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EX-31.1 - CEO CERTIFICATION SECTION 302 - INVENTIV HEALTH INCceocertificationsection302.htm
EX-31.2 - CFO CERTIFICATION SECTION 302 - INVENTIV HEALTH INCcfocertificationsection302.htm
EX-32.2 - CFO CERTIFICATION SECTION 1350 - INVENTIV HEALTH INCcfocertificationsection1350.htm
EX-32.1 - CEO CERTIFICATION SECTION 1350 - INVENTIV HEALTH INCceocertificationsection1350.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended June 30, 2010

or

[_]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the Transition Period From ___________ to ___________

Commission file number 0-30318

INVENTIV HEALTH, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
52-2181734
(State or other jurisdiction
 
(IRS Employer
of incorporation or organization)
 
Identification No.)

500 Atrium Drive
 
08873
Somerset, New Jersey
 
(zip code)
(Address of principal executive office)
   

(800) 416-0555
(Registrant's telephone number, including area code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ]  No [ ]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company”  in Rule 12b-2 of the Exchange Act. (Check one):

           Large accelerated filer [ ]                                Accelerated filer [X]
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 Exchange Act).  Yes [_] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of August 3, 2010, there were 33,938,248 outstanding shares of the registrant's common stock.



 
 

 

INVENTIV HEALTH, INC.
INDEX TO QUARTERLY REPORT ON
FORM 10-Q

   
 
PART I. FINANCIAL INFORMATION
   
     
ITEM 1. Financial Statements
   
   
and December 31, 2009 (unaudited)
 
 
     
   
ended June 30, 2010 and 2009 (unaudited)
 
 
     
   
ended June 30, 2010 and 2009 (unaudited)
 
 
     
 
 
     
   
Results of Operations
 
 
     
 
 
     
 
 
     
PART II. OTHER INFORMATION
   
     
 
 
     
 
 
     
 
 
     
SIGNATURES
 
 
     
EXHIBITS
   


 
 

 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements are only predictions and provide our current expectations or forecasts of future events and financial performance and may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, though the absence of these words does not necessarily mean that a statement is not forward-looking.

We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Forward-looking statements include all matters that are not historical facts and include statements concerning:
 
  • our business strategy, outlook, objectives, plans, intentions and goals;
  • our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund our operations and planned capital expenditures for the foreseeable future;
  • our belief that our growth and success will depend on our ability to continue to enhance the quality of our existing services, serve our clients across all phases of a product lifecycle, 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 that pharmaceutical companies will increasingly outsource their sales representatives;
  • our belief that our clients are looking for service providers with global capabilities;
  • our expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions;
  • our estimates regarding our future earnout obligations from completed 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; and
  • our expectations regarding the potential impact of pending litigation.
 
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;
  • our ability to accurately forecast insurance claims within our self-insured programs;
  • our ability to accurately forecast the performance of business units to which our potential earnout obligations relate and, therefore, to accurately estimate the amount of the earnout obligations we will incur;
  • the potential impact of pricing pressures on pharmaceutical manufacturers from future health care reform initiatives or from changes in the reimbursement policies of third party payers;
  • potential disruptions and switching costs related to vendors relationships;
  • 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;
  • consolidation in the pharmaceutical industry; and
  • changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing.

Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in Item 1A, Risk Factors, Part I, of our Form 10-K for the year ended December 31, 2009, and in Item 1A, Risk Factors, Part II, of this Quarterly Report on Form 10-Q.

Except to the extent required by applicable laws or rules, we do not undertake to update any forward-looking statements or to publicly announce revisions to any of the forward-looking statements, whether as a result of new information, future events or otherwise.





 
 

 

PART I. FINANCIAL INFORMATION
ITEM 1.                      Financial Statements
INVENTIV HEALTH, INC.
(in thousands, except share and per share amounts)
(unaudited)
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and equivalents
  $ 99,870     $ 132,818  
Restricted cash and marketable securities
    1,340       2,539  
Accounts receivable, net of allowances for doubtful accounts of $3,721 and $5,254 at
               
June 30, 2010 and December 31, 2009, respectively
    157,498       160,012  
Unbilled services
    98,805       76,502  
Prepaid expenses and other current assets
    12,271       12,676  
Current tax assets
    5,074       4,408  
Current deferred tax assets
    14,302       12,881  
Total current assets
    389,160       401,836  
                 
Property and equipment, net
    63,969       65,243  
Equity investments
    1,799       1,873  
Goodwill
    268,091       262,528  
Other intangibles, net
    213,459       218,283  
Non-current deferred tax assets
    52,038       58,920  
Deposits and other assets
    18,362       21,280  
Total assets
  $ 1,006,878     $ 1,029,963  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Current portion of capital lease obligations
  $ 9,019     $ 9,293  
Current portion of long-term debt
    3,122       3,455  
Accrued payroll, accounts payable and accrued expenses
    110,127       129,471  
Client advances and unearned revenue
    64,202       65,437  
Total current liabilities
    186,470       207,656  
                 
Capital lease obligations, net of current portion
    13,258       14,080  
Long-term debt
    297,057       318,450  
Non-current income tax liabilities
    3,622       5,758  
Other non-current liabilities
    54,636       54,766  
Total liabilities
    555,043       600,710  
                 
Commitments and Contingencies (Note 14)
               
Equity:
               
 inVentiv Health, Inc. stockholders’ equity:
               
   Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding at
               
    June 30, 2010 and December 31, 2009, respectively
    --       --  
   Common stock, $.001 par value, 50,000,000 shares authorized; 33,923,319 and 33,630,886
               
   shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    34       34  
  Additional paid-in-capital
    408,809       404,763  
  Accumulated other comprehensive loss
    (17,684 )     (16,203 )
  Accumulated earnings
    60,370       40,661  
              Total inVentiv Health, Inc. stockholders’ equity
    451,529       429,255  
Noncontrolling interest
    306       (2 )
              Total equity
    451,835       429,253  
              Total liabilities and equity
  $ 1,006,878     $ 1,029,963  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 
 

                                                                      
 

INVENTIV HEALTH, INC.
(in thousands, except per share amounts)
(unaudited)
   
For the Three-Months Ended
   
For the Six-Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
 
2009
 
Net revenues
  $ 246,916     $ 235,499     $ 476,527     $ 456,483  
Reimbursed out-of-pocket expenses
    37,535       33,542       77,285       70,210  
   Total revenues
    284,451       269,041       553,812       526,693  
                                 
Operating expenses:
                               
Cost of services
    153,322       148,397       295,837       292,883  
Reimbursable out-of-pocket expenses
    39,172       33,879       80,820       70,569  
Selling, general and administrative expenses
    69,882       61,917       133,283       119,071  
 Total operating expenses
    262,376       244,193       509,940       482,523  
                                 
Operating income
    22,075       24,848       43,872       44,170  
Interest expense
    (5,437 )     (5,773 )     (12,990 )     (11,547 )
Interest income
    20       50       64       115  
Income before income tax provision and (loss) income from equity investments
        16,658           19,125           30,946           32,738  
Income tax provision
    (6,716 )     (7,768 )     (10,573 )     (13,540 )
Income before (loss) income from equity investments
      9,942         11,357         20,373         19,198  
(Loss) income from equity investments
    (3 )     (11 )     (87 )     8  
Net income
    9,939       11,346       20,286       19,206  
   Less:  Net income attributable to the noncontrolling interest
    (381 )     (54 )     (577 )     (5 )
Net income attributable to inVentiv Health, Inc.
  $ 9,558     $ 11,292     $ 19,709     $ 19,201  
                                 
Earnings per share (see Note 7):
                               
Net income attributable to inVentiv Health, Inc.:
                               
Basic
  $ 0.28     $ 0.34     $ 0.58     $ 0.57  
Diluted
  $ 0.28     $ 0.34     $ 0.57     $ 0.57  
Weighted average common shares outstanding:
                               
Basic
    33,900       33,471       33,835       33,411  
Diluted
    34,435       33,657       34,361       33,567  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

                                                            
 
 

 

INVENTIV HEALTH, INC.
(in thousands)
(unaudited)
   
For the Six-Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
    Net income
  $ 20,286     $ 19,206  
  Adjustments to reconcile net income  to net cash  provided by operating activities:
               
Depreciation
    10,935       10,327  
Amortization
    6,324       6,267  
Tradename writeoff
    --       117  
Loss (income) from equity investments
    87       (8 )
Partial termination of derivative financial instrument
    1,741       --  
Deferred taxes
    5,461       5,510  
Gains on marketable securities
    (216 )     (1,682 )
Stock-based compensation expense
    4,651       5,070  
Tax benefit from stock option exercises and vesting of restricted shares
    2,042       907  
                 
  Changes in assets and liabilities, net of effects from discontinued operations:
               
