to ultimately settle. These estimates tend to be reasonably accurate over time; however, assumptions regarding severity of claims, medical cost inflation, as well as specific case facts can create short-term volatility in estimates.
Earnings (Loss) Per Share (“EPS”)
Basic net earnings per share excludes the effect of potentially dilutive securities and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect 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 earnings 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:
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands, except per share data) | |
| Basic EPS from Continuing Operations Computation | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (128,685 | ) | | $ | 47,226 | | | $ | 49,198 | |
| Weighted average number of common shares outstanding | | | 33,043 | | | | 31,578 | | | | 29,159 | |
| Basic EPS from continuing operations | | $ | (3.89 | ) | | $ | 1.50 | | | $ | 1.69 | |
| | | | | | | | | | | | | |
| Diluted EPS from Continuing Operations Computation | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (128,685 | ) | | $ | 47,226 | | | $ | 49,198 | |
| Adjustments | | | -- | | | | -- | | | | -- | |
| Adjusted income from continuing operations | | $ | (128,685 | ) | | $ | 47,226 | | | $ | 49,198 | |
| | | | | | | | | | | | | |
| Weighted average number of common shares outstanding | | | 33,043 | | | | 31,578 | | | | 29,159 | |
Stock options (1) | | | n/a | | | | 497 | | | | 780 | |
Restricted awards (2) | | | n/a | | | | 192 | | | | 119 | |
| Total diluted common shares outstanding | | | 33,043 | | | | 32,267 | | | | 30,058 | |
| | | | | | | | | | | | | |
| Diluted EPS from continuing operations | | $ | (3.89 | ) | | $ | 1.46 | | | $ | 1.64 | |
| (1) | For the years ended December 31, 2008, December 31, 2007 and December 31, 2006, 271,227 shares, 145,510 shares and 362,479 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 years ended December 31, 2008, December 31, 2007 and December 31, 2006, 767,679 shares, negligible shares and 7,336 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. |
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized. Realization is dependent on generating sufficient taxable income of a specific nature prior to the expiration of any loss carryforwards or capital losses. The asset may be reduced if estimates of future taxable income during the carryforward period are reduced. In addition, the Company maintains reserves for certain tax items, which are included in income taxes payable on its consolidated balance sheet. The Company periodically reviews these reserves to determine if adjustments to these balances are necessary.
Foreign Currency Translations
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 its foreign business units, which are not material to its consolidated financial statements. The Company’s treatment of foreign subsidiaries is consistent with the guidelines set forth in SFAS 52, Foreign Currency Translations. The financial statements of the Company’s 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 December 31, 2008, the accumulated other comprehensive losses related to foreign currency translations was approximately $2.6 million. Foreign currency transaction gains and (losses) are included in the results of operations and are not material.
Use of Estimates
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include certain amounts that are based on management's best estimates and judgments. Estimates are used in determining items such as revenue recognition, reserves for accounts receivable, certain assumptions related to goodwill and intangible assets, deferred tax valuation, fair value of marketable securities, claims and insurance accruals, derivative financial instruments, stock based compensation and amounts recorded for contingencies and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. The Company is not aware of reasonably likely events or circumstances that would result in different amounts being reported that would have a material impact on its consolidated results of operations or consolidated financial condition.
Fair Value of Liquid Financial Instruments
The carrying amount of our cash and cash equivalents, accounts receivable, unbilled services and accounts payable approximate fair value because of the relatively short maturity of these instruments.
Derivative Financial Instruments
The Company enters into interest rate swap agreements to modify the interest rate characteristics of our outstanding long-term debt. At hedge inception, and at least quarterly thereafter, the Company assesses whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense). The fair values of the Company’s interest rate swaps are obtained from dealer quotes. These values 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.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist of accounts receivable and unbilled services. The Company places its investments in highly rated financial institutions, U.S. Treasury bills, money market accounts, investment grade short-term debt instruments. The Company is subject to credit exposure to the extent the Company maintains cash balances at one institution in excess of the Federal Depository Insurance Company limit of $250,000. Its receivables are concentrated with its major pharmaceutical clients. The Company does not require collateral or other security to support clients' receivables.
Accounting for Stock Options
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 2006 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, 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 for the years ended December 31, 2008 and 2007 of $10.6 million and $9.7 million, respectively, of which $2.3 million and $2.4 million, respectively, were recorded in cost of services and $8.3 million and $7.3 million recorded as Selling, General and Administrative expenses (“SG&A”), respectively. The stock-based compensation expense caused (loss) income before income tax provision, minority interest in income of subsidiary and income from equity investments to decrease by $10.6 million and $9.7 million for the years ended December 31, 2008 and 2007, respectively, net (loss) income to (increase) decrease by $7.3 million and $5.7 million for the years ended December 31, 2008 and 2007, respectively, and basic and diluted earnings per share to decrease by $0.22 and $0.18 per share for the years ended December 31, 2008 and 2007, respectively.
Cash provided by financing activities increased by $0.3 million and $7.9 million for the years ended December 31, 2008 and 2007, respectively, related to excess tax benefits from the exercise of stock-based awards.
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.
Recent Accounting Pronouncements
In October 2008, the FASB issued Staff Position No. FSP FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3) which amends FAS 157 to include guidance on how to determine the fair value of a financial asset in an inactive market and which is effective immediately on issuance, including prior periods for which financial statements have not been issued. The implementation of FSP FAS 157-3 did not have a material impact on the Company’s financial position and results of operations.
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 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 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. We are currently evaluating the impact of this standard on our 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. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
In February 2007, 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 implementation of SFAS 159 did not have a material effect on our consolidated balance sheets, results of operations and cash flows.
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. The implementation of SFAS 157 did not have a material effect on our consolidated balance sheets, results of operations and cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our 2006 annual financial statements. The adoption of SAB No. 108 did not have a material impact on our consolidated results of operations or consolidated financial position.
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, we adopted FIN 48 as of January 1, 2007, as required. Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The adoption of FIN 48 did not have a material impact on our consolidated statements of operations, financial position, cash flows, and other significant matters, such as debt covenants or our normal business practices.
3. 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. earnout payments from acquisitions are generally accrued at the end of an earnout 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 earnout 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.
Promotech Logistics Solutions – In December 2008, the Company completed the acquisition of the net assets of Promotech Logistics Solutions for approximately $7.2 million in cash, including certain post-closing adjustments and direct acquisition costs, yet to be finalized. There are no earnout provisions related to this acquisition. Promotech Logistics Solutions is headquartered in New Jersey and provides non-personal promotion services, similar to our existing Promotech group. Promotech Logistics Solutions’ financial results have been reflected in the inVentiv Commercial segment since the date of its 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. The Company will be obligated to make certain earnout 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 earnout payments, which may be material, contingent on CCA’s performance measurements during 2007 through 2010. The amount accrued at December 31, 2008 for the 2008 earnout was approximately $25.9 million. 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 earnout 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.
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 earnout 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 earnout 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 earnout 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 earnout 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 was obligated to make certain earnout payments, 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 2008 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 was obligated to make certain earnout payments, contingent on DialogCoach's performance measurements during 2006 through 2008. DialogCoach did not achieve the initial earnout threshold for 2006, 2007 and 2008 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 earnout 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.
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 earnout 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 earnout 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 amount accrued at December 31, 2008 for the 2008 earnout was approximately $12.3 million. The portions adjusted in the subsequent years mainly relate to the finalization of the earnout 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 earnout 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 $2.4 million remains accrued at December 31, 2008. The portions adjusted in the subsequent years mainly relate to the finalization of the earnouts 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.
