-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6TvQNVT3C7ItfUMjhlwzOGsw/r5ObcTsCt937hPJSQ9xd/BJFOvkPnm3fyGa2aI b8HA+0P5JCLpLSoiUgIkDQ== 0001089473-06-000047.txt : 20060809 0001089473-06-000047.hdr.sgml : 20060809 20060809163307 ACCESSION NUMBER: 0001089473-06-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060809 DATE AS OF CHANGE: 20060809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVENTIV HEALTH INC CENTRAL INDEX KEY: 0001089473 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 522181734 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30318 FILM NUMBER: 061018052 BUSINESS ADDRESS: STREET 1: 200 COTTONTAIL LANE STREET 2: VANTAGE COURT NORTH CITY: SOMERSET STATE: NJ ZIP: 08873 BUSINESS PHONE: 732-537-4800 MAIL ADDRESS: STREET 1: 200 COTTONTAIL LANE STREET 2: VANTAGE COURT NORTH CITY: SOMERSET STATE: NJ ZIP: 08873 FORMER COMPANY: FORMER CONFORMED NAME: VENTIV HEALTH INC DATE OF NAME CHANGE: 19990810 FORMER COMPANY: FORMER CONFORMED NAME: SNYDER HEALTHCARE SERVICES INC DATE OF NAME CHANGE: 19990624 10-Q 1 quartertwo2006form10q.htm FORM 10-Q FOR Q2 2006 Form 10-Q for Q2 2006
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, 2006

or

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

For the Transition Period From ___________ to ___________

Commission file number 0-30318

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

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

200 Cottontail Lane
Vantage Court North
Somerset, New Jersey 08873
(Address of principal executive office and zip code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]   Accelerated filer [X]  Non-accelerated filer [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]

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

As of July 31, 2006, there were 29,304,231 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
 
 
 
   
 
   
 
   
   
 
 
   
   
   
PART II. OTHER INFORMATION
  
   
   
 
   
 
   
   
   
SIGNATURES
   
EXHIBITS
 



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements
INVENTIV HEALTH, INC.
(in thousands, except share and per share amounts)
(unaudited)
   
June 30,
  
December 31,
  
   
2006
  
2005
  
           
ASSETS
          
Current assets:
          
Cash and equivalents
  
$
50,391
  
$
73,102
  
Restricted cash
    
317
    
3,878
  
Accounts receivable, net of allowances for doubtful accounts of $3,887
              
and $3,979 at June 30, 2006 and December 31, 2005, respectively
    
101,875
    
112,782
  
Unbilled services
    
61,481
    
41,206
  
Prepaid expenses and other current assets
    
10,663
    
5,737
  
Current deferred tax assets
    
4,100
    
4,029
  
Total current assets
    
228,827
    
240,734
  
Property and equipment, net
    
40,604
    
36,637
  
Equity investments
    
4,735
    
5,183
  
Goodwill
    
212,122
    
173,777
  
Other intangibles, net
    
152,208
    
117,606
  
Deferred tax assets
    
10,555
    
3,428
  
Deposits and other assets
    
10,817
    
6,529
  
Total assets
  
$
659,868
  
$
583,894
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
Current portion of capital lease obligations
  
$
10,152
  
$
10,859
  
Current portion of long-term debt
    
1,750
    
1,750
  
Accrued payroll, accounts payable and accrued expenses
    
63,049
    
77,816
  
Current income tax liabilities
    
12,608
    
7,359
  
Client advances and unearned revenue
    
44,779
    
29,393
  
Total current liabilities
    
132,338
    
127,177
  
Capital lease obligations, net of current portion
    
18,440
    
17,695
  
Long-term debt
    
171,938
    
172,813
  
Other non-current liabilities
    
14,410
    
12,994
  
Total liabilities
    
337,126
    
330,679
  
               
Commitments and contingencies
              
               
Minority Interest
    
120
    
(4
)
               
Stockholders' equity:
              