Accounts receivable, net
    5,844       31,898  
Unbilled services
    (22,030 )     (20,154 )
Prepaid expenses and other current assets
    405       3,943  
Accrued payroll, accounts payable and accrued expenses
    15,707       (2,242 )
Net tax liabilities
    (5,521 )     (3,969 )
Client advances and unearned revenue
    (2,127 )     2,299  
Excess tax benefits from stock based compensation
    (330 )     1,033  
Other
    3,375       (734 )
Net cash provided by continuing operations
    46,634       57,788  
Net cash used in discontinued operations
    --       (613 )
Net cash provided by operating activities
    46,634       57,175  
                 
Cash flows from investing activities:
               
Restricted cash balances and marketable securities
    1,415       5,826  
Investment in cash value of life insurance policies
    (620 )     (2,722 )
Cash paid for acquisitions, net of cash acquired
    (3,957 )     (532 )
Acquisition earn-out payments
    (41,447 )     (38,264 )
Equity investments
    (13 )     30  
Purchases of property and equipment
    (5,771 )     (9,770 )
Proceeds from manufacturers rebates on leased vehicles
    --       453  
Net cash used in continuing operations
    (50,393 )     (44,979 )
Net cash provided by discontinued operations
    --       613  
Net cash used in investing activities
    (50,393 )     (44,366 )
                 
Cash flows from financing activities:
               
Repayments on long-term debt
    (21,750 )     (1,073 )
Borrowings (repayments) on line of credit
    24       (948 )
Repayments on capital lease obligations
    (4,769 )     (6,371 )
Cash paid for unwinding of an interest rate swap on debt
    (1,741 )     --  
Withholding shares for taxes
    (1,391 )     (523 )
Proceeds from exercise of stock options
    1,629       850  
Excess tax benefits from stock-based compensation
    330       (1,033 )
Distributions to noncontrolling interests in affiliated partnership
    (284 )     (398 )
Net cash used in financing activities
    (27,952 )     (9,496 )
                 
Effect of exchange rate changes
    (1,237 )     1,186  
                 
Net change in cash and equivalents
    (32,948 )     4,499  
Cash and equivalents, beginning of period
    132,818       90,463  
Cash and equivalents, end of period
  $ 99,870     $ 94,962  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 13,408     $ 11,271  
Cash paid for income taxes
  $ 8,641     $ 12,043  
Supplemental disclosures of non-cash activities:
               
Vehicles acquired through capital lease agreements
  $ 6,675     $ 4,988  
Stock issuance related to acquisitions
  $ --     $ 2,335  

The accompanying notes are an integral part of these unaudited condensed 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 its 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 and third party administrators.

 
The Company’s service offerings reflect the changing needs of its clients as their products move through the late-stage development and regulatory approval processes and into product launch.  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.

        On May 6, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with inVentiv Group Holdings, Inc. (formerly Papillon Holdings, Inc.) (“Parent”) and inVentiv Acquisition, Inc. (formerly Papillon Acquisition, Inc.) (“Merger Sub”), each of which is an affiliate of Thomas H. Lee Partners, L.P., providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of the Parent.  The closing of the Merger (the “Merger Closing”) took place on August 4, 2010.  See Subsequent Events – Note 20 for further details of the Merger.

Business Segments

Certain balances in segment reporting have been reclassified to conform to the current segment reporting structure.  In the first quarter of 2010, the Company realigned The Therapeutics Institute (“TTI”) from inVentiv Patient Outcomes to inVentiv Commercial Services.  This realignment is reflected in the Company’s condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009, the condensed consolidated income statements of the Company for the three and six months ended June 30, 2010 and 2009 and the condensed consolidated cash flows for the six months ended June 30, 2010 and 2009.  See Note 19, Segment Information, for further details.

The Company currently serves its clients primarily through four business segments, which correspond to its reporting segments for 2010:

·  
inVentiv Clinical, which provides professional resourcing and clinical research services to pharmaceutical, biotech and device companies.  Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing and strategic resource teams.  In addition, inVentiv Clinical provides its clinical research clients full service late-stage clinical development, Risk Evaluation and Mitigation Strategy (“REMS”) and outsourced functional services and CRO services in various areas, including clinical operations, medical affairs and biometrics/data management.  inVentiv Clinical consists of the Smith Hanley group of companies (“Smith Hanley”), inVentiv Clinical Solutions (“iCS”), and Paragon Rx (“Paragon”), which was acquired in December 2009;
 
·  
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 sales teams, sales support services, market research, commercial analytics, healthcare strategies, clinical educator teams, managed markets access, biotech/specialty managed markets, and integrated commercialization.  This segment includes Advance Insights and inVentiv Selling Solutions; and
 
·  
inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, medical cost containment and consulting solutions and patient relationship marketing.  This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), AWAC and Patient Marketing Group, LLC (“PMG”).
 
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.           Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the condensed consolidated balance sheets, condensed consolidated results of operations and condensed consolidated cash flows of the Company and its subsidiaries (the "condensed consolidated financial statements"). These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the SEC related to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted.  The Company believes that the disclosures made herein are adequate such that the information presented is not misleading. These condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary to fairly present the Company's condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009, the condensed consolidated statements of operations of the Company for the three and six months ended June 30, 2010 and 2009 and the condensed consolidated statements of cash flows for the six-months ended June 30, 2010 and 2009.  Operating results for the three and six months ended June 30, 2010 are not indicative of the results that may be expected for the year ending December 31, 2010.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on February 24, 2010.

The preparation of financial statements requires the use of management estimates and assumptions, including but not limited to, determining the estimated fair value of goodwill and intangible assets, matching intangible amortization to underlying benefits (e.g. sales and cash inflows) and evaluating the need for valuation allowances for deferred tax assets.  Such estimates are comprised of numerous assumptions regarding the Company’s future revenues, cash flows and operational results.  Management believes that its estimates are reasonable and appropriate based upon current facts and circumstances.  Actual results may differ from estimated results.  Management regularly reviews the information related to these estimates and adjusts the carrying amounts of the applicable assets prospectively, if and when actual results differ materially from previous estimates.

Our operations consist primarily of four business segments: inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes   The condensed consolidated financial statements include the accounts of inVentiv Health, Inc., its wholly owned subsidiaries, its 60% owned subsidiary, Taylor Search Partners (“TSP”), which was acquired in conjunction with the acquisition of inVentiv Communications, Inc., and its 88.8% owned subsidiary, DWA Health ("DWA"), based in Italy.  In December 2007, the Company increased its investment interest from 44% to 85% in Liedler, a service provider of communication and marketing tools for technical, medical and pharmaceutical products, located in Germany.   In December 2009, the Company increased its investment interest from 85% to 100%.  The Company accounted for Liedler as an equity investment until the 2007 acquisition date, and then included its results in the consolidated results of the Company thereafter.  Intercompany transactions have been eliminated in consolidation.

As a result of the acquisition of inVentiv Communications, Inc., the Company has a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden, which is accounted for by using the equity method of accounting.

3.           Recently Issued Accounting Standards:

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-09, which provided an update to Accounting Standards Codification (“ASC”) 855.  ASU 2010-09 removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated.  The Company adopted this ASU as of March 31, 2010.

In January 2010, the FASB issued ASU 2010-06, which provided an update to ASC 820.  ASU 2010-06 requires new disclosures of transfers into and out of Level 1 and Level 2 of the fair value hierarchy as well as the activity of purchases, sales, issuances and settlements of Level 3 measurements.  The ASU 2010-06 update did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
 
 
In October 2009, the FASB issued ASU 2009-13, which provided an update to ASC 605.  ASU 2009-13 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting in multiple-deliverable arrangements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact that this update will have on its Condensed Consolidated Financial Statements.


4.           Acquisitions:

Acquisitions are accounted for using purchase accounting, including the guidance of ASC 805 for all acquisitions prior to 2009 and the updated guidance the FASB issued relating to ASC 805 for acquisitions after January 1, 2009.  The financial results of the acquired businesses are included in the Company’s financial statements from their acquisition dates.  Earnout payments from acquisitions prior to 2009 are generally accrued at the end of an earnout period in conjunction with the preparation of the Company’s financial statements when the acquired company’s results are reviewed, as more fully described below.  The present value of earnout payments from acquisitions after January 1, 2009 is estimated and recorded as of the acquisition date, as required by the updated guidance of ASC 805. The terms of the acquisition agreements generally include multiple earnout periods or a multi-year earnout period.  Pro forma financial information was not required to be disclosed for the 2009 and 2010 acquisitions noted below as they were not material to the consolidated operations of the Company prior to the dates they were acquired and began to be consolidated into the Company.

The following acquisitions were consummated during 2010 and 2009:

iCS Chicago – In February 2010, the Company completed the acquisition of the net assets of Essential Group, Inc.  (“Essential” or “iCS Chicago”) for approximately $3.1 million and $1.0 million of assumed liabilities, including post-closing adjustments yet to be finalized. Essential is a growing clinical research organization that has been folded under the inVentiv Clinical brand as iCS Chicago.  The Company acquired iCS Chicago to expand the depth of its clinical operations offering with associates who bring trial monitoring and project management experience in a variety of therapeutic areas.