4. Significant Clients:
During the years ended December 31, 2008 and 2007, the Company had no clients that accounted for more than 10%, individually, of the Company's total revenues across its inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments.
5. Restricted Cash and Marketable Securities:
As of December 31, 2008 and December 31, 2007, there were approximately $1.3 million and $1.7 million of restricted cash, respectively, of which $0.4 million relates to outstanding letters of credit, to support the security deposits relating to the New York, Washington D.C, California and London offices, which are reflected in the inVentiv Communications segment. The beneficiaries have not drawn on the $0.4 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 December 31, 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 December 31, 2008 and December 31, 2007, respectively.
As of December 31, 2008 and December 31, 2007, the Company had $10.0 million and $45.3 million, respectively, invested in the Columbia Strategic Cash Portfolio (“CSCP”). Based on an update provided by CSCP for December 31, 2008, the Company has recorded $3.7 million of the $10.0 million balance as long-term. The $3.7 million is classified as deposits and other assets on the December 31, 2008 Consolidated Balance Sheet, which is expected to be distributed after 2009. As the majority of the Company’s recorded balances in the CSCP continue to be short-term in nature, $6.3 million and $45.3 million, respectively, are classified as restricted cash and marketable securities on the December 31, 2008 and December 31, 2007 Consolidated Balance Sheets. During the years ended December 31, 2008 and December 31, 2007, the Company recorded $2.6 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 December 31, 2008, the value of the CSCP may materially change depending on market conditions. Consistent with the Company's investment policy guidelines, the majority of CSCP investments 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 $3.4 million cumulative impairment charge through December 31, 2008 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. Property and Equipment, net:
Property and equipment consist of the following:
| | | As of December 31, | |
| | | 2008 | | | 2007 | |
| | | (in thousands) | |
| Land | | $ | --- | | | $ | --- | |
| Buildings and leasehold improvements | | | 15,479 | | | | 12,352 | |
| Computer equipment and software | | | 35,676 | | | | 28,072 | |
| Vehicles | | | 32,252 | | | | 37,638 | |
| Furniture and fixtures | | | 12,783 | | | | 6,741 | |
| | | | 96,190 | | | | 84,803 | |
| Accumulated depreciation | | | (32,808 | ) | | | (30,063 | ) |
| | | $ | 63,382 | | | $ | 54,740 | |
The vehicles have been recorded under the provisions of a capital lease. The inVentiv Commercial segment has entered into a lease agreement to provide fleets of automobiles for sales representatives for certain client engagements.
Depreciation expense of property and equipment totaled $20.9 million, $18.2 million, and $15.1 million in 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006 inVentiv recorded $11.2 million, $10.5 million and $8.7 million of depreciation, respectively, on vehicles under capital lease.
7. Goodwill and Other Intangible Assets:
Goodwill consists of the following:
| (in thousands) | | inVentiv Clinical | | | inVentiv Communications | | | inVentiv Commercial | | | inVentiv Patient Outcomes | | | Other | | | Total | |
| Balance as of January 1, 2007 | | $ | 55,742 | | | $ | 112,928 | | | $ | 40,366 | | | $ | 57,791 | | | | -- | | | $ | 266,827 | |
| Goodwill acquired during the year | | | 12 | | | | 53,674 | | | | 5,141 | | | | 16,656 | | | | -- | | | | 75,483 | |
Goodwill through contingent consideration(1) | | | 1,190 | | | | 24,356 | | | | 266 | | | | 15,592 | | | | -- | | | | 41,404 | |
| Balance as of January 1, 2008 | | $ | 56,944 | | | $ | 190,958 | | | $ | 45,773 | | | $ | 90,039 | | | | -- | | | $ | 383,714 | |
| Goodwill acquired during the year | | | -- | | | | -- | | | | 1,561 | | | | 5,202 | | | | -- | | | | 6,763 | |
Goodwill through contingent consideration(1) | | | 32 | | | | 31,127 | | | | -- | | | | 12,153 | | | | | | | | 43,312 | |
Goodwill allocation (2) | | | -- | | | | (6,674 | ) | | | -- | | | | -- | | | | -- | | | | (6,674 | ) |
| Other adjustments | | | 186 | | | | 863 | (4) | | | -- | | | | -- | | | | -- | | | | 1,049 | |
Impairment losses(3) | | | (41,344 | ) | | | (112,667 | ) | | | -- | | | | (58,627 | ) | | | -- | | | | (212,638 | ) |
| Balance as of December 31, 2008 | | $ | 15,818 | | | $ | 103,607 | | | $ | 47,334 | | | $ | 48,767 | | | | -- | | | $ | 215,526 | |
| (1) | The contingent consideration represents adjustments relating to the finalization of the earnouts for the twelve months ended December 31and March 31 of each year. (see Note 3) |
| (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 2007 10-K was filed. |
| (3) | these amounts relate to the respective reporting unit noncash impairment charges of goodwill as a result of the interim impairment tests the Company performed at December 31, 2008. The fair value of each reporting unit was estimated using the expected present value of future cash flows. |
| (4) | 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. |
Other intangible assets, by class, consist of the following:
| | | December 31, 2008 | | | December 31, 2007 | |
| (in thousands) | | | | | Accumulated | | | | | | | | | Accumulated | | | | |
| | | Gross | | | Amortization | | | Net | | | Gross | | | Amortization | | | Net | |
| Customer relationships | | $ | 113,896 | | | $ | (27,177 | ) | | $ | 86,719 | | | $ | 105,537 | | | $ | (15,946 | ) | | $ | 89,591 | |
| Technology | | | 14,168 | | | | (4,497 | ) | | | 9,671 | | | | 37,940 | | | | (1,714 | ) | | | 36,226 | |
| Noncompete agreement | | | 1,506 | | | | (911 | ) | | | 595 | | | | 880 | | | | (617 | ) | | | 263 | |
| Tradenames subject to amortization | | | 2,275 | | | | (790 | ) | | | 1,485 | | | | 1,211 | | | | (277 | ) | | | 934 | |
| Other | | | 1,232 | | | | (683 | ) | | | 549 | | | | 1,234 | | | | (386 | ) | | | 848 | |
| Total definite-life intangibles | | | 133,077 | | | | (34,058 | ) | | | 99,019 | | | | 146,802 | | | | (18,940 | ) | | | 127,862 | |
Tradenames not subject to amortization (1) | | | 127,490 | | | | -- | | | | 127,490 | | | | 153,260 | | | | -- | | | | 153,260 | |
Total other intangibles (2) | | $ | 260,567 | | | $ | (34,058 | ) | | $ | 226,509 | | | $ | 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 and the interim impairment test performed at December 31, 2008. |
| (2) | The decrease in total gross other intangibles is primarily related to the noncash impairment charge the Company incurred for both definite and indefinite lived intangibles. The impaired identifiable intangible assets, were primarily from decreases in the fair value of our technology and indefinite-lived tradenames in our inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments. The fair value of intangible assets was estimated using the expected present value of future cash flows. |
The Company has the following identifiable intangible assets:
| Intangible asset | | Amount (in thousands) | | | Weighted average amortization period | |
| Tradename | | $ | 129,765 | | | | (1 | ) |
| Customer relationships | | | 113,896 | | | 10.7 years | |
| Technology | | | 14,168 | | | 14.3 years | |
| Noncompete agreement | | | 1,506 | | | 4.5 years | |
| Other | | | 1,232 | | | 4.5 years | |
| Total | | $ | 260,567 | | | | | |
| (1) | $2.3 million of the tradenames are definite-life intangibles, which have a weighted average amortization period of 4.8 years. |
Amortization expense, based on intangibles subject to amortization held at December 31, 2008, is expected to be $12.5 million in 2009, $12.0 million in 2010, $11.7 million in 2011, $11.5 million in 2012, $10.2 million in 2013 and $41.1 million thereafter.