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued
              
and outstanding at June 30, 2006 and December 31, 2005, respectively
    
--
    
--
  
Common stock, $.001 par value, 50,000,000 shares authorized; 29,294,229 and
              
27,862,436 shares issued and outstanding at June 30, 2006 and
             
December 31, 2005, respectively
    
29
    
28
  
Additional paid-in-capital
    
267,891
    
233,441
  
Deferred compensation
    
--
    
(3,563
)
Accumulated other comprehensive earnings
   
935
    
221
  
Accumulated earnings
   
53,767
    
23,092
  
Total stockholders' equity
    
322,622
    
253,219
  
Total liabilities and stockholders' equity
  
$
659,868
  
$
583,894
  
The accompanying notes are an integral part of these 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,
  
   
2006
  
2005
  
2006
  
2005
  
Net revenues
  
$
154,739
  
$
112,530
  
$
297,677
  
$
217,045
  
Reimbursable out-of-pockets
    
28,240
    
19,258
    
58,979
    
35,601
  
Total revenues
   
182,979
    
131,788
    
356,656
    
252,646
  
                           
Operating expenses:
                          
Cost of services
    
97,947
    
80,451
    
193,061
    
158,104
  
Reimbursed out-of-pocket expenses
    
29,913
    
19,310
    
59,606
    
35,369
  
Selling, general and administrative expenses
    
34,938
    
16,955
    
64,925
    
31,355
  
Total operating expenses
    
162,798
    
116,716
    
317,592
    
224,828
  
                           
Operating income
    
20,181
    
15,072
    
39,064
    
27,818
  
Interest expense
    
(2,241
)
  
(322
)
  
(3,898
)
  
(710
)
Interest income
    
362
    
253
    
1,096
    
506
  
Income from continuing operations before income tax provision, minority interest in income of subsidiary and income (loss) from equity investments
    
18,302
    
15,003
    
36,262
    
27,614
  
Income tax benefit (provision)
    
1,748
    
(5,971
)
  
(5,436
)
  
(9,390
)
Income from continuing operations before minority interest in income of subsidiary and income (loss) from equity investments
    
20,050
    
9,032
    
30,826
    
18,224
  
Minority interest in income of subsidiary
    
(352
)
  
--
    
(676
)
  
--
  
Income (loss) from equity investments
   
166
    
--
    
(144
)
  
--
  
Income from continuing operations
    
19,864
    
9,032
    
30,006
    
18,224
  
                           
Income from discontinued operations:
                          
Gains on disposals of discontinued operations, net of taxes
    
1,115
    
1,463
    
1,221
    
1,562
  
Net income from discontinued operations
    
1,115
    
1,463
    
1,221
    
1,562
  
                           
Net income
  
$
20,979
  
$
10,495
  
$
31,227
  
$
19,786
  
                           
Earnings per share (see Note 6):
                          
Continuing operations:
                          
Basic
  
$
0.68
  
$
0.34
  
$
1.05
  
$
0.69
  
Diluted
  
$
0.66
  
$
0.32
  
$
1.01
  
$
0.66
  
Discontinued operations:
                          
Basic
  
$
0.04
  
$
0.05
  
$
0.04
  
$
0.06
  
Diluted
  
$
0.03
  
$
0.06
  
$
0.04
  
$
0.05
  
Net income:
                          
Basic
  
$
0.72
  
$
0.39
  
$
1.09
  
$
0.75
  
Diluted
  
$
0.69
  
$
0.38
  
$
1.05
  
$
0.71
  
Weighted average common shares outstanding:
                          
Basic
    
29,188
    
26,757
    
28,696
    
26,431
  
Diluted
    
30,186
    
27,879
    
29,737
    
27,763
  

The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
INVENTIV HEALTH, INC.
(in thousands)
(unaudited) 

   
For Six-Months Ended
  
   
June 30,
  
   
2006
  
2005
  
Cash flows from operating activities:
      
(Revised)
  