Paragon In December 2009, the Company completed the acquisition of the net assets of Paragon for approximately $5.9 million in upfront cash and stock consideration.  As required by the updated guidance of ASC 805, effective January 1, 2009, the Company recorded an additional $4.1 million in earnout consideration based on Paragon’s estimated performance measurements during 2010 through 2012.  The Company remeasured the fair value of the liability as of June 30, 2010 and no adjustment was made to the liability. The $4.1 million is included on the June 30, 2010 and December 31, 2009 condensed consolidated balance sheets as part of other non-current liabilities.  Paragon is headquartered in Delaware and is a leading provider in designing and implementing REMS.  The Company acquired Paragon to strengthen its REMS capabilities, to complement its broad array of risk communications and REMS implementation services and to expand the breadth of inVentiv Clinical’s scope of safety science offerings.


The following table summarizes the preliminary purchase price allocations in connection with the completed 2009 and 2010 acquisitions:

 
(in thousands)
 
Paragon
   
iCS Chicago
   
2009 and 2010 Total
 
Fair Value of the Net Assets (Liabilities) Acquired
  $ 277     $ (950 )   $ (673 )
Customer Relationships
    3,100       1,500       4,600  
Technology
    1,000       --       1,000  
Tradename subject to amortization
    250       --       250  
Goodwill, excluding contingent consideration (tax deductible)
    1,248       2,568       3,816  
Total purchase price, before contingent consideration
    5,875       3,118       8,993  
Contingent consideration estimate at acquisition date
    4,100       --       4,100  
Total purchase price, including estimate of contingent consideration
  $ 9,975     $ 3,118     $ 13,093  

The $4.1 million of contingent consideration, as described above, is based on Paragon’s estimated performance measurements during 2010 through 2012 and represents the present value of the expected payments during these respective periods, using a discounted cash flow analysis.  As described above, the Company remeasured the fair value of the liability as of June 30, 2010 and no adjustment was required to be made to the liability.

All earnout obligations under acquisitions consummated prior to January 1, 2009 were completed as of the date of this report.

5.           Restricted Cash:

As of June 30, 2010 and December 31, 2009, there were approximately $1.3 million and $1.4 million, respectively, of restricted cash, of which $0.9 million and $1.0 million, respectively, relate to security deposits for the London office in the inVentiv Communications segment and $0.4 million for both periods relate to letters of credit for the New York, Washington D.C and California offices, which are also reflected in the inVentiv Communications segment.  The beneficiaries have not drawn on the $0.4 million letters of credit.

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 as of June 30, 2010 and December 31, 2009.

6.           Employee Stock Compensation:
 
The Company follows ASC 718, which provides guidance in 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.

Stock-based compensation expense was $2.5 million, of which $0.4 million was recorded in cost of services and $2.1 million recorded as Selling, General and Administrative expenses (“SG&A”) for the three months ended June 30, 2010 and $2.5 million, of which $0.5 million was recorded in cost of services and $2.0 million recorded as SG&A for the three months ended June 30, 2009. For the six-months ended June 30, 2010, stock-based compensation expense was $4.7 million, of which $0.5 million was recorded in cost of services and $4.2 million recorded as SG&A; for the six-months ended June 30, 2009, stock-based compensation expense was $5.1 million, of which $0.7 million was recorded in cost of services and $4.4 million was recorded as SG&A.

Assumptions

The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Expected life of option
 
5.5-6 yrs
   
5.5-6 yrs
   
6 yrs
   
6 yrs
 
Risk-free interest rate
    -- (1)     -- (1)     2.65 %     1.36 %
Expected volatility
    50 %     50 %     52 %     47 %
Expected dividend yield
    0.00 %     0.00 %     0.00 %     0.00 %
(1) In the second quarter of 2010 and 2009, no options were granted by the Company, hence, the interest rate was not applicable.

The Company analyzed historical trends in expected volatility and expected life of stock options on a quarterly basis; during 2010 and 2009 the volatility ranged between 47%-52%.  As of January 1, 2008, the Company applied updated guidance from ASC 718 for determining the expected term and the range of the expected term remained unchanged at 5.5 to 6 years as previously reported.  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 ASC 718, 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 for the six months ended June 30, 2010 and 2009 was 5.30%.

Stock Incentive Plan and Award Activity

The Company’s 2006 Stock Incentive Plan (Amended on April 27, 2009) (“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").  The Company discontinued making grants under the 1999 Stock Incentive Plan 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 4.2 million shares, which includes 4.1 million additional shares that were approved by our shareholders on June 17, 2009. As of June 30, 2010, the aggregate number of unissued shares of the Company’s common stock that may be issued under the Stock Plan is 3.7 million shares.

The exercise price of options granted under the Stock Plan may not be less than 100% of the fair market value per share of the Company’s common stock on the date of the option grant. The vesting and other provisions of the options are determined by the Compensation Committee of the Company’s Board of Directors.


The following table summarizes activity under the Company’s Equity Incentive Plans for the six months ended June 30, 2010 (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, 2010
    1,672     $ 20.55       6.39     $ 2,926  
Granted and assumed
    279     $ 16.92                  
Exercised
    (99 )   $ 16.30                  
Forfeited/expired/cancelled
    (2 )   $ 27.61                  
Outstanding at June 30, 2010
    1,850     $ 20.23       6.18     $ 13,061  
                                 
Vested and expected to vest at June 30, 2010
    1,799     $ 20.34       6.15     $ 12,558  
                                 
Options exercisable at June 30, 2010
    1,124     $ 21.57       5.36     $ 6,538  
 
There were no stock options granted during the three-months ended June 30, 2010 or June 30, 2009.   The weighted-average grant-date fair value of stock options granted during the six-months ended June 30, 2010 and 2009 was $8.74 and $4.96 per share, respectively.   The total intrinsic value of options exercised during the three-months ended June 30, 2010 and 2009 was $0.5 million and $0.8 million, respectively, and was $1.6 million and $0.8 million during the six-months ended June 30, 2010 and 2009, respectively.  As of June 30, 2010 and December 31, 2009, there was approximately $4.2 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 2.7 years and 2.5 years, respectively.
 
 
The actual tax benefit realized for the tax deductions from option exercises related to share-based payment arrangements totaled $0.1 million and $0.2 million for the three months ended June 30, 2010 and 2009, respectively, and totaled $0.2 million for the six-months ended June 30, 2010 and 2009.
 

 
 

 


 
Options outstanding and exercisable have exercise price ranges and weighted average remaining contractual lives of:
 

 
Outstanding Options
 
Exercisable Options
 
 
Exercise Price Range
 
Numbers of Options
 
Weighted Average Exercise Price
Weighted Average
Remaining Life
(years)
 
Number of Options
 
Weighted Average
Exercise Price
$1.66
To
$10.30
100,425
$6.75
3.14
100,425
$6.75
$10.82
To
$10.82
343,488
$10.82
8.55
85,876
$10.82
$10.86
To
$15.48
18,934
$13.93
4.01
 18,934
$13.93
$15.96
To
$15.96
200,000
$15.96
4.23
200,000
$15.96
$16.13
To
$16.89
86,114
$16.65
5.03
55,000
$16.89
$16.92
To
$16.92
279,310
$16.92
6.52
--
$--
$17.25
To
$26.76
249,319
$22.92
4.86
249,319
$22.92
$26.77
To
$28.66
249,788
$27.30
6.52
214,894
$27.08
$30.64
To
$32.55
188,489
$32.15
7.14
  109,561
$32.00
$35.01
To
$37.21
133,713
$35.96
6.05
89,713
$35.72
     
1,849,580
   
1,123,722
 

A summary of the status and changes of the Company’s nonvested shares related to its Equity Incentive Plans as of and during the six months ended June 30, 2010 is presented below:

 
(in thousands, except per share amounts)
 
Shares
   
Weighted Average Grant-Date Fair Value
 
Nonvested at January 1, 2010
    1,008     $ 19.00  
Granted
    347     $ 16.88  
Released
    (276 )   $ 21.80  
Forfeited
    (43 )   $ 22.38  
Nonvested at June 30, 2010
    1,036     $ 17.41  
 
As of June 30, 2010 and December 31, 2009, there was approximately $12.9 million and $11.8 million, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan; that cost is expected to be recognized over a weighted average of 2.7 years and 2.5 years, respectively. The total fair value of shares vested during the three and six months ended June 30, 2010 was $0.6 million and $4.7 million, respectively.  During the three and six-months ended June 30, 2009 the amounts were $0.3 million and $1.8 million, respectively.
 
7.           Earnings Per Share (“EPS”):

Basic earnings per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock.  Potentially dilutive securities are excluded from the computation of diluted net income per share when their inclusion would be antidilutive.