As discussed in Note 2, the Company performed annual impairment tests as of June 30, 2008 and concluded that the existing goodwill and indefinite lived intangible tradename balances were not impaired. During the fourth quarter of 2008, as a result of adverse equity market conditions that caused a decrease in the current market multiples and the company’s stock price, the Company concluded that a triggering event had occurred indicating potential impairment, and accordingly performed an impairment test of its goodwill and other intangible assets at December 31, 2008. The Company employed the income valuation approach based on discounted cash flows and the market approach. This interim impairment test resulted in pre-tax noncash goodwill and intangible asset impairment charges of approximately $268 million, including $238 million of indefinite-lived assets under SFAS No. 142, Goodwill and Other Intangible Assets, and $30 million of definite-lived assets under SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets, The $268 million was recorded as impairment of goodwill and other intangibles assets on the Company’s consolidated statements of operations.
8. 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 facility. 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.
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 December 31, 2008 and December 31, 2007 was 1.43% and 4.70%, respectively. As disclosed in Note 12, the Company has a $325 million derivative financial instrument 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. 8-14, Debtor’s Accounting for the Changes in Line-of-Credit or Revolving-Debt Arrangements (EITF 8-14), and its term loan under the provisions of EITF Issue No. 6-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments (EITF 6-19). 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 $3.9 million and $4.3 million and are included in Deposits and Other Assets on the balance sheet as of December 31, 2008 and December 31, 2007, respectively.
The following table displays the required future commitment of the Company’s debt:
| Years Ending December 31, | | | |
| 2009 | | $ | 4,279 | |
| 2010 | | | 3,329 | |
| 2011 | | | 3,317 | |
| 2012 | | | 3,317 | |
| 2013 | | | 156,765 | |
| Thereafter | | | 155,100 | |
| Total minimum payments | | $ | 326,107 | |
9. Accrued Payroll, Accounts Payable and Accrued Expenses:
Accrued payroll, accounts payable and accrued expenses consist of the following:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (in thousands) | |
| Accrued payroll and related employee benefits | | | 38,733 | | | $ | 29,676 | |
| Accounts payable | | | 10,421 | | | | 17,873 | |
| Accrued media liability | | | 9,415 | | | | 8,509 | |
| Accrued insurance | | | 9,912 | | | | 6,709 | |
| Accrued commissions | | | 6,185 | | | | 5,013 | |
| Accrued professional fees | | | 4,403 | | | | 2,867 | |
| Accrued meeting fees | | | 770 | | | | 836 | |
| Contingent consideration from acquisitions | | | 40,875 | | | | 52,862 | |
| Accrued expenses | | | 8,295 | | | | 14,363 | |
| | | $ | 129,009 | | | $ | 138,708 | |
10. Fair Value Measurement
As discussed in Note 2, the Company adopted SFAS 157 on January 1, 2008, which among other things, 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 December 31, 2008 and the basis for that measurement:
(in thousands) | Total Fair Value Measurement December 31, 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 | $10,416 | $417 | -- | $9,999 (1) |
Deferred Compensation Plan Assets | 6,691 | -- | 6,691 | -- |
| TOTAL ASSETS | $17,107 | $417 | $6,691 | $9,999 |
| | | | | |
| LIABILITIES | | | | |
Deferred Compensation Plan Liabilities | $6,762 | -- | $6,762 | -- |
| Derivative Liabilities | 30,783 | -- | -- | 30,783 |
| TOTAL LIABILITIES | $37,545 | $-- | $6,762 | $30,783 |
(1) – As described in Note 5, the Level 3 marketable securities balance of $10.0 million includes $6.3 million classified as restricted cash and marketable securities and $3.7 million as deposits and other assets, respectively, on the Company’s December 31, 2008 Balance Sheet.
As mentioned in Note 12 below, as a result of recent market conditions, the Company updated its valuation of its five-year interest rate derivative as of December 31, 2008, resulting in a credit value adjustment of $4.8 million to the derivative liability, of which $1.4 million was recorded as of September 30, 2008, with a corresponding offset to Other Comprehensive Income as a result of cash flow hedge accounting (see Note 12). 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.
As a result of the decrease in available investment prices from September 30, 2008 to December 31, 2008 due to market conditions, the Company changed its classification of marketable securities from a Level 2 input to a Level 3 input. The Company incurred a $2.6 million impairment charge during 2008, of which $2.0 million was in the fourth quarter of 2008 and primarily related to the lack of liquidity and resulting distressed values of investments in the marketplace. These factors resulted in a significant percentage of the securities within CSCP that required unobservable inputs, which was not materially present through September 30, 2008. These significant inputs included interest rate curves, credit curves and creditworthiness of the counterparty. There were no changes to the presentation of the CSCP in the consolidated financial statements as a result of the Level 2 input to Level 3 input change.
The following is a rollforward of the Level 3 liability through December 31, 2008:
| | Fair Value Measurements |
| (in thousands) | Using Significant Unobservable Inputs (Level 3) |
| ASSETS | CSCP |
| 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 | 9,999 |
| Balance at December 31, 2008 | $9,999 |
| | |
| LIABILITIES | 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 |
| Included in earnings (or changes in net asset) | |
| Included in other comprehensive income | 12,058 |
| Purchases, issuances and settlement | |
| Deferred tax impact of other comprehensive income | 8,234 |
| Transfers in and/or out of Level | |
| Balance at December 31, 2008 | $30,783 |
11. Leases:
The Company leases certain facilities, office equipment and other assets under non-cancelable operating leases. The operating leases are expensed on a straight-line basis and may include certain renewal options and escalation clauses.
The following is a schedule of future minimum lease payments for these operating leases at December 31, 2008 (in thousands):
| Years Ending December 31, | | | |
| 2009 | | $ | 22,289 | |
| 2010 | | | 20,571 | |
| 2011 | | | 17,438 | |
| 2012 | | | 15,577 | |
| 2013 | | | 11,961 | |
| Thereafter | | | 53,081 | |
| Total minimum lease payments | | $ | 140,917 | |
Rental expense charged to operations was approximately $19.0 million, $13.0 million and $8.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The Company also has commitments under capital leases. The following is a schedule of future minimum lease payments for these capital leases at December 31, 2008 (in thousands):
| | | (a) | |
| Years Ending December 31, | | | |
| 2009 | | $ | 14,328 | |
| 2010 | | | 13,152 | |
| 2011 | | | 9,762 | |
| 2012 | | | 3,305 | |
| 2013 | | | 18 | |
| Total minimum lease payments | | | 40,565 | |
Amount representing interest and management fees | | | (2,138 | ) |
| | | | 38,427 | |
| Current portion | | | (13,417 | ) |
| Non-current lease obligations | | $ | 25,010 | |
(a) These future commitments include interest and management fees, which are not recorded on the Consolidated Balance Sheet as of December 31, 2008 but will be recorded as incurred.
12. Derivative Financial Instruments:
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 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 declined to zero at maturity, which was December 31, 2008, the $2.9 million of fair value was recognized in earnings over the remaining life of the swap as part of the ineffectiveness calculation. During the year ended December 31, 2008, the fair market value of the original derivative asset increased from a liability of approximately $1.0 million to the maturity value of $0. Approximately $1.1 million was recorded as interest expense, attributable to the financing component embedded within the interest rate swap, while $2.1 million ($1.2 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, as the Company’s original 2005 three-year interest rate swap arrangement described above expired. 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 December 31, 2008, and accordingly, $20.5 million ($12.2 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 Consolidated Balance Sheet. This change in Other Comprehensive Income includes the $4.8 million credit value adjustment as discussed in Note 10.