Net income from continuing operations
  
$
30,006
  
$
18,224
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation
    
7,578
    
8,508
  
Amortization
    
2,616
    
602
  
Loss from equity investments
    
144
    
--
  
Minority interest in income of subsidiary
    
676
    
--
  
Fair market value adjustment on derivative financial instrument
    
(2,824
)
  
--
  
Deferred taxes
    
(7,198
)
  
(343
)
Stock compensation expense
    
3,336
    
245
  
Tax benefit from stock option exercises and vesting of restricted shares
    
4,530
    
7,815
  
               
Changes in assets and liabilities, net of effects from discontinued operations:
              
Accounts receivable, net
    
22,971
    
(18,763
)
Unbilled services
    
(18,428
)
  
(6,807
)
Prepaid expenses and other current assets
    
(2,889
)
  
(1,539
)
Accrued payroll, accounts payable and accrued expenses
    
(8,912
)
  
(2,607
)
Current income tax liabilities
    
5,128
    
(836
)
Client advances and unearned revenue
    
2,411
    
(3,917
)
Excess tax benefits from stock based compensation
    
(4,002
)
  
--
  
Other
    
3,569
    
2,257
  
Net cash provided by continuing operations
    
38,712
    
2,839
  
Net cash provided by (used in) discontinued operations
    
1,103
    
(50
)
Net cash provided by operating activities
    
39,815
    
2,789
  
               
Cash flows from investing activities:
              
Restricted cash balances
    
3,561
    
(1,298
)
Investment in cash value of life insurance policies
    
(3,439
)
  
(961
)
Cash paid for acquisitions, net of cash acquired
    
(50,412
)
  
(902
)
Acquisition earn-out payments
    
(8,267
)
  
(5,181
)
Equity investments
    
304
    
--
  
Purchases of property and equipment
    
(3,755
)
  
(2,923
)
Proceeds from manufacturers rebates on leased vehicles
    
141
    
2
  
Net cash used in continuing operations
    
(61,867
)
  
(11,263
)
Net cash provided by discontinued operations
    
118
    
1,612
  
Net cash used in investing activities
   
(61,749
)
  
(9,651
)
               
Cash flows from financing activities:
              
Repayments on credit agreement
    
(875
)
  
--
  
Repayments on capital lease obligations
    
(6,759
)
  
(6,418
)
Withholding shares for taxes
    
(85
)
  
--
  
Proceeds from exercise of stock options
    
2,778
    
3,433
  
Excess tax benefits from stock-based compensation
    
4,002
    
--
  
Distributions to minority interests in affiliated partnership
    
(552
)
  
--
  
Net cash used in continuing operations
    
(1,491
)
  
(2,985
)
Net cash provided by discontinued operations
    
--
    
--
  
Net cash used in financing activities
    
(1,491
)
  
(2,985
)
               
Effect of exchange rate changes
    
714
    
(48
)
               
Net decrease in cash and equivalents
    
(22,711
)
  
(9,895
)
Cash and equivalents, beginning of period
    
73,102
    
50,809
  
Cash and equivalents, end of period
  
$
50,391
  
$
40,914
  
               
Supplemental disclosures of cash flow information:
              
Cash paid for interest
  
$
6,392
  
$
725
  
Cash paid for income taxes
  
$
2,977
  
$
2,766
  
Supplemental disclosures of non-cash activities:
              
Vehicles acquired through capital lease agreements
  
$
11,144
  
$
4,898
  
Stock issuance related to acquisitions
  
$
27,177
  
$
3,255
  

The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
1. Organization and Business:

inVentiv Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”, formerly Ventiv Health, Inc.) is a leading provider of value-added services to the pharmaceutical and life sciences industries. We support a broad range of clinical development, communications and commercialization activities that are critical to our customers' ability to complete the development of new drug products and medical devices and successfully bring them to market. Our goal is to assist our customers in meeting their objectives in each of these areas by providing our services on a flexible and cost-effective basis. We provide services to over 200 client organizations, including all top 20 global pharmaceutical companies and numerous emerging and specialty biotechnology companies.