A summary of the computation of basic and diluted earnings per share is as follows:


   
Three-Months Ended June 30,
   
Six-Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands, except per share data)
 
Basic EPS Computation
                       
Net income attributable to inVentiv Health, Inc.
  $ 9,558     $ 11,292     $ 19,709     $ 19,201  
Weighted average number of common shares outstanding
    33,900       33,471       33,835       33,411  
Basic EPS attributable to inVentiv Health, Inc.
  $ 0.28     $ 0.34     $ 0.58     $ 0.57  
                                 
Diluted EPS Computation
                               
Net income attributable to inVentiv Health, Inc.
  $ 9,558     $ 11,292     $ 19,709     $ 19,201  
                                 
Weighted average number of common shares outstanding
    33,900       33,471       33,835       33,411  
Stock options (1)
    239       56       193       51  
Restricted stock awards (2)
    296       130       333       105  
Total diluted common shares outstanding
    34,435       33,657       34,361       33,567  
                                 
Diluted EPS attributable to inVentiv Health, Inc.
  $ 0.28     $ 0.34     $ 0.57     $ 0.57  
 
 
(1)   For the three-months and six-months ended June 30, 2010, 723,393 and 1,044,486 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding.  Similarly, for the three and six months ended June 30, 2009, 1,760,515 shares and 1,730,749 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding. 
(2) For the three-months and six-months ended June 30, 2010, 47,501 and 53,109 shares, respectively, were excluded from the calculation of diluted EPS due to the fact that the shares are considered anti-dilutive because the number of potential buyback shares is greater than the number of weighted shares outstanding.  Similarly, for the three and six months ended June 30, 2009, 435,768 and 407,625 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.
 
 
8.           Significant Clients:

               During the six-months ended June 30, 2010, the Company had one client that accounted for approximately 11% of the Company’s total revenues across the inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments. During the six-months ended June 30, 2009, the Company had no clients that accounted for more than 10%, individually, of the Company's total revenues across the inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments.

9.           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, 2009
$15,818
$103,607
$47,334
$48,767
--
$215,526
Goodwill acquired during the year
1,248
 
--
--
--
--
1,248
Goodwill through contingent consideration(1)
4,100
23,088
--
18,506
--
45,694
Goodwill allocation (2)
--
--
60
--
--
60
Balance as of December 31, 2009
 
$21,166
 
$126,695
 
$47,394
 
$67,273
--
 
$262,528
Goodwill acquired during the year
 
2,568
 
 
756
 
--
 
--
 
--
 
3,324
Goodwill through contingent consideration(3)
 
--
 
2,298
 
--
 
(59)
 
--
 
2,239
Balance as of June 30, 2010
$23,734
$129,749
$47,394
$67,214
--
$268,091

(1)  
For acquisitions before January 1, 2009, the contingent consideration represents adjustments relating to the finalization of the earnouts for the respective periods.  For Paragon, the contingent consideration represents the estimated earnout at the acquisition date.
(2)  
The amount relates to the allocation of the goodwill at year-end to identifiable intangible assets arising from the PLS acquisition.  Identifiable intangible assets were allocated at December 31, 2008, but were revised accordingly based on finalization of the valuation, in accordance with ASC 805 guidance.
(3)  
The contingent consideration represents adjustments relating to the finalization of the earnouts for the respective periods for acquisitions before January 1, 2009.

Other intangible assets consist of the following:

   
June 30, 2010
   
December 31, 2009
 
(in thousands)
       
Accumulated
               
Accumulated
       
   
Gross
   
Amortization
   
Net
   
Gross
   
Amortization
   
Net
 
Customer relationships
  $ 118,434     $ (43,358 )   $ 75,076     $ 116,934     $ (37,917 )   $ 79,017  
Technology
    15,168       (5,716 )     9,452       15,168       (5,277 )     9,891  
Noncompete agreement
    1,506       (1,235 )     271       1,506       (1,127 )     379  
Tradenames subject to amortization
    2,409       (1,361 )     1,048       2,409       (1,163 )     1,246  
Other
    1,232       (1,110 )     122       1,232       (972 )     260  
  Total definite-life intangibles
    138,749       (52,780 )     85,969       137,249       (46,456 )     90,793  
Tradenames not subject to amortization (1)
    127,490       --       127,490       127,490       --       127,490  
  Total other intangibles (2)
  $ 266,239     $ (52,780 )   $ 213,459     $ 264,739     $ (46,456 )   $ 218,283  

(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.
(2)  
The increase in total gross other intangibles are related to the identifiable intangible assets for the iCS Chicago acquisition.

The Company has the following identifiable intangible assets:

Intangible asset
 
Amount
(in thousands)
   
Weighted average amortization period
 
Tradename
  $ 129,899      (1)
Customer relationships
    118,434    
10.7 years
 
Technology
    15,168    
13.8 years
 
Noncompete agreement
    1,506    
4.5 years
 
Other
    1,232    
4.5 years
 
Total
  $ 266,239      

(1)  
$2.4 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 June 30, 2010, is expected to be $6.3 million for the remainder of 2010, $12.3 million in 2011, $12.1 million in 2012, $10.8 million in 2013, $10.4 million in 2014, $9.5 million in 2015 and $24.3 million thereafter.

The balances recorded on the Company’s Condensed Consolidated Balance Sheet for goodwill and other indefinite-life intangibles, such as tradenames, are assessed annually for potential impairment as of June 30, pursuant to the guidelines of ASC 350 and ASC 360.  In accordance with ASC 350, the Company uses the two-step process for periods in which impairment testing is performed.  The first step compares the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the second step of the test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. To calculate the implied fair value of goodwill in this second step, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to the assets and liabilities of the reporting unit represents the implied fair value of goodwill. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized for that difference.

Goodwill and other indefinite-life intangibles were assessed for potential impairment on June 30, 2010, as noted above, for the Company’s annual impairment testing.   The Company conducted its assessment and concluded that the foregoing balances on the Company’s Condensed Consolidated Balance Sheet were not impaired as of June 30, 2010.

During the first quarter of 2009, the Company strategically changed its Strategy & Analytics’ name to Advance Insights, thereby discontinuing the usage of Health Products Research, Strategyx, Ventiv Access Services and Creative Healthcare Solutions names.  The Company accordingly recorded a $0.1 million tradename writeoff as a result of discontinuing the Strategyx name, which is included as part of selling, general and administrative expenses on the condensed consolidated income statement.

10.           Fair Value Measurement
 
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
Fair value guidance 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 June 30, 2010 and December 31, 2009 and the basis for that measurement:

As of June 30, 2010:
(in thousands)
 
Total Fair Value Measurement
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
LIABILITIES
                       
Derivative Liabilities
  $ 25,023       --       --     25,023  
Acquisition-related contingent consideration
    4,100 (1)     --       --       4,100  
TOTAL LIABILITIES
  $ 29,123       --       --     $ 29,123  


As of December 31, 2009:
(in thousands)
 
Total Fair Value Measurement
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
ASSETS
                       
 Marketable Securities
  $ 1,014     $ --     $ 1,014     $ --  
 Deferred Compensation Plan Assets
    10,413       --       10,413       --  
TOTAL ASSETS
  $ 11,427     $ --     $ 11,427     $ --  
                                 
LIABILITIES
                               
Deferred Compensation Plan Liabilities
  $ 9,393     $ --     $ 9,393     $ --  
 Derivative Liabilities
    24,572       --       --       24,572  
Acquisition–related contingent consideration
    4,100 (1)     --       --       4,100  
TOTAL LIABILITIES
  $ 38,065     $ --     $ 9,393     $ 28,672  

(1)  
 See Note 4 for further details of the acquisition–related contingent consideration.

The Company recorded its valuation of its five-year interest rate derivative as of June 30, 2010 and December 31, 2009, resulting in a credit value adjustment of $0.9 million and $1.8 million, respectively, to the derivative liability, with a corresponding offset to Other Comprehensive Income as a result of cash flow hedge accounting (see Note 13).  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, classifying this as a Level 3 input under the definition described above.  The significant inputs in this valuation included credit market spread, estimated exposure and company and counterparty default risk.  There were no transfers into or out of Levels 1 or 2 during the six months ended June 30, 2010.