Based on current assumptions regarding the interest rate environment and other market conditions at December 31, 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 $11.9 million.
13. 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. We do not believe that any action will have a material adverse effect on us.
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 the latest 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. Defendants also successfully moved to strike Plaintiff’s class allegations as improper. The operative Sixth Amended Complaint, which was filed on January 6, 2008, alleges five causes of action against Defendants. Only three of these claims – violation of the CMIA, breach of fiduciary duty, and unjust enrichment – are alleged against Adheris.
On February 8, 2009, the remaining parties to the Weisz action entered into a Settlement Agreement and Release (the "Weisz Settlement"). Under the terms of the Weisz Settlement, which has been preliminarily approved by the court but remains subject to final court approval after a fairness hearing, Adheris would agree to refrain from knowing participation in any refill reminder programs, targeted mailings or notifications regarding medical conditions of specific California residents except those residents who have expressly opted in to the communication or as otherwise permitted by California law. Adheris currently does not conduct significant business in California of the type encompassed by Weisz Settlement. It is expected that Adheris’ financial contribution to the settlement in excess of its retention amount will be funded by insurance. Our insurer, AIG, is defending this action under reservation of rights.
The hearing to consider final approval of the Weisz Settlement is scheduled for June 5, 2009. If the settlement does not become final, Adheris intends to continue to defend this action vigorously, and we do not believe that this action will have a material adverse effect on our 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 our 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. In December 2008, the parties to the action entered into a settlement agreement, which is subject to Court approval and requires notification to various state attorneys general. The hearing to consider final approval of the settlement is scheduled for June 10, 2009. If the settlement agreement becomes final, the amount to be paid to the settlement class in excess of the deductible amount is expected to be funded by Chubb Group. If the settlement does not become final, 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.
Other We are subject to lawsuits, investigations and claims arising out of the conduct of our business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain such claims have been filed or are pending against us. All such matters are of a kind routinely experienced in our business and are consistent with our historical experience. We do not believe that any such routine action will have a material adverse effect on us.
14. Common Stock and Stock Incentive Plans:
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 stock option activity under the Company’s equity incentive plans for the years ended December 31, 2008, 2007 and 2006 (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, 2006 | 2,971 | $10.47 | 6.32 | $39,401 |
| Granted and assumed | 366 | 26.34 | | |
| Exercised | (971) | 6.72 | | |
| Forfeited/expired/cancelled | (172) | 14.75 | | |
| Outstanding at December 31, 2006 | 2,194 | $14.43 | 7.24 | $45,900 |
| Granted and assumed | 172 | 35.75 | | |
| Exercised | (783) | 8.82 | | |
| Forfeited/expired/cancelled | (77) | 21.20 | | |
| Outstanding at December 31, 2007 | 1,506 | $19.43 | 6.86 | $18,121 |
| Granted and assumed | 261 | 31.37 | | |
| Exercised | (173) | 13.82 | | |
| Forfeited/expired/cancelled | (95) | 19.21 | | |
| Outstanding at December 31, 2008 | 1,499 | $22.18 | 6.52 | $1,014 |
| Vested and expected to vest at December 31, 2008 | 1,449 | $21.87 | 6.45 | $1,014 |
| | | | | |
| Options exercisable at December 31, 2006 | 1,246 | $9.82 | 6.41 | $31,813 |
| Options exercisable at December 31, 2007 | 853 | $14.59 | 5.99 | $13,963 |
| Options exercisable at December 31, 2008 | 935 | $17.13 | 5.44 | $1,014 |
| | | | | |
The weighted-average grant-date fair value of stock options granted was $12.82, $16.62 and $13.02 at December 31, 2008, 2007 and 2006, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006, was $2.4 million, $6.9 million and $6.5 million, respectively. As of December 31, 2008 and 2007, there was approximately $4.6 million and $6.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted; that cost is expected to be recognized over a weighted average of 2.5 years and 2.2 years, respectively.
The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $1.1 million, $8.0 million and $9.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Options outstanding and exercisable at December 31, 2008 had 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 | 150,424 | $6.25 | 1.79 | 150,424 | $6.25 |
| $8.45 | To | $15.48 | 98,416 | $10.02 | 5.06 | 98,416 | $10.02 |
| $15.96 | To | $15.96 | 250,000 | $15.96 | 5.73 | 250,000 | $15.96 |
| $16.89 | To | $17.75 | 185,053 | $17.26 | 5.74 | 185,053 | $17.26 |
| $18.20 | To | $26.76 | 198,623 | $24.92 | 6.80 | 111,874 | $24.95 |
| $26.77 | To | $26.77 | 180,000 | $26.77 | 7.45 | 90,000 | $26.77 |
| $28.66 | To | $31.45 | 124,882 | $29.73 | 8.99 | 10,368 | $30.64 |
| $32.55 | To | $32.55 | 156,891 | $32.55 | 9.05 | -- | -- |
| $35.01 | To | $35.01 | 96,822 | $35.01 | 8.06 | 24,213 | $35.01 |
| $37.21 | To | $37.21 | 57,914 | $37.21 | 8.50 | 14,479 | $37.21 |
| | | | 1,499,025 | | | 934,827 | |
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:
| | 2008 | 2007 | 2006 |
| Expected life of option | 6 yrs | 6 yrs | 5.5-6 yrs |
| Risk-free interest rate | 3.06% | 4.81% | 4.90% |
| Expected volatility | 37% | 40% | 45% |
| Expected dividend yield | 0.00% | 0.00% | 0.00% |
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 2008 and 2007 the volatility remains at a range of 36%-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 rate utilized in 2008, 2007 and 2006 was 6.58%, 3.91% and 3.25%.
A summary of the status and changes of the Company’s nonvested shares related to our equity incentive plan is presented below:
(in thousands, except per share amounts) | Shares | Weighted Average Grant-Date Fair Value |
| Nonvested at January 1, 2006 | 208 | $20.31 |
| Granted | 401 | $26.33 |
| Released | (62) | $20.66 |
| Forfeited | (27) | $24.67 |
| Nonvested at December 31, 2006 | 520 | $24.66 |
| Granted | 271 | $35.37 |
| Released | (134) | $22.96 |
| Forfeited | (61) | $27.94 |
| Nonvested at December 31, 2007 | 596 | $29.41 |
| Granted | 318 | $30.13 |
| Released | (198) | $27.55 |
| Forfeited | (49) | $29.17 |
| Nonvested at December 31, 2008 | 667 | $30.30 |
As of December 31, 2008 and 2007, there was approximately $12.6 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 2.5 years and 2.8 years, respectively. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 were $5.7 million, $4.9 million and $1.8 million, respectively.
15. Benefit Plans:
inVentiv Health, Inc. and certain of its subsidiaries maintain a defined contribution benefit plans. Costs incurred by the Company related to this plan amounted to approximately $3.7 million, $3.0 million and $2.2 million for 2008, 2007 and 2006, respectively.
On November 22, 2004, the Company adopted the Ventiv Health, Inc. Deferred Compensation Plan (the “Plan”), which was approved by its Board of Directors. The 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 inVentiv Health, Inc. or an affiliated employer participating in the Plan. The compensation deferrals were initiated in 2005. The deferred compensation liability of approximately $6.8 million was included in other liabilities in our Consolidated Balance Sheets as of December 31, 2008 and 2007, respectively. The Plan does not provide for the payment of above-market interest to participants.