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. We have established expertise and leadership in providing the services our clients require at each of these stages of product development and commercialization and seek to address their outsourced service needs on a comprehensive basis throughout the product life cycle.

On June 14, 2006, we changed our name to inVentiv Health, Inc. as part of a re-branding initiative that began when we acquired inChord Communications, Inc. ("inChord"), a healthcare marketing and communications company, in October 2005.

Business Segments

We currently serve our clients primarily through three business segments, which correspond to our reporting segments for 2006:

·  
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional service provision. This segment was initially built through several businesses that were acquired in the fourth quarter of 2004: the Smith Hanley group of companies (which includes Smith Hanley Associates, Smith Hanley Consulting Group and MedFocus) and HHI Clinical & Statistical Research Services (“HHI”). In April 2006, the Company augmented inVentiv Clinical with the acquisition of Synergos, LLP ("Synergos"), a clinical services provider with expertise in clinical trial management services.

·  
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, interactive communication development and patient and physician education. This segment includes inChord, Adheris, Inc. ("Adheris"), a patient compliance and persistence communications company, which we acquired in the first quarter of 2006, and Jeffrey Simbrow Associates Inc. (and certain of its affiliated companies) ("JSAI"), a leading healthcare marketing and communications agency, which we acquired in the second quarter of 2006, as more fully discussed below.

·  
inVentiv Commercial, which consists of our outsourced sales and marketing teams, planning and analytics services, sample accountability and patient assistance businesses, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area.

Our 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.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the condensed consolidated financial position, 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 pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) related to interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted. The Company believes that the disclosures made herein are adequate such that the information presented is not misleading. These condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are necessary to fairly present the Company's condensed consolidated financial position as of June 30, 2006 and December 31, 2005, the condensed consolidated income statements of the Company for the three and six-months ended June 30, 2006 and 2005 and the condensed consolidated cash flows for the six-months ended June 30, 2006 and 2005. Certain revenues and cost of services balances have been reclassified to conform to current presentation related to the presentation of reimbursable expenses in accordance with Emerging Issues Task Force No. 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred. Operating results for the three and six-months ended June 30, 2006 are not indicative of the results that may be expected for the year ending December 31, 2006.

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, 2005 as filed with the Securities and Exchange Commission on March 16, 2006.

The condensed consolidated financial statements include the accounts of inVentiv Health, Inc., its wholly owned subsidiaries and its 53% owned subsidiary, Taylor Search Partners (“TSP”), which was acquired in conjunction with the acquisition of inChord. Our continuing operations consist primarily of three business segments: inVentiv Clinical, inVentiv Communications and inVentiv Commercial. All significant intercompany transactions have been eliminated in consolidation.
 
As a result of the acquisition of inChord, we have a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden and a 44% interest in Angela Liedler GmbH (“Liedler”), a service provider of communication and marketing tools for technical, medical and pharmaceutical products, located in Germany. Both of these investments are accounted for using the equity method of accounting.

In December 2005, we entered into an exclusive joint venture agreement with SIRO Clinpharm Pvt. Ltd., India's largest domestic contract research organization, to offer pharmaceutical companies India-based clinical data management services. This project is in the development stage and has not commenced providing client services.

Condensed Consolidated Statements of Cash Flows

During the third quarter of 2005, the Company revised the presentation of its condensed consolidated statements of cash flows to separately present the cash flows from discontinued operations within the categories of operating, investing and financing activities. A summary of the effect of the revised presentation on the consolidated statements of cash flows for the six months ended June 30, 2005 is as follows:
 
   
Six Months Ended
June 30, 2005
  
(in thousands)
        
Net cash flows used in operating activities as previously reported
  
$
2,839
  
Change in net cash flows from discontinued operations
    
(50
)
Net cash flows used in operating activities as currently reported
  
$
2,789
  
 
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Recently Issued Accounting Standards:
 
In July 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company has not yet determined the impact this interpretation will have on its consolidated results of operations or financial position.