The following is a rollforward of the Level 3 assets and liabilities from January 1, 2009 through June 30, 2010:

   
Fair Value Measurements
 
 
 
 
(in thousands)
 
Using Significant Unobservable Inputs (Level 3)
 
ASSETS
 
Marketable Securities
 
Balance at January 1, 2009
  $ 9,999  
    Included in earnings (or changes in net assets)
    415  
    Included in other comprehensive income
    --  
    Purchases, issuances and settlements
    (10,414 )
    Transfers in and/or out of Level 3
    --  
Balance at January 1, 2010
  $ --  
    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
    --  
Balance at June 30, 2010
  $ --  
         
LIABILITIES
 
Derivative/Acquisition-related Contingent Consideration
 
Balance at January 1, 2009
  $ 30,783  
    Included in earnings (or changes in net assets)
    --  
    Included in other comprehensive income
    (3,828 )
    Deferred tax impact of other comprehensive income
    (2,383 )
    Acquisition–related contingent consideration (1)
    4,100  
    Transfers in and/or out of Level 3
    --  
Balance at January 1, 2010
  $ 28,672  
    Included in earnings (or changes in net assets)
    --  
    Included in other comprehensive income
    187  
    Deferred tax impact of other comprehensive income
    264  
    Acquisition–related contingent consideration (1)
    --  
    Transfers in and/or out of Level 3
    --  
Balance at June 30, 2010
  $ 29,123  
(1) See Note 4 for further details of the acquisition–related contingent consideration

11.           Debt:
 
The Company is party to 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, 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 July 6, 2014, with scheduled quarterly amortization of 1% per year until the final year (July 2013 – July 2014) of the Amended and Restated Credit Agreement, during which 94% of the term loan is to be repaid. The revolving loans will mature on July 6, 2013. 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 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.
 
In March 2010, the Company paid down approximately $21 million of its term loan, including a $20 million prepayment, a portion of which was required as part of the Excess Cash Flow requirement described above.  In conjunction with the prepayment of debt, the Company terminated approximately $20 million notional of its swap arrangement as described in Note 13.
 
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 Company has certain restrictions under this Credit Agreement to pay dividends.  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, 3.5 to 1.0 (the permitted leverage ratio was 4.0 to 1.0 through December 31, 2009; the Company’s leverage ratio was 2.3 to 1.0 and 2.5 to 1.0 as of June 30, 2010 and December 31, 2009, respectively).
 
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 June 30, 2010 and December 31, 2009 was 0.54% and 0.25%, respectively.  As disclosed in Note 13, the Company has a derivative financial instrument, currently with a notional amount of approximately $300 million, to hedge against the current term loan facility.
 
The Company accounts for amendments to its revolving credit facility and term loan under the provisions of ASC 470. In amending its revolving credit facility and term loan, 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 ASC 470.  In connection with an amendment of our existing $164 million term loan, under the terms of ASC 470, 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 was approximately $3.1 million and $3.4 million and are included in Deposits and Other Assets on the condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009, respectively.

See Note 20 for a description of the subsequent impact of the Merger on the Company’s existing indebtedness at June 30, 2010.

12.        Capital Lease Obligations:

During 2000, the Company entered into a master lease agreement to provide a fleet of automobiles for sales representatives of its inVentiv Commercial Services operating segment. Subsequent to 2000, the Company entered into other lease agreements with multiple vendors. Based on the terms of the agreements, management concluded that the leases were capital leases based on the criteria established by ASC 840. The Company capitalized leased vehicles and recorded the related lease obligations totaling approximately $6.7 million and $5.4 million (including rebates of $0.4 million) during the six-months ended June 30, 2010 and 2009, respectively.  The Company also incurred net disposals of $3.4 million and $6.4 million during the six-months ended June 30, 2010 and 2009, respectively.

13.           Derivative Financial Instrument:
 
ASC 815, 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.  The Company records the fair market value of its derivatives as other assets and other liabilities within the Company’s condensed consolidated balance sheet.  Derivatives that are not part of hedge relationships are recorded at fair market value on the Company’s Condensed Consolidated Balance Sheet with the changes in fair value recorded to interest expense on its Condensed Consolidated Income Statement.  For hedge relationships designated as cash flow hedges under ASC 815, 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 Condensed Consolidated Income Statement.
 
The Company enters into interest rate swaps to manage interest rate risk associated with variable rate debt.

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 that increased to $325 million effective December 31, 2008 (concurrently with the expiration of the Company’s original 2005 three-year interest rate swap arrangement) to hedge the total outstanding debt notional amount.  This hedge relationship was designated as a cash flow hedge.  At hedge inception, the Company employed the dollar offset method by performing a sensitivity analysis to assess effectiveness and utilized the hypothetical derivative method to measure ineffectiveness.  The hypothetical derivative contains the same terms and conditions as the debt agreement.  The fair value of the derivative, net of credit value adjustment, was approximately $25.0 million and $24.6 million as of June 30, 2010 and December 31, 2009, respectively, and was recorded in other non-current liabilities.  As a result of the hypothetical derivative method, there was no ineffectiveness for the period ended June 30, 2010, and accordingly, $0.4 million ($0.2 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 Condensed Consolidated Balance Sheet.  This change in Other Comprehensive Income includes the $0.9 million and $1.8 million credit value adjustment for June 30, 2010 and December 31, 2009, respectively, as discussed in Note 10.  The total amount of loss reclassified from accumulated other comprehensive income into interest expense for the three months and six months ended June 30, 2010 was approximately $3.5 million and $9.0 million, respectively.

As described in Note 11, the Company terminated approximately $20 million notional of its swap arrangement in conjunction with the prepayment of debt in addition to the $0.8 million amortization relating to the first quarter 2010 principal loan payment.  The Company de-designated $20 million notional amount of the cash flow hedge and reclassified $1.7 million from accumulated other comprehensive income into interest expense during the first quarter of 2010 in connection with the termination of this portion of the hedge.

Based on current assumptions regarding the interest rate environment and other market conditions at June 30, 2010, 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 $12.7 million.

See Note 20 for a description of the subsequent impact of the Merger on the Company’s existing swap arrangement.
 
14.           Commitments and Contingencies:

Shareholders Litigation
 
On May 7, 2010, a putative stockholder class action, captioned Palkon v. R. Blane Walter et al, Case No. SOM-C-12037-10, was filed in the Chancery Division of New Jersey Superior Court for Somerset County against the Company, its directors, certain of its officers, and Thomas H. Lee Partners., L.P. (“THL”).  An amended complaint was filed with the court on June 7, 2010, which was joined by the plaintiff in the Beard action referenced below. As amended, the complaint alleges that the Company’s preliminary proxy statement omitted material information necessary to enable stockholders to cast an informed vote with regard to the proposed merger transaction and that the defendant directors and officers breached their fiduciary duties of loyalty, good faith and care by, among other things, failing to maximize stockholder value, and that THL aided and abetted the alleged breaches of fiduciary duties. Among other remedies, the complaint seeks a declaration that the defendant directors and officers breached their fiduciary duties and an injunction preventing consummation of the merger.  On July 9, 2010, the court stayed this action pending the outcome of the Delaware actions, discussed below.
 
On May 12, 2010, a putative stockholder class action, captioned Steamfitters Local Union 449 v. R. Blane Walter et al, Case No. 5492, was filed in the Delaware Court of Chancery against the Company, its directors, certain of its officers, THL, Parent and Merger Sub. An amended complaint was filed with the court on June 7, 2010. The complaint, as amended, alleges that the defendant directors engaged in self-dealing and breached their fiduciary duties of loyalty, fairness, good faith and care by, among other things, allegedly failing to disclose in the Company’s preliminary proxy statement material information to enable the stockholders to render an informed decision with regard to voting for or against the proposed merger transaction, failing to secure adequate merger consideration and to consider a strategic alternative, and that THL aided and abetted the alleged breaches of duty. Among other remedies, the complaint seeks a declaration that the defendant directors breached their fiduciary duties and an injunction preventing the defendants from placing their own interests ahead of those of the Company and its shareholders, or initiating any defensive measures that would inhibit the defendants’ ability to maximize value for the Company stockholders. The complaint also seeks compensatory damages.
 
On May 13, 2010, a putative stockholder class action, captioned Beard v. inVentiv Health, Inc. et al, Case No. SOM-C-12039-10, was filed in the Chancery Division of New Jersey Superior Court for Somerset County against the Company, its directors, certain of its officers and THL. The court has consolidated this action with the Palkon case referenced above and, on July 9, 2010, the court stayed this action pending the outcome of the Delaware actions..
 
On May 15, 2010, a putative stockholder class action, captioned Carter v. R. Blane Walter et al, Case No. SOM-C-12041-10, was filed in the Chancery Division of New Jersey Superior Court for Somerset County against the Company, its directors, certain of its officers, Parent, Merger Sub and THL. The complaint alleges that the defendant directors and officers engaged in self-dealing and breached their fiduciary duties of loyalty, fairness, good faith and care by, among other things, not taking adequate measures to protect the interests of the Company’s stockholders and by embarking on a process that avoids competitive bidding and provides THL with an unfair advantage by excluding alternative proposals, and that THL aided and abetted the alleged breaches of fiduciary duties. Among other remedies, the complaint seeks a declaration that the defendant directors and officers breached their fiduciary duties and an injunction preventing the defendants from initiating any defensive measures that would inhibit the defendants’ ability to maximize value for the Company stockholders. The complaint also seeks compensatory damages.  The court has consolidated this action with the Palkon case referenced above and, on July 9, 2010, the court stayed this action pending the outcome of the Delaware actions.
 