To assist in the funding of the Plan obligation, we participate in a corporate-owned life insurance program in a rabbi trust whereby it purchases life insurance policies covering the lives of certain employees, with inVentiv Health, Inc. 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 as of December 31, 2008 and 2007 were approximately $5.1 million and $5.4 million, respectively and are currently classified in Deposits and other assets on our Consolidated Balance Sheets. In addition, approximately $1.6 million and $1.4 million as of December 31, 2008 and 2007, respectively, were invested in mutual funds and classified in other current assets on our Consolidated Balance Sheets.
16. Income Taxes:
Our income tax provision included the following components:
| | | For the Years Ended | |
| | | December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (in thousands) | |
| Current: | | | | | | | | | |
| U.S.—Federal | | $ | 27,376 | | | $ | 25,979 | | | $ | 22,900 | |
| U.S.—State and local | | | 3,325 | | | | 2,164 | | | | 2,811 | |
| Foreign | | | 2 | | | | 433 | | | | 837 | |
| | | $ | 30,703 | | | $ | 28,576 | | | $ | 26,548 | |
| Deferred: | | | | | | | | | | | | |
| U.S.—Federal | | $ | (77,567 | ) | | $ | 788 | | | $ | (7,183 | ) |
| U.S.—State and local | | | (11,343 | ) | | | 37 | | | | (77 | ) |
| Foreign | | | 0 | | | | 0 | | | | (122 | ) |
| | | | (88,910 | ) | | $ | 825 | | | $ | (7,382 | ) |
| Income tax provision | | $ | (58,207 | ) | | $ | 29,401 | | | $ | 19,166 | |
The provision for taxes on net income differs from the amount computed by applying the U.S. federal income tax rate as a result of the following:
| | For the Years Ended |
| | December 31, |
| | 2008 | 2007 | 2006 |
| Taxes at statutory U.S. federal income tax rate | 35.0% | 35.0% | 35.0% |
| Foreign tax differences | 0.0 | 0.1 | 1.0 |
| State and local income taxes, net of federal tax benefit | 4.3 | 2.9 | 4.5 |
| Establish/(release) of valuation allowance/ Utilization of net operating losses / Other tax benefits | 0.2 | (0.4) | (13.1) |
| Impairment of intangible assets | (8.0) | 0.0 | 0.0 |
| Other permanent differences | (0.3) | 0.8 | 0.6 |
| Effective tax rate | 31.1% | 38.4% | 28.0% |
Deferred income taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities. As of December 31, 2008 and 2007, the deferred tax assets and liabilities consisted of the following:
| | | As of December 31, | |
| | | 2008 | | | 2007 | |
| Current Deferred Tax Assets: | | (in thousands) | |
| Accrued expenses | | $ | 10,487 | | | $ | 5,501 | |
| Deferred rent | | | 134 | | | | 191 | |
| Net operating loss carry forwards | | | 0 | | | | 779 | |
| Deferred revenue | | | 268 | | | | 229 | |
| Allowance for doubtful accounts | | | 1,314 | | | | 532 | |
| Other | | | 321 | | | | 232 | |
| Subtotal | | | 12,524 | | | | 7,464 | |
Non-Current Deferred Tax Assets:
| Deferred Compensation | | | 9,965 | | | | 7,568 | |
| Fair market value adjustment | | | 12,517 | | | | 5,014 | |
| Intangible Assets | | | 57,438 | | | | 0 | |
| NOL & FTC carry forwards | | | 3,628 | | | | 4,423 | |
| Fixed Assets | | | 7,764 | | | | 7,076 | |
| Other | | | 850 | | | | 964 | |
| Subtotal | | | 92,162 | | | | 25,045 | |
| Gross Deferred Tax Assets | | | 104,686 | | | | 32,509 | |
| | | | | | | | | |
Current Deferred Tax Liabilities: | | | | | | | | |
| Accrued Expenses | | | (571 | ) | | | (1,707 | ) |
| Other | | | (2,354 | ) | | | (344 | ) |
| Subtotal | | | (2,925 | ) | | | (2,051 | ) |
| | | | | | | | | |
| Non-Current Deferred Tax Liabilities: | | | | | | | | |
| Property and Equipment | | | (9,081 | ) | | | (6,330 | ) |
| Intangible Assets | | | (3,260 | ) | | | (27,275 | ) |
| Other | | | (697 | ) | | | (895 | ) |
| Subtotal | | | (13,038 | ) | | | (34,500 | ) |
Gross Deferred Tax Liabilities | | | (15,963 | ) | | | (36,551 | ) |
| | | | | | | | | |
| Valuation Allowance | | | (4,353 | ) | | | (4,843 | ) |
| | | | | | | | | |
| Net Deferred Tax Assets/(Liabilities) | | $ | 84,370 | | | $ | (8,885 | ) |
During 2008, the impairment of $268.7 million of intangible assets resulted in an increase of approximately $88.2 million to deferred tax assets. This item is disclosed net of U.S. deferred tax liabilities related to intangible assets of $30.8 million resulting in a net deferred tax asset of $57.4 million. It is management’s belief that it is more likely than not that the deferred tax asset will be realized in the future. Reversal of the deferred tax assets will occur in varying amounts beginning in 2009 and continuing through 2023.
As of December 31, 2007 the Company had a deferred tax asset of $0.7 million relating to a capital tax loss carryover. Management believed that it was more likely than not that the associated deferred tax asset would not be realized in the future, and a valuation allowance of $0.7 million was recorded. During 2008, the Company determined that $0.8 million of the capital loss carryover would be utilized during December 31, 2008, and the remainder would expire in 2008. Due to the expiration of the credit, the deferred tax asset and valuation reserve were reversed.
As of December 31, 2008 a deferred tax asset in the amount of $0.2 existed relating to state net operating loss carry forwards. A valuation allowance has been recorded against the state net operating loss carryovers as management believes it is more likely than not that the associated deferred tax asset will not be realized in the future. The gross amount of the state net operating losses is approximately $3.6 million and expires in varying amounts beginning in 2009 and continuing through 2026.
The Company does not provide for federal income taxes or tax benefits relating to the undistributed earnings or losses of its foreign subsidiaries that are controlled foreign corporations. It is the Company’s belief that such earnings will be indefinitely reinvested in the companies that produced them. At December 31, 2008, the Company has not provided federal income taxes on approximately $4.6 million of earnings of foreign subsidiaries. If these earnings were remitted as dividends, the Company would be subject to U.S. income taxes and certain foreign withholding taxes. The Company has determined that it is not practical to compute a deferred tax liability related to these earnings.
The Company adopted the provisions FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated balance sheet, results of operations or cash flows. The amounts of unrecognized tax benefit were $6.3 million as of January 1, 2008 and $5.3 million as of December 31, 2008. Included in this balance were positions that, if recognized, would affect the effective tax rate by $1.0 million as of January 1, 2008 and $0.9 million as of December 31, 2008.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| Unrecognized tax benefits balance at January 1, 2008 | $6.3 |
| Increase in tax positions for prior years | -- |
| Decreases in tax positions for prior years | (0.4) |
| Increase in tax positions for current year | 0.2 |
| Settlements | (0.1) |
| Lapse of statute of limitations | (0.7) |
| Unrecognized tax benefits balance at December 31, 2008 | $5.3 |
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 as of January 1, 2008 and December 31, 2008 was $2.7 million and 2.6 million respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, 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 $1.2 million within the next 12 months. The decrease is primarily related to additional federal and state taxes that have expiring statutes of limitations.