On November 10, 2005, the FASB issued Interpretation No. 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (“FIN 45-3”). FIN 45-3 amends FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), to expand the scope to include guarantees granted to a business, such as a physician’s practice, or its owner(s), that the revenue of the business for a period will be at least a specified amount. Under FIN 45-3, the accounting requirements of FIN 45 are effective for any new revenue guarantees issued or modified on or after January 1, 2006 and the disclosure of all revenue guarantees, regardless of whether they were recognized under FIN 45, is required for all interim and annual periods beginning after January 1, 2006. The adoption of FIN 45-3 did not have a material impact on our condensed consolidated balance sheets, condensed consolidated income statements or condensed consolidated statements of cash flows.

In June 2005, the FASB issued Statement of Financial Account Standard (“SFAS”) No. 154, Accounting Changes and Error Corrections, (“SFAS No.154”) a replacement of Accounting Principles Board ("APB") Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The implementation of SFAS No. 154 did not have an impact on our condensed consolidated balance sheets, condensed consolidated income statements or condensed consolidated statements of cash flows.

4. Acquisitions:

In April 2006, the Company acquired Synergos for approximately $6.4 million in cash and stock, including certain post-closing adjustments and direct acquisition costs, for approximately $0.7 million of net tangible assets. Synergos, based in The Woodlands, Texas, is a focused clinical services provider with expertise in clinical trial management services, particularly project management and monitoring, as well as investigator and patient recruitment. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Synergos’s performance measurements during 2006 and 2007. The results of Synergos have been reflected in the inVentiv Clinical segment from the date of its acquisition. The assets acquired and liabilities assumed in connection with the acquisition and pro forma results of operations are not deemed material to the condensed consolidated financial statements.

In April 2006, the Company acquired JSAI for approximately $8.8 million in cash and stock, including certain post-closing adjustments and direct acquisition costs. JSAI is Canada's leading healthcare marketing and communications agency. The Company will be obligated to make certain earn-out payments, which may be material, contingent on JSAI’s performance measurements during the 12-month periods ending March 31, 2007, 2008 and 2009. The results of JSAI have been reflected in the inVentiv Communications segment from the date of its acquisition. The assets acquired and liabilities assumed in connection with the acquisition and pro forma results of operations are not deemed material to the condensed consolidated financial statements. 

In February 2006, the Company acquired Adheris for approximately $69.6 million in cash and stock, including certain post-closing adjustments and direct acquisition costs, for approximately $10.0 million of net tangible assets. Adheris is a Massachusetts-based industry leader in the area of patient compliance and persistency programs. The Company will be obligated to make certain earn-out payments, which may be material, contingent on Adheris's performance measurements during 2006 through 2008. The results of Adheris have been reflected in the inVentiv Communications segment from the date of its acquisition. The assets acquired and liabilities assumed in connection with the acquisition and pro forma results of operations are not deemed material to the condensed consolidated financial statements. 
 
In October 2005, the Company acquired all of the outstanding capital stock of inChord for approximately $196.8 million of cash and stock, including certain post-closing adjustments and direct acquisition costs, for approximately $18.6 million of net tangible assets. To help finance the transaction, the Company entered into a Credit Agreement, dated October 5, 2005, as more fully described in footnote 10. The Company acquired inChord to vastly expand its service portfolio in the marketing and communications arena, expand its market position in the pharmaceutical services market and achieve cross-selling opportunities by leveraging its existing businesses. The Company will be obligated to make certain earn-out payments, which may be material, contingent on inChord’s performance measurements from 2005 through 2007. inChord’s 2005 earnout of $3.8 million in cash and stock, of which $3.6 million was accrued at December 31, 2005, was paid in 2006. The portion adjusted in the subsequent year mainly relate to the finalization of the earn-outs for the previous year, as allowed under the contract. The results of inChord have been reflected in the inVentiv Communications segment since the date of acquisition.
 