On May 25, 2010, a putative stockholder class action, captioned Ramage v. Eran Broshy et al, Case No. SOM-C-12044-10 was filed in the Chancery Division of New Jersey Superior Court for Somerset County against the Company, its directors, certain of its officers, Parent and Merger Sub. The complaint alleges that the defendant directors and officers engaged in self-dealing and breached their fiduciary duties of loyalty and care by failing to engage in an honest and fair sale process and maximize stockholder value, and that THL (which is not named as a party to the action) aided and abetted the alleged breaches of duty. Among other remedies, the complaint seeks an injunction preventing consummation of the merger or, in the event it is consummated, an order rescinding the merger or the award of rescissory damages, and an order directing the defendants to account for all damages caused by them and all profits and any special benefits obtained as a result of the alleged breach of fiduciary duties. The plaintiff voluntarily dismissed this action and, on June 7, 2010, the plaintiff filed in the Delaware Court of Chancery an action under the caption Ramage v. Eran Broshy et al, Case No. 5547-CC, containing allegations similar to those contained in the New Jersey Ramage action but also alleging that the defendant directors and officers breached their fiduciary duty by failing to disclose information material to the Company’s stockholders to make an informed decision on whether to vote in favor of the proposed transaction. On June 8, 2010, the Steamfitters case and the Delaware Ramage case were consolidated by the Delaware Court of Chancery.
 
The Company, its board of directors, and THL believe that the above lawsuits are without merit and intend to defend them vigorously.
 
Other Matters

The Company is also 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.   In the opinion of management, taking into account the advice of legal counsel, no matters outstanding as of June 30, 2010 arising out of the conduct of the Company’s business are likely to have a material adverse effect on inVentiv.


15.           Deferred Compensation:

The inVentiv Health, Inc. Deferred Compensation Plan (the "NQDC Plan") provides eligible management and other highly compensated employees with the opportunity to defer, on a pre-tax basis, their salary, bonus, and other specified cash compensation and to receive the deferred amounts, together with a deemed investment return (positive or negative), either at a pre-determined time in the future or upon termination of employment with the Company or an affiliated employer participating in the NQDC Plan.  The compensation deferrals were initiated in 2005.  The deferred compensation liability of approximately $9.1 million and $9.4 million were included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009.  The NQDC Plan does not provide for the payment of above-market interest to participants.

To assist in the funding of the NQDC Plan obligation, the Company participates in a corporate-owned life insurance program in a rabbi trust whereby it purchases life insurance policies covering the lives of certain employees, with the Company named as beneficiary.  Rabbi trusts are grantor trusts generally set up to fund compensation for a select group of management or highly paid executives.  The cash value of the life insurance policy at June 30, 2010 and December 31, 2009 was approximately $9.7 million and $9.1 million, respectively, and is currently classified in Deposits and Other Assets on the Company’s Condensed Consolidated Balance Sheets. In addition, approximately $0.3 million and $1.3 million as of June 30, 2010 and December 31, 2009, respectively, were invested in mutual funds and classified in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

16.           Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740.  Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities.  Deferred tax assets are also recognized for tax net operating loss carry forwards.  These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to be reversed or utilized.  Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
 
        Income tax provision includes U.S. federal, state, local and foreign income taxes and is based on pre-tax income or loss.  The interim period provision for income taxes is based upon the Company’s estimate of its annual effective income tax rate.  In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes and the ability of the Company to use tax credits and net operating loss carry forwards.
 
        The Company assesses uncertain tax positions in accordance with income tax accounting standards.  Under this method, income tax benefits should be recognized when, based on the technical merits of a tax position, the Company believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed.  If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.
 
The effective tax rate for the six-month period ended June 30, 2010 was 34.9%. The rate includes a tax benefit of $3.0 million due to the expiration of unrecognized tax positions which were recognized in accordance with ASC 805.  The effective tax rate for the six-month period ended June 30, 2009 was 41.3%.  The rate included a benefit due to the utilization of state net operating losses of $0.5 million.  The Company’s current effective tax rate is based on current projections for earnings in the tax jurisdictions in which inVentiv does business and is subject to taxation.  The Company’s effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions.
 
As of June 30, 2010 and December 31, 2009 the Company had unrecognized tax benefits of $2.8 million and $5.1 million, respectively.  Included in these balances were positions totaling $2.3 million at June 30, 2010 and $4.5 million at December 31, 2009 that, if recognized, would affect the effective tax rate.
 
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense.  The total amount of accrued interest and penalties recorded as of June 30, 2010 and December 31, 2009 were $1.0 million and $2.1 million, respectively.
 
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  The Company is no longer subject to U.S. federal income tax examinations for years before 2006 and generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2005.
 
     Management has concluded that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $0.1 million within the next 12 months.  The decrease is primarily related to federal and state taxes that may be settled or have expiring statutes of limitations.

17.           Equity

The following table describes the 2010 activity in the Company’s Total Equity accounts for the six-months ended June 30, 2010:

   
inVentiv Health, Inc Shareholders
             
(in thousands)
 
 
 
 
Common Stock
   
 
 
Additional Paid-In
Capital
   
 
 
 
Accumulated earnings
   
 
 
Compre-hensive
Income
   
Accumulated Other Comprehensive Loss (1)
   
 
 
Noncontrolling Interest
   
 
 
 
 
Total
 
Balance at December 31, 2009
  $ 34     $ 404,763     $ 40,661           $ (16,203 )   $ (2 )   $ 429,253  
Net income
                    19,709     $ 19,709               577       20,286  
Net change in effective portion of derivative, net of taxes
                            (188 )     (188 )             (188 )
Unrealized gain on marketable securities
                            46       46               46  
Foreign currency translation
adjustment
                            (1,339 )     (1,339 )             (1,339 )
                            $ 18,228                          
Restricted stock expense
            3,262                                       3,262  
Withholding shares for taxes
            (1,391 )                                     (1,391 )
Consultant compensation
            65                                       65  
Tax expense from exercise of
employee stock options and vesting of restricted stock
            (676 )                                     (676 )
Proceeds from exercise of stock options
            1,629                                       1,629  
Stock option expense
            1,389                                       1,389  
Purchase of remaining shares from noncontrolling interests
            (232 )                             15       (217 )
Distributions
                                            (284 )     (284 )
Balance at June 30, 2010
  $ 34     $ 408,809     $ 60,370             $ (17,684 )   $ 306     $ 451,835  

(1) As of June 30, 2010, Accumulated Other Comprehensive Loss consists of a $3.1 million loss on currency translation fluctuations in our foreign bank accounts of our UK, France, German, Japanese and Canadian subsidiaries, and equity investments and noncontrolling interest in our foreign business units as well as other comprehensive loss of approximately $14.6 million, net of taxes, that relates to the effective portion of the Company’s derivative instruments, as described in Note 13.


18.           Related Parties:

The Company is party to an acquisition agreement dated September 6, 2005 pursuant to which the Company acquired inVentiv Communications, Inc. (then known as inChord Communications, Inc. ("inChord")) from Mr. Walter and other former inChord shareholders.  Mr. Walter and certain of his family members had an approximately 92% interest in the earnout consideration payable under the acquisition agreement.  In April of 2009, Mr. Walter and such family members received a total of $2.2 million in cash and common stock constituting earnout consideration.  The inChord acquisition agreement was approved prior to its execution by the Board of Directors of the Company.

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 Mr. Walter, his brothers and other current employees of inVentiv Communications.  The term of the lease is fifteen years, and expires on September 30, 2015.  During the six months ended June 30, 2010 and year ended December 31, 2009, the Company paid $0.9 million and $1.8 million, respectively, in rent to Lexington MLP Westerville L.P.

inVentiv Commercial provided services to Mission Pharmacal (“Mission”) during 2009 and 2010.  Revenues generated for services provided to Mission totaled approximately $7.8 million and $13.0 million for the six months ended June 30, 2010 and year ended December 31, 2009, respectively.  Terrell G. Herring, who is one of our directors, serves as President of the Pharmaceutical Division of Mission Pharmacal.  Mr. Herring has recused himself from any negotiations between the Company and Mission Pharmacal.

Our Chairman, Eran Broshy, has been engaged to provide consulting services to the Company pursuant to a consulting agreement entered into effective August 1, 2009.  Pursuant to the consulting agreement, which has a term of three years, Mr. Broshy will earn a consulting fee of $100,000 per year.