17. Discontinued Operations:
For the years ended December 31, 2008, 2007 and 2006, income from discontinued operations, net of taxes, were $0.7 million, $0.3 million and $2.0 million, respectively. For the years ended December 31, 2008, 2007 and 2006, income from discontinued operations, net of taxes, mainly consisted of contingency payments due from our previously divested Germany based operations. In addition, approximately $1.2 million of tax liability was reversed since the receivership of the previously-divested France-based unit was finalized during the fourth quarter of 2006.
18. Related Parties:
inVentiv Communications’ leases its current headquarters facility in Westerville, Ohio from Lexington MLP Westerville L.P. Prior to May 15, 2007, this facility was partially owned by R. Blane Walter, the Company’s CEO (who is also a member of the Board of Directors), his brothers and other current employees of inVentiv Communications. The term of the lease is fifteen years, and expires on September 30, 2015.
Several inVentiv business units provided services to Cardinal Health, Inc. (“Cardinal”) during 2008. Revenues generated for services provided to Cardinal totaled approximately $475,000 and $760,000 for 2008 and 2007, respectively. Robert Walter, who is the father of R. Blane Walter, our CEO, served as Executive Chairman, and subsequently as an Executive Director, of Cardinal during 2007 and 2008. R. Blane Walter and his immediate family members (including Robert Walter) and related trusts own approximately 3% of the outstanding capital stock of Cardinal. All transactions between the Company and Cardinal were on arms'-length terms and were negotiated without the involvement of any members of the Walter family.
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.
19. 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. As mentioned in Note 1, the Company added the inVentiv Patient Outcomes 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 December 31, 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 pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. |
| · | Other, which encompasses the activities of the corporate management group. |
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, 2006:
For the year ended December 31, 2008 (in thousands):
| | | inVentiv Clinical | | | inVentiv Communications | | | inVentiv Commercial | | | inVentiv Patient Outcomes | | | Other | | | Total | |
| Revenues | | $ | 217,103 | | | $ | 343,198 | | | $ | 453,961 | | | $ | 125,927 | | | | -- | | | $ | 1,140,189 | |
| Less: Intersegment revenues | | | (169 | ) | | | (1,311 | ) | | | (18,895 | ) | | | (2 | ) | | | -- | | | | (20,377 | ) |
| Reported Revenues | | $ | 216,934 | | | $ | 341,887 | | | $ | 435,066 | | | $ | 125,925 | | | | | | | $ | 1,119,812 | |
| Depreciation and amortization | | | 2,251 | | | | 10,271 | | | | 17,836 | | | | 5,586 | | | | 44 | | | | 35,988 | |
| Interest expense | | | 110 | | | | 144 | | | | 1,419 | | | | 3 | | | | 23,788 | | | | 25,464 | |
| Interest income | | | 82 | | | | 579 | | | | -- | | | | 38 | | | | 1,284 | | | | 1,983 | |
| Impairment of Goodwill and Other Intangible Assets | | | 41,344 | | | | 135,601 | | | | 4,037 | | | | 86,867 | | | | -- | | | | 267,849 | |
Segment (loss) income (1) | | $ | (24,585 | ) | | $ | (91,624 | ) | | $ | 38,709 | | | $ | (63,987 | ) | | $ | (44,157 | ) | | $ | (185,644 | ) |
For the year ended December 31, 2007 (in thousands):
| | | inVentiv Clinical | | | inVentiv Communications | | | inVentiv Commercial | | | inVentiv Patient Outcomes | | | Other | | | Total | |
| Revenues | | $ | 187,240 | | | $ | 290,408 | | | $ | 410,825 | | | $ | 100,474 | | | $ | -- | | | $ | 988,947 | |
| Less: Intersegment revenues | | | (313 | ) | | | (1,295 | ) | | | (10,039 | ) | | | -- | | | | -- | | | | (11,647 | ) |
| Reported Revenues | | $ | 186,927 | | | $ | 289,113 | | | $ | 400,786 | | | $ | 100,474 | | | $ | -- | | | $ | 977,300 | |
| Depreciation and amortization | | | 1,886 | | | | 7,167 | | | | 16,401 | | | | 3,597 | | | | 57 | | | | 29,108 | |
| Interest expense | | | -- | | | | 41 | | | | 2,229 | | | | 5 | | | | 18,442 | | | | 20,717 | |
| Interest income | | | 93 | | | | 782 | | | | 94 | | | | 99 | | | | 1,971 | | | | 3,039 | |
Segment income (loss) (1) | | $ | 14,306 | | | $ | 42,725 | | | $ | 35,452 | | | $ | 18,352 | | | $ | (33,720 | ) | | $ | 77,115 | |
For the year ended December 31, 2006 (in thousands):
| | | inVentiv Clinical | | | inVentiv Communications | | | inVentiv Commercial | | | inVentiv Patient Outcomes | | | Other | | | Total | |
| Revenues | | $ | 150,317 | | | $ | 208,406 | | | $ | 351,647 | | | $ | 61,944 | | | $ | -- | | | $ | 772,314 | |
| Less: Intersegment revenues | | | 531 | | | | 1,008 | | | | 4,530 | | | | -- | | | | -- | | | | 6,069 | |
| Reported Revenues | | | 149,786 | | | | 207,398 | | | | 347,117 | | | | 61,944 | | | | -- | | | | 766,245 | |
| Depreciation and amortization | | | 1,527 | | | | 3,619 | | | | 13,673 | | | | 1,833 | | | | 88 | | | | 20,740 | |
| Interest expense | | | -- | | | | 90 | | | | 1,781 | | | | 5 | | | | 9,485 | | | | 11,361 | |
| Interest income | | | 61 | | | | 569 | | | | 33 | | | | 120 | | | | 1,911 | | | | 2,694 | |
Segment income (loss)(1) | | | 11,623 | | | | 26,685 | | | | 44,088 | | | | 7,291 | | | | (20,276 | ) | | | 69,411 | |
(1) Income from continuing operations before income tax provision, minority interest in income of subsidiary and income from equity investments
| (in thousands) | | December 31, | |
| | | 2008 | | | 2007 | |
| Total Assets: | | | | | | |
| inVentiv Clinical | | | 97,162 | | | $ | 127,426 | |
| inVentiv Communications | | | 377,123 | | | | 513,079 | |
| inVentiv Commercial | | | 205,910 | | | | 183,787 | |
| inVentiv Patient Outcomes | | | 134,355 | | | | 198,141 | |
| Other | | | 158,566 | | | | 88,423 | |
| Total assets | | $ | 973,116 | | | $ | 1,110,856 | |
INVENTIV HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Selected Quarterly Financial Data (unaudited, in thousands):
The following table summarizes financial data by quarter for inVentiv for 2008 and 2007.