In August 2005, the Company acquired the net assets of PRS, a provider of compliance management and marketing support services based in Horsham, Pennsylvania. PRS specializes in pharmaceutical sample management and compliance services; its operations are similar in nature to the business of Franklin Group, Inc. and Lincoln Ltd, Inc. (together, “Franklin”), which was acquired in June 2004. The closing consideration for the transaction was approximately $13.6 million in cash and stock (taking into account post-closing adjustments and direct acquisition costs) for approximately $1.0 million of net assets. The Company will be obligated to make certain earn-out payments, which may be material, contingent on PRS’s performance measurements in 2005 and 2006. The amount due with respect to PRS for 2005 was approximately $0.3 million, which was accrued for as of December 31, 2005 and paid in April 2006. The results of PRS have been reflected in the inVentiv Commercial segment since the date of acquisition.

In November 2004, the Company acquired the net assets of HHI. HHI, based in Baltimore, Maryland, is a specialized statistical analysis and data management provider to the U.S. pharmaceutical industry. HHI complements the Smith Hanley business by offering clients the option of outsourced clinical support services as an alternative to internal staffing. The closing consideration for the transaction was approximately $6.2 million in cash and stock (taking into account post-closing adjustments and direct acquisition costs) for approximately $0.8 million of net tangible assets. The Company is obligated to make certain earn-out payments, which may be material, contingent on HHI’s performance measurements in 2005 and 2006. HHI’s 2005 earn-out was approximately $5.4 million, which $5.0 million was previously accrued for at December 31, 2005, and paid during the first quarter of 2006. The results of HHI have been reflected in the inVentiv Clinical segment since the date of acquisition.

In October 2004, the Company acquired the net assets of Smith Hanley. Smith Hanley specializes primarily in providing late-stage clinical staffing and recruiting services to the U.S. pharmaceutical industry. The Company acquired Smith Hanley to expand its service portfolio in the clinical services and recruitment areas, expand its market position in the pharmaceutical services market and achieve cross-selling opportunities by leveraging our existing sales force and relationships. The Company acquired approximately $9.5 million of net tangible assets for consideration of approximately $52.9 million in cash and stock (taking into account post-closing adjustments and direct acquisition costs) and was obligated to make certain earn-out payments, contingent on Smith Hanley’s performance measurements in 2004 and 2005. Smith Hanley’s 2004 earn-out paid in 2005 was approximately $6.6 million, for which $6.8 million was previously accrued for at December 31, 2004. Smith Hanley’s 2005 earn-out paid in 2006 was approximately $4.6 million, of which $4.0 million was previously accrued for at December 31, 2005. The portions adjusted in the subsequent years mainly relate to the finalization of the earn-outs for the respective years. The results of Smith Hanley have been reflected in the inVentiv Clinical segment since the date of acquisition.

In June 2004, the Company acquired the net assets of Franklin, based in Somerville, New Jersey. Franklin specializes primarily in conducting patient assistance programs and pharmaceutical compliance services. The Company paid approximately $11.3 million in cash and stock (taking into account post-closing adjustments and direct acquisition costs) to acquire approximately $2.7 million of net tangible assets. The Company is obligated to make certain earn-out payments, which may be material, contingent on Franklin’s performance measurements during 2004 through 2006. Franklin’s 2004 earn-out paid in 2005 was approximately $1.8 million, $1.7 million of which was accrued for at December 31, 2004. Franklin’s 2005 earn-out paid in April 2006 was approximately $3.2 million, which was accrued for at December 31, 2005. The portions adjusted in the subsequent years mainly relate to the finalization of the earn-outs for the respective years. Franklin’s financial results have been reflected in the inVentiv Commercial segment since the date of acquisition.
 
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 
5. Employee Stock Compensation:
 
In December 2004, the FASB revised SFAS No. 123 (“SFAS 123(R)”), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the SEC adopted a new rule amending the effective dates for FAS 123(R). In accordance with the new rule, the Company adopted the accounting provisions of SFAS 123 (R) as of January 1, 2006.