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 realigned TTI from inVentiv Patient Outcomes to inVentiv Commercial, and has reclassified its segment reporting to conform to the current segment structure.  The following represents the Company’s reportable segments as of June 30, 2010:

·  
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, CRO Services, REMS, 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, clinical educator teams, 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, 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 the TTI realignment from inVentiv Patient Outcomes to inVentiv Commercial described above had been in effect from January 1, 2009:

Three-months ended June 30, 2010 (in thousands):

   
inVentiv
Clinical
   
inVentiv Communications
   
inVentiv Commercial
   
inVentiv Patient Outcomes
   
Other
   
Total
 
Revenues
  $ 57,410     $ 93,738     $ 108,521     $ 31,180       --     $ 290,849  
Less: Intersegment revenues
    (87 )     (1,135 )     (4,899 )     (277 )     --       (6,398 )
Reported Revenues
  $ 57,323     $ 92,603     $ 103,622     $ 30,903       --     $ 284,451  
Depreciation and amortization
    863       2,840       3,619       1,053       3       8,378  
Interest expense
    --       5       101       --       5,331       5,437  
Interest income
    --       4       --       --       16       20  
Segment income (loss) (1)
  $ 2,190     $ 12,386     $ 10,294     $ 7,509     $ (15,721 )   $ 16,658  
 
Three-months ended June 30, 2009 (in thousands):

   
inVentiv
Clinical
   
inVentiv Communications
   
inVentiv Commercial
   
inVentiv Patient Outcomes
   
Other
   
Total
 
Revenues
  $ 53,359     $ 75,635     $ 112,337     $ 31,126     $ --     $ 272,457  
Less: Intersegment revenues
    (55 )     (419 )     (2,882 )     (60 )     --       (3,416 )
Reported Revenues
  $ 53,304     $ 75,216     $ 109,455     $ 31,066       --     $ 269,041  
Depreciation and amortization
    808       2,584       3,558       1,118       12       8,080  
Interest expense
    --       23       84       2       5,664       5,773  
Interest income
    --       13       9       2       26       50  
Segment income (loss) (1)
  $ 3,391     $ 10,242     $ 11,458     $ 7,556     $ (13,522 )   $ 19,125  


Six-months ended June 30, 2010 (in thousands):

   
inVentiv
Clinical
   
inVentiv Communications
   
inVentiv Commercial
   
inVentiv Patient Outcomes
   
Other
   
Total
 
Revenues
  $ 111,417     $ 182,112     $ 208,835     $ 62,068       --     $ 564,432  
Less: Intersegment revenues
    (155 )     (1,388 )     (8,644 )     (433 )     --       (10,620 )
Reported Revenues
  $ 111,262     $ 180,724     $ 200,191     $ 61,635       --     $ 553,812  
Depreciation and amortization
    2,298       5,567       7,275       2,113       6       17,259  
Interest expense
    --       61       206       --       12,723       12,990  
Interest income
    --       7       --       --       57       64  
Segment income (loss) (1)
  $ 3,852     $ 22,957     $ 20,468     $ 14,260     $ (30,591 )   $ 30,946  


Six-months ended June 30, 2009 (in thousands):

   
inVentiv
Clinical
   
inVentiv Communications
   
inVentiv Commercial
   
inVentiv Patient Outcomes
   
Other
   
Total
 
Revenues
  $ 104,577     $ 146,988     $ 223,386     $ 59,793     $ --     $ 534,744  
Less: Intersegment revenues
    (104 )     (840 )     (6,979 )     (128 )     --       (8,051 )
Reported Revenues
  $ 104,473     $ 146,148     $ 216,407     $ 59,665     $ --     $ 526,693  
Depreciation and amortization
    1,369       5,070       7,895       2,238       22       16,594  
Interest expense
    --       42       195       3       11,307       11,547  
Interest income
    1       31       9       2       72       115  
Segment income (loss) (1)
  $ 4,902     $ 20,136     $ 18,429     $ 13,441     $ (24,170 )   $ 32,738  


                                                                     
 
 

 
INVENTIV HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued



(1) Income before income tax provision and (loss) income from equity investments
 
 
 
(in thousands)
 
June 30, 2010
   
December 31, 2009
 
 
Total Assets:
           
 inVentiv Clinical    $ 123,035      $ 119,744  
 inVentiv Communications     410,088       407,920  
 inVentiv Commercial     191,361       178,678  
 inVentiv Patient Outcomes     147,133       151,862  
 Other     135,261       171,759  
 
Total assets
   $ 1,006,878      $ 1,029,963  
 
 
 
20.          Subsequent Events:
In July 2010, the Company acquired 74.08% of the equity of Substrathomme SA for approximately EUR 4.1 million (approximately $5.0 million) and intends to acquire the remaining 25.92% on September 1, 2010 for approximately EUR 1.4 million (approximately $1.8 million), which excludes post-closing adjustments and contingent consideration yet to be finalized.  Substrathomme is one of the oldest leading independent healthcare marketing and communication agencies in France.   Substrathomme is expected to be included in the condensed consolidated financial statements within the inVentiv Communications’ segment from its acquisition date.
 
As discussed in Note 1, the Company completed the closing of the Merger with inVentiv Group Holdings, Inc. and inVentiv Acquisition, Inc., each of which is an affiliate of Thomas H. Lee Partners, L.P., on August 4, 2010.  As a consequence of the Merger Closing, all of the previously outstanding shares of the Company's common stock and all of the Company's equity incentive awards were entitled to receive the merger consideration provided for in the Merger Agreement and the Parent became the sole stockholder of the Company, through wholly-owned intermediate subsidiaries.  Certain additional transactions consummated as part of the Merger Closing are described in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on August 5, 2010.

In order to finance a portion of the purchase price paid to stockholders of the Company under the Merger Agreement and the refinancing of the Credit Agreement, simultaneously with the Merger Closing, (i) Merger Sub completed an offering of $275 million in aggregate principal amount of its 10% Senior Notes due 2018 (the “Senior Notes”), which were assumed by the Company by virtue of the consummation of the Merger Closing, and (ii) the Parent, the Company, certain subsidiaries of the Company, certain lenders and Citibank, N.A. entered into a Credit Agreement dated as of August 4, 2010 (the “Senior Secured Credit Facility”), consisting of a $525 million term loan facility and a $75 million revolving credit facility.  Certain terms and conditions of the Senior Notes and the Senior Secured Credit Facility are summarized in the Company's Current Report on Form 8-K filed with the SEC on August 5, 2010.

Concurrently with the Merger Closing, the Credit Agreement discussed in Note 11 was refinanced using a portion of the proceeds from the Senior Notes and the Senior Secured Credit Facility.

Concurrently with the Merger Closing, the Company entered into an agreement with its existing hedge counterparty to amend its existing swap arrangements described in Note 13 and to hedge a portion of the indebtedness incurred or to be incurred under the Senior Secured Credit Facility.  The amendments were made in order to increase the fixed rate paid by the Company under the swap agreements and to bring the terms of the hedge arrangements in line with the terms of the new Senior Secured Credit Facility.  The existing hedge counterparty and the Company also agreed to transfer a portion of the hedge arrangements to a new hedge counterparty.  Otherwise, the principal terms of the hedge arrangements remain the same.
 
 
                                                                     
 
 

 


This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements, accompanying notes and other financial information included in the Annual Report on Form 10-K for the year ended December 31, 2009.

Our Business

inVentiv Health Inc. (together with its subsidiaries, “inVentiv, ” “we,” "us," or "our") is a leading provider of value-added, outsourced services to the pharmaceutical, life sciences and healthcare industries. We provide a broad range of clinical development, communications and commercialization services that are critical to our clients’ ability to complete the development and successful commercialization of their pharmaceutical products and medical devices. We seek to serve our clients across all phases of a product’s lifecycle by providing a full suite of outsourced 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 post-launch product lifecycle. We have established expertise and leadership in providing the services our clients require at each of these stages, and seek to address their outsourced-service needs on a comprehensive basis. Our unique platform allows us to effectively assist our clients with services throughout their products’ lifecycle, spanning drug development, sales, advertising and patient compliance programs. For payors, we provide a variety of medical cost containment services that enhance savings and improve patient outcomes, including opportunities to address billing errors, additional discounts and treatment protocols for patients.

On May 6, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with inVentiv Group Holdings, Inc. (formerly Papillon Holdings, Inc.) (“Parent”) and inVentiv Acquisition, Inc. (formerly Papillon Acquisition, Inc.) (“Merger Sub”), each of which is an affiliate of Thomas H. Lee Partners, L.P., providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.  The closing of the Merger  (the “Merger Closing”) took place on August 4, 2010.  As a consequence of the Merger Closing, all of the previously outstanding shares of the Company's common stock and all of the Company's equity incentive awards were entitled to receive the merger consideration provided for in the Merger Agreement and Parent became the sole stockholder of the Company.  Certain additional transactions consummated as part of the Merger Closing are described in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2010.