| | | 2008 Quarter Ended | |
| | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total | |
| | | (in thousands, except per share amounts) | |
| Revenues | | $ | 262,321 | | | $ | 285,042 | | | $ | 289,173 | | | $ | 283,276 | | | $ | 1,119,812 | |
| Gross profit | | | 82,048 | | | | 87,306 | | | | 87,097 | | | | 90,919 | | | | 347,370 | |
| Income (loss) from continuing operations | | | 8,032 | | | | 13,075 | | | | 13,326 | | | | (163,118 | ) | | | (128,685 | ) |
| Income (loss) from discontinued operations | | | 12 | | | | 94 | | | | (3 | ) | | | 561 | | | | 664 | |
| Net income (loss) | | | 8,044 | | | | 13,169 | | | | 13,323 | | | | (162,557 | ) | | | (128,021 | ) |
Earnings (losses) per share (a) | | | | | | | | | | | | | | | | | | | | |
| Continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.25 | | | $ | 0.40 | | | $ | 0.40 | | | $ | (4.94 | ) | | $ | (3.89 | ) |
| Diluted | | $ | 0.24 | | | $ | 0.39 | | | $ | 0.40 | | | $ | (4.92 | ) | | $ | (3.89 | ) |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.02 | | | $ | 0.02 | |
| Diluted | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.02 | | | $ | 0.02 | |
| Net income (loss): | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.25 | | | $ | 0.40 | | | $ | 0.40 | | | $ | (4.92 | ) | | $ | (3.87 | ) |
| Diluted | | $ | 0.24 | | | $ | 0.39 | | | $ | 0.40 | | | $ | (4.90 | ) | | $ | (3.87 | ) |
| | | 2007 Quarter Ended | |
| | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total (a) | |
| | | (in thousands, except per share amounts) | |
| Revenues | | $ | 221,955 | | | $ | 232,434 | | | $ | 254,913 | | | $ | 267,998 | | | $ | 977,300 | |
| Gross profit | | | 59,127 | | | | 69,560 | | | | 80,361 | | | | 86,690 | | | | 295,738 | |
| Income from continuing operations | | | 10,384 | | | | 7,165 | | | | 14,134 | | | | 15,543 | | | | 47,226 | |
| Income from discontinued operations | | | 86 | | | | 92 | | | | 90 | | | | (10 | ) | | | 258 | |
| Net income | | | 10,470 | | | | 7,257 | | | | 14,224 | | | | 15,533 | | | | 47,484 | |
Earnings per share (a) | | | | | | | | | | | | | | | | | | | | |
| Continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.34 | | | $ | 0.23 | | | $ | 0.44 | | | $ | 0.48 | | | $ | 1.50 | |
| Diluted | | $ | 0.33 | | | $ | 0.22 | | | $ | 0.43 | | | $ | 0.47 | | | $ | 1.46 | |
| Discontinued operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | |
| Diluted | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.01 | |
| Net income (losses): | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.34 | | | $ | 0.23 | | | $ | 0.44 | | | $ | 0.48 | | | $ | 1.50 | |
| Diluted | | $ | 0.34 | | | $ | 0.23 | | | $ | 0.43 | | | $ | 0.47 | | | $ | 1.47 | |
(a) The sum of the net earnings per share do not add up to the full year amount due to rounding and because the quarterly calculations are based on varying numbers of shares outstanding.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
(in thousands)
| | | | | | Additions | | | Deductions | | | | |
| | | Balance at Beginning Of Year | | | Charged to Cost and Expense | | | Charged to other Accounts (1) | | | from Reserve for Purpose for which Reserve was Created | | | Balance at End Of Year | |
| Allowances for Doubtful Accounts: | | | | | | | | | | | | | | | |
| Year ended December 31, 2008 | | $ | 3,098 | | | $ | 4,622 | | | $ | 109 | | | $ | 3,042 | | | $ | 4,787 | |
| Year ended December 31, 2007 | | $ | 3,583 | | | $ | 9,311 | | | $ | 865 | | | $ | 10,661 | | | $ | 3,098 | |
| Year ended December 31, 2006 | | $ | 3,979 | | | $ | 2,257 | | | $ | 145 | | | $ | 2,798 | | | $ | 3,583 | |
(1) Reserves acquired through acquisitions.
None.
Attached as exhibits to this Form 10-K are certifications of inVentiv's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of Deloitte & Touche LLP, our independent registered public accounting firm, regarding its audit of inVentiv’s internal control over financial reporting and of management’s assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the Deloitte & Touche report for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2008, our disclosure controls and procedures are effective 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 Securities and Exchange Commission and that material information relating to us and our consolidated subsidiaries is made known to management, including the Chief Executive Officer and Chief Financial Officer during the period when our periodic reports are being prepared. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing management's annual report on internal control over financial reporting.
Our management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our Disclosure Controls 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, within the company 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.
Changes in Internal Control Over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management's assessment that we maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission is included under the caption Management's Report on Internal Control Over Financial Reporting, in Part II, Item 8 of this Annual Report on Form 10-K.
None
Our Code of Business Conduct and Ethics is available within the Investor Relations/Corporate Governance portion of our website at www.inventivhealth.com. We intend to disclose on our website information concerning any future amendments to our waivers under the Code as permitted by Item 5.05 of Form 8-K.
The remaining information required by Items 10, 11, 12, 13 and 14 of Form 10-K will be set forth in our Proxy Statement (to be filed within 120 days after our fiscal year ended December 31, 2008) relating to the 2009 Annual Meeting of Stockholders and is incorporated by reference herein.
(a) 1. The following Consolidated Financial Statements of inVentiv Health, Inc. are filed under “Item 8. Financial Statements and Supplementary Data.”
Consolidated Balance Sheets as of December 31, 2008 and 2007.
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006.
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.
Notes to Consolidated Financial Statements
2. The following financial statement schedule is filed under “Item 8. Financial Statements and Supplementary Data.”
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are not required under Regulation S-X.
3. The following exhibits are filed herewith or are incorporated herein by reference, as indicated.
(b)
| Exhibit | Description |
| 3.1 | Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Form 10 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 3.1.1 | Certificate of Amendment to Certificate of Incorporation of the Registrant (filed as Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 3.2 | Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed December 18, 2006). * |
| 3.2.2 | Amendment to Amended and Restated By-Laws (filed as Exhibit 3.2.2 to the Registrant’s Current Report on Form 8-K filed June 16, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended).* |
| 4.1 | Specimen form of certificate representing the Registrant’s common stock (filed as Exhibit 4.1 to the Registrant's Form 10 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 10.4.5 | inVentiv Health, Inc. 2006 Long-Term Incentive Plan. (filed as Exhibit 10.21 to the Registrant's Current Report on Form 8-K filed June 19, 2006 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.8 | Form of Director Stock Option Award Notice. (filed as Exhibit 10.4.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.9 | Form of Director Restricted Stock Award Notice. (filed as Exhibit 10.4.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.10 | Form of Executive Officer Restricted Stock Award Notice. (filed as Exhibit 10.4.10 to the Registrant's Current Report on Form 8-K filed January 23, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.11 | Form of Executive Officer Stock Option Award Notice. (filed as Exhibit 10.4.11 to the Registrant's Current Report on Form 8-K filed January 23, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.12 | Form of Executive Officer/Chairman Restricted Stock Award Notice. (filed as Exhibit 10.4.12 to the Registrant's Current Report on Form 8-K filed January 23, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.13 | Form of Executive Officer/Chairman Stock Option Award Notice. (filed as Exhibit 10.4.13 to the Registrant's Current Report on Form 8-K filed January 23, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.14 | Form of Executive Officer Restricted Stock Award Notice. (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed February 3, 2009 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.4.15 | Form of Executive Officer Stock Option Award Notice. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed February 3, 2009 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.5 | Employment Agreement, dated May 9, 2006 by and between Eran Broshy and the Registrant (filed as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2006 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.5.1 | Amendment dated February 23, 2007 to Employment Agreement, dated May 9, 2006, by and between Eran Broshy and the Registrant (filed as Exhibit 10.5.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.5.2 | Employment Agreement, dated June 11, 2008 by and between Eran Broshy and the Registrant (filed as Exhibit 10.5.2 to the Registrant’s Quarterly Report on Form 10-for the three months ended June 30, 2008 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.9 | Employment Agreement, dated August 13, 2001 by and between John R. Emery and the Registrant (filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.9.1 | Amendment dated January 1, 2004 to Employment Agreement, dated August 13, 2001, by and between John R. Emery and the Registrant (filed as Exhibit 10.9.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11 | Employment Agreement, dated April 8, 2002 by and between Terrell Herring and the Registrant (filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * † |
| 10.11.1 | Amendment dated January 1, 2004 to Employment Agreement, dated April 8, 2002, by and between Terrell Herring and the Registrant (filed as Exhibit 10.11.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11.2 | Amendment to Employment Agreement dated June 15, 2004 between the Registrant and Terrell Herring (filed as Exhibit 10.11.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11.3 | Amendment to Employment Agreement dated October 18, 2004 between the Registrant and Terrell Herring (filed as Exhibit 10.11.3 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11.4 | Amendment to Employment Agreement dated January 23, 2006 between the Registrant and Terrell Herring (filed as Exhibit 10.11.4 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11.5 | Amendment to Stock Option Agreement(s)/Restricted Stock Award Agreement(s) dated May 7, 2007 between the Registrant and Terrell Herring (filed as Exhibit 10.11.5 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.11.6 | Amendment to Stock Option Agreement(s)/Restricted Stock Award Agreement(s) dated August 6, 2007 between the Registrant and Terrell Herring (filed as Exhibit 10.11.6 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.12 | Asset Purchase Agreement dated as of September 21, 2004 among the Registrant, Smith Hanley Holding Corporation and the other parties thereto (filed as Exhibit 2.1 to the Registrant's Form 8-K/A filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended, on December 29, 2004). * # |
| 10.13 | The Registrant 2005 Deferred Compensation Plan (filed as Exhibit 10.1 to the Registrant's Form 8-K filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended, on November 29, 2004). *† |
| 10.14 | Asset Purchase Agreement dated as of November 19, 2004 among the Registrant, HHI, L.L.C. and the other parties thereto (filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2005 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *# |
| 10.15 | Asset Purchase Agreement dated as of August 5, 2005 among the Registrant, Pharmaceutical Resource Solutions LLC and the other parties thereto (filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 2005 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *# |
| 10.16 | Acquisition Agreement dated September 6, 2005 by and among inChord Communications, Inc., the shareholders of inChord Communications, Inc., the Registrant and Accordion Holding Corporation (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed October 11, 2006 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 10.17 | Form of Indemnification Agreement entered into with each executive officer and director of Ventiv (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed October 11, 2006 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.18 | Employment Agreement dated as of September 6, 2005 between inChord Communications, Inc. and R. Blane Walter (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed October 11, 2006 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.18.1 | Employment Agreement dated as of August 7, 2007 between the Registrant and R. Blane Walter (filed as Exhibit 10.18.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.18.2 | Employment Agreement dated June 3, 2008 between the Registrant and R. Blane Walter (filed as Exhibit 10.18.2 to the Registrant’s Current Report on Form 8-K filed June 4, 2008 with the Securities and Exchange Commission under the Securities Act of 1934, as amended).*† |
| 10.19 | Credit Agreement dated as of October 5, 2005 among the Registrant, the Subsidiary Guarantors, the lenders party thereto, UBS Securities LLC, as bookmanager, as joint lead arranger, and as documentation agent, UBS Loan Finance LLC, as swingline lender, UBS AG, Stamford Branch, as issuing bank, as administrative agent for the Lenders and as collateral agent, Banc of America Securities LLC, as joint lead arranger, and Bank of America, N.A., as syndication agent (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed October 11, 2006 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 10.20 | Amended and Restated Acquisition-Related Incentive Plan (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *#† |
| 10.21 | Employment Agreement dated January 1, 2003 between the Registrant and David Bassin (filed as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.21.1 | Amendment to Employment Agreement dated January 1, 2003 between the Registrant and David Bassin (filed as Exhibit 10.21.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.21.2 | Amendment to Stock Option Agreement(s)/Restricted Stock Award Agreement(s) dated May 11, 2007 between the Registrant and David Bassin (filed as Exhibit 10.21.2 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.21.3 | Amendment to Stock Option Agreement(s)/Restricted Stock Award Agreement(s) dated August 6, 2007 between the Registrant and David Bassin (filed as Exhibit 10.21.3 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *† |
| 10.22 | Amended and Restated Credit Agreement dated as of October 5, 2005 among the Registrant, the Subsidiary Guarantors, the lenders party thereto, UBS Securities LLC, as bookmanager, as joint lead arranger, and as documentation agent, UBS Loan Finance LLC, as swingline lender, UBS AG, Stamford Branch, as issuing bank, as administrative agent for the Lenders and as collateral agent, Banc of America Securities LLC, as joint lead arranger, and Bank of America, N.A., as syndication agent (filed as Exhibit 10.22 to the Registrant's Current Report on Form 8-K filed July 12, 2007 with the Securities and Exchange Commission under the Securities Act of 1934, as amended). * |
| 10.23 | Purchase Agreement dated as of July 6, 2007 among Chandler Chicco Agency, LLC, (“CCA NY”), BioSector 2 LLC, the members of the Companies listed on Schedule I thereto, the Registrant and Chandler Chicco LLC (filed as Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *# |
| 10.24 | Purchase Agreement dated as of July 6, 2007 by and among, Innovative Health Strategies, Inc. (f/k/a IHS of SC, Inc.) (“IHS”), AWAC.MD, Inc. (“AWAC”), iProcert, LLC (“iProcert”, and together with IHS and AWAC, the “Companies”), the shareholders and members of the Companies listed on Schedule I thereto, the Registrant and AWAC LLC. (filed as Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the three months ended September 30, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *# |
| 10.25 | Second Amended and Restated Acquisition-Related Incentive Plan (filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended). *#† |
| 10.26 | Letter Agreement dated February 27, 2008 by and between Blue Ridge Investments, L.L.C. and inVentiv Health, Inc., as amended by letter amendment dated May 7, 2008 (filed as Exhibit 10.26 to the Registrant’s Quarterly Report on Form 10-Q for the three months ended March 31, 2008 filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended).* |
| 21.1 | Subsidiaries of inVentiv Health, Inc. |
| 23 | Consent of Deloitte & Touche LLP. |
| 31.1 | Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Exchange Act. |
| 31.2 | Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Exchange Act. |
| 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. |
| 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. |
* Incorporated by reference.
# Certain portions omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.
† Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | inVentiv Health, Inc. | |
| | | | |
| February 27, 2009 | By: | /s/ David S. Bassin | |
| | | David S. Bassin | |
| | | Chief Financial Officer and Secretary | |
| | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| | | |
| /s/ ERAN BROSHY | Executive Chairman of the Board | February 27, 2009 |
| Eran Broshy | Director | |
| | | |
| /s/ DAVID S BASSIN | Chief Financial Officer | February 27, 2009 |
| David S Bassin | (Principal Financial Officer and Principal Accounting Officer) | |
| | | |
| /s/ BLANE WALTER | Chief Executive Officer | February 27, 2009 |
| Blane Walter | (Principal Executive Officer and Director) | |
| | | |
/s/ TERRELL G. HERRING | President and COO | February 27, 2009 |
| Terrell G. Herring | (Director) | |
| | | |
/s/ MARK E. JENNINGS | Director | February 27, 2009 |
| Mark E.Jennings | | |
| | | |
/s/ PER G.H. LOFBERG | Director | February 27, 2009 |
| Per G.H. Lofberg | | |
| | | |
| /s/ A. CLAYTON PERFALL | Director | February 27, 2009 |
| A. Clayton Perfall | | |
| | | |
| /s/ DR. CRAIG SAXTON | Director | February 27, 2009 |
| Dr. Craig Saxton | | |