On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective application method, as permitted under SFAS 123(R), which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation over the service periods for awards expected to vest. Under this method, compensation cost in 2006 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (2) all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company will recognize the cost of all employee stock awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures. Accordingly, prior periods amounts have not been restated. Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

The adoption of SFAS 123 (R) resulted in stock-based compensation expense of $1.7 million, of which $0.6 million was recorded in cost of services and $1.1 million recorded as Selling, General and Administrative expenses (“SG&A”) for the three months ended June 30, 2006 and $3.3 million, of which $1.2 million was recorded in cost of services and $2.1 million recorded as SG&A for the six months ended June 30, 2006. The incremental stock-based compensation expense caused income before income tax provision, minority interest in income of subsidiary and income (loss) from equity investments to decrease by $1.7 million and $ 3.3 million for the three months and six months ended June 30, 2006, respectively, net income to decrease by $1.0 million and $2.0 million for the three months and six months ended June 30, 2006, respectively, and basic and diluted earnings per share to decrease by $0.03 per share and $0.07 per share for the three months and six months ended June 30, 2006, respectively. Cash provided by operating activities decreased and cash provided by financing activities increased by $4.0 million related to excess tax benefits from the exercise of stock-based awards.
 
On November 10, 2005, the FASB issued FASB Staff Position No. 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.

Pro forma Information for Periods Prior to the Adoption of FAS 123R

Prior to the adoption of SFAS 123(R), the Company applied Accounting Principles Board No. 25 (“APB 25”) to account for its stock-based awards. Under ABP 25, the Company only recorded stock-based compensation expense for restricted stock units. Under the provisions of APB 25, the Company was not required to recognize compensation expense for the cost of stock options issued under its equity compensation plans as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, forfeitures of awards were recognized as they occurred. The Company has not changed its valuation model used for estimating the fair value of options granted after January 1, 2006, from the Black-Scholes option-pricing model previously used for pro forma presentation purposes as required under SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures.

The following table details the effect on net income and earnings per share had compensation expense for the employee stock-based awards been recorded in the second quarter and year ended June 30, 2005 based on the fair value method under SFAS 123:

(in thousands, except per share data)
  
Three-Months Ended June 30, 2005
  
Six-Months Ended June 30, 2005
  
           
Net income attributable to common shareholders, as reported
  
$
10,495
  
$
19,786
  
Add: total stock-based compensation expense included in reported net income attributable to common shareholders, net of tax
    
71
    
100
  
Less: stock-based employee compensation expense determined under the fair value method, net of related income tax
    
(684
)
  
(2,336
)
Pro forma net earnings
  
$
9,882
  
$
17,550
  
As reported: Basic
  
$
0.39
  
$
0.75
  
As reported: Diluted
  
$
0.38
  
$
0.71
  
Pro forma: Basic
  
$
0.37
  
$
0.66
  
Pro forma: Diluted
  
$
0.35
  
$
0.63
  

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,
 
2006
2005
2006
2005
Expected life of option
5.5-6 yrs
4 yrs
5.5-6 yrs
4 yrs
Risk-free interest rate
5.03%
3.77%
4.90%
4.13%
Expected volatility
45%
83%
45%
84%
Expected dividend yield
0.00%
0.00%
0.00%
0.00%
 
During the fourth quarter of 2005, management analyzed its expected volatility and expected life of stock options and concluded that the current expected volatility for options granted during the fourth quarter of 2005 should be 45% and the expected life of the options granted should range between 5.5 and 6.0 years, depending on the grantee’s employee status. During the three months and six months ended June 30, 2005, the Company utilized an expected volatility of 83% and 84%, respectively, and an expected term of 4 years for both periods in its calculation of stock compensation expense, which was disclosed in its condensed consolidated financial statement footnotes. The variables used in the first half of 2005 and prior years were based solely on historical data, while the current rates are more reflective of current and future periods. These conclusions were based on several factors, including past company history, current and future trends, comparable benchmarked data and other key metrics. 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 and does not currently intend to pay cash dividends, thus has assumed a 0% dividend yield.
 