In order to finance a portion of the purchase price paid to stockholders of the Company under the Merger Agreement and the refinancing of the Credit Agreement, simultaneously with the Merger Closing, (i) Merger Sub completed an offering of $275 million in aggregate principal amount of its 10% Senior Notes due 2018 (the “Senior Notes”), which were assumed by the Company by virtue of the consummation of the Merger Closing, and (ii) Parent, the Company, certain subsidiaries of the Company, certain lenders and Citibank, N.A. entered into a Credit Agreement dated as of August 4, 2010 (the “Senior Secured Credit Facility”), consisting of a $525 million term loan facility (the “Term Loan Facility”) and a $75 million revolving credit facility (the “Revolver Facility”).  Certain terms and conditions of the Senior Notes and the Senior Secured Credit Facility are summarized in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2010.
 
Business Segments

Certain balances in segment reporting have been reclassified to conform to the current segment reporting structure. In the first quarter of 2010, we realigned The Therapeutics Institute (“TTI”) from inVentiv Patient Outcomes to inVentiv Commercial Services. In this Quarterly Report on Form 10-Q, we reflect this change for all periods presented, reflected in the language below.
 
We serve our clients primarily through four operating segments, which correspond to our reporting segments for 2010:
 
·  
inVentiv Clinical. This segment provides pharmaceutical, biotech and device companies with clinical recruitment and temporary staffing on a contract basis to assist these companies in their paths to drug development. In addition, inVentiv Clinical provides its clinical research clients full service late-stage clinical development, outsourced functional services and CRO services, executive placement and Risk Evaluation and Mitigation Strategy (“REMS”) services in various areas, including clinical operations, medical affairs and biometrics/data management.  inVentiv Clinical consists of the Smith Hanley group of companies (“Smith Hanley”), inVentiv Clinical Solutions (“iCS”), and Paragon Rx (“Paragon”), which was acquired in December 2009;
 
·  
inVentiv Communications. This segment is the world’s largest communications network dedicated exclusively to healthcare. Comprised of many of the industry’s respected and recognized advertising agencies, PR firms, medical communication companies, interactive agencies and branding firms, this segment delivers an integrated suite of services that provide healthcare and life sciences clients with dynamic and innovative communications services. 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. This segment is a premier provider of comprehensive sales programs to the healthcare and life sciences industries, providing high quality outsourced sales teams, including full-time, part-time, flex and on-call life sciences and pharmaceutical sales representatives. Beyond providing expert sales solutions, we offer a complete spectrum of complementary sales services to clients, including sales force recruiting, sales training and development, sample management and strategic consulting and analysis services. For more than 25 years, this segment has provided customized outsourced sales solutions to meet clients’ needs in a cost-effective and flexible manner. This segment includes Advance Insights, formerly known as inVentiv Strategy & Analytics, and inVentiv Selling Solutions. inVentiv Selling Solutions includes Promotech Logistics Solutions LLC (“PLS”), acquired in December 2008; and
 
·  
inVentiv Patient Outcomes. This segment is dedicated to improving patient outcomes by bundling services that help patients “start right and stay right” on their therapies. We deliver comprehensive solutions that benefit pharmaceutical manufacturers, healthcare providers, pharmacists, payors and patients. This segment provides services related to patient pharmaceutical compliance, patient assistance and reimbursement programs, patient relationship marketing and medical cost containment and consulting solutions.  This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), AWAC and Patient Marketing Group, LLC (“PMG”).
 
Material Trends Affecting our Business
 
Our business is related significantly to the research and development efforts of pharmaceutical and biotechnology companies and the degree to which these companies outsource services that have traditionally been performed internally by fully integrated manufacturers. Although the pharmaceutical industry is generally regarded as non-cyclical, the current recessionary environment has impacted virtually all economic activity in the United States and abroad, including in the pharmaceutical and life sciences industries. Furthermore, increased competition as a result of patent expirations, market acceptance of generic drugs and governmental and privately managed care organization efforts to reduce healthcare costs have also added to drug pricing pressures. Our clients continue to make efforts to significantly reduce expenditures in all areas of their businesses, resulting in increased budget scrutiny.
 
These circumstances present both risks and opportunities for us. We aggressively pursue opportunities to enhance our business and market share with clients who seek the efficiencies and cost savings that can be attained by consolidating their outsourcing programs with a smaller number of high quality providers, and we believe that these opportunities will continue. In the longer term, we believe the pressures on our clients to reduce unit costs are likely to drive decisions to outsource a greater scope of commercialization services and a concurrent increase in the overall size of the markets in which we operate. Our clients already appear to be adopting strategies to outsource more of their pharmaceutical marketing expenditures with select, sophisticated providers who are capable of delivering lower cost and more flexible solutions consistent with the service capabilities that inVentiv offers. Our approach to creating integrated, multi-service offerings is a significant area of opportunity in the future. In addition, the pharmaceutical industry is increasingly investing in commercialization solutions that drive patient compliance and loyalty to branded prescription products and improve health outcomes. We believe that our Patient Outcomes division is a market leader in terms of expertise and a breadth of patient-centric services and is well positioned to benefit from this market development.
 
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. Our business was affected during 2009 by the hesitation of clients to make outsourcing expenditure decisions. Although we have seen evidence in recent months that our clients’ expenditures with certain of our business units are stabilizing, current economic conditions present continuing challenges and make it difficult for us to predict client marketing spend levels. Delays in FDA approval of drug candidates also impact our clients from time to time and can lead to unanticipated reduction or deferral of outside marketing spend.
 
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 or acquire businesses over time. Cost management strategies employed by management include:
 
·  
reduction of fixed cost headcount;
 
·  
our “in balance” staffing initiative, through which we have converted full-time equivalent positions to hourly positions that can be billed in direct response to the requirements of our client engagements;
 
·  
completion during the first quarter of 2009 of our “super studio” in Columbus, Ohio, which has increased utilization and efficiency by allowing the management of project-based graphic design and production needs for agencies across the inVentiv Communications division;
 
·  
negotiation of favorable rates with our vendors;
 
·  
ongoing implementation of our Peoplesoft software to manage enterprise-wide resources; and
 
·  
consolidation of certain facilities and operations.
 
We believe that these steps will allow us to provide competitive pricing to our clients and to increase margins.
 
Pharmaceutical industry consolidation is likely to make more pronounced both the downside risks and the upside opportunities for providers of outsourced commercialization services. To date, although there have been isolated instances in which a program or relationship has been eliminated or reduced following a business combination involving one or more existing clients, we do not believe we have been materially impacted by consolidation. The concentration of business with our largest clients has increased slightly in recent years, while the total number of clients and functional areas we cover has expanded substantially.
 
Our business has also been affected by the difficult financing environment that is currently faced by biotechnology clients, particularly those that do not yet have any products approved for commercialization. The financing challenges in the biotechnology market and the resulting impact on the liquidity of individual biotechnology companies affect the number of projects our clients in this segment can initiate, the amount available to be budgeted for the services we provide and may impact the quality of receivables generated in terms of both aging and ultimate collectability.
 
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 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 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 approvals 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 improve, we believe that the number of products to be submitted for and 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. As a result of our deep and long-standing relationships with our clients, we believe that we are well positioned to capture these opportunities.

Business Strategy

Although certain areas of our business slowed during early 2009 as a result of the current trends discussed above, our businesses have generated strong overall revenue growth for the past several years.  Our organic 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 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 been a core element of our business strategy since 2004.  We expect to 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 acquisitions are accounted for using purchase accounting and the financial results of the acquired businesses are included in our consolidated financial statements from their acquisition 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 2009, we established inVentiv Japan, a business unit within inVentiv Selling Solutions. We believe the potential opportunity in Japan is significant based on the total number of Japanese representatives, labor laws that could encourage outsourcing, the competitive landscape, and a significant number of drugs that are expected to enter the Japanese market in the coming years.

Earnout Obligations Related to Completed Acquisitions

The terms of most of our completed acquisitions include the opportunity for the sellers to receive contingent earnout consideration based on the performance of the acquired businesses. The terms of the acquisition agreements generally include multiple earnout periods or a multi-year earnout period. The acquisitions consummated prior to January 1, 2009 fall under the guidance of ASC 805, excluding the requirements of contingent consideration for acquisitions made after January 1, 2009. As such, we accrue the earnout obligations for these acquisitions at the end of an earnout period when the contingency is resolved and additional consideration is distributable for these acquisitions. These earnout obligations have historically been material in amount and represent a significant use of cash for the periods in which they are earned or paid. Such payout amounts are subject to variability and could vary significantly based on the actual performance of the acquired businesses. All earnout obligations under acquisitions consummated prior to January 1, 2009 were completed as of the date of this report. Earnout obligations for acquisitions consummated after January 1, 2009 are initially recorded as part of the purchase price at the estimated fair value at the date of acquisition in accordance with the updated guidance of ASC 805.

International Operations

The following is a summary of our non-U.S. operations:

Division
Location
Percent Ownership
inVentiv Communications
United Kingdom
100%
 
France
100%
 
Canada
100%
 
Germany (Liedler)
100%
 
Japan (Admed)