As part of the requirements of SFAS 123 (R), 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.
 
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
 
Stock Incentive Plan and Award Activity

As of June 14, 2006, the Company’s 2006 Stock Incentive Plan (“Stock Plan”) authorizes it to grant incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights ("SARs”). The aggregate number of shares of our common stock that may be issued under the Stock Plan upon exercise of options, SARs or in the form of restricted stock is 9.1 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 our common stock on the date of the option grant. The vesting and other provisions of the options are determined by the Compensation Committee of our Board of Directors.
 
The following table summarizes activity under our equity incentive plans for the six months ended June 30, 2006 (in thousands, except per share amounts):
 
   
 
 
 
 
Shares
  
Weighted Average Exercise Price
  
Weighted Average Remaining Contractual Term (in years)
  
 
 
Aggregate Intrinsic Value
  
 
Outstanding at January 1, 2006
    
2,971
  
$
10.47
              
 
Granted and assumed
    
328
  
$
25.89
              
 
Exercised
    
(442
)
$
6.29
              
 
Forfeited/expired/cancelled
    
(82
)
$
14.43
              
 
Outstanding at June 30, 2006
    
2,775
  
$
12.84
    
7.38
  
$
44,239
  
 
Options exercisable at June 30, 2006
    
1,233
  
$
8.85
    
6.30
  
$
24,582
  
 
The weighted-average grant-date fair value of stock options granted during the three-months ended June 30, 2006 and 2005 was $12.94 and $11.73 per share, respectively, and in addition, during the six-months ended June 30, 2006 and 2005 were $12.48 and $14.13 per share. The total intrinsic value of options exercised during the three-months ended June 30, 2006 and 2005 was $0.4 million and $0.3 million, respectively, and in addition, during the six-months ended June 30, 2006 and 2005 were $2.8 million and $3.4 million. As of June 30, 2006, there was approximately $11.4 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 2.8 years.
 
The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $0.5 million, individually, for both the three months ended June 30, 2006 and 2005 and during the six-months ended June 30, 2006 and 2005 were $4.0 million and $7.1 million, respectively.
 
A summary of the status and changes of our nonvested shares related to our equity incentive plans as of and during the six months ended June 30, 2006 is presented below:
 
(in thousands, except per share amounts)
Shares
Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2006
208
$20.31
Granted
348
$25.69
Released
(35)
$18.52
Forfeited
(10)
$23.93
Nonvested at June 30, 2006
511
$24.03
 
As of June 30, 2006, there was approximately $10.2 million 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 3.7 years. The total fair value of shares vested during the three and six-months ended June 30, 2006 were $1.0 million and $1.3 million, respectively. During the three and six-months ended June 30, 2005 the amounts were negligible.
 
6. Earnings Per Share (“EPS”):

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

A summary of the computation of basic and diluted earnings per share from continuing operations is as follows:
   
Three-Months Ended June 30,
  
Six-Months Ended June 30,
   
2006
  
2005
  
2006
  
2005
   
(in thousands, except per share and footnote disclosure data)
Basic EPS from Continuing Operations Computation
                        
Income from continuing operations
  
$
19,864
  
$
9,032
  
$
30,006
  
$
18,224
Weighted average number of common shares outstanding
    
29,188
    
26,757
    
28,696
    
26,431
Basic EPS from continuing operations
  
$
0.68
  
$
0.34
  
$
1.05
  
$
0.69
                         
Diluted EPS from Continuing Operations Computation
                        
Income from continuing operations
  
$
19,864
  
$
9,032
  
$
30,006
  
$
18,224
                         
Weighted average number of common shares outstanding
    
29,188
    
26,757
    
28,696
    
26,431
Stock options (1)
    
897
    
1,112
    
948
    
1,323
Restricted stock awards (2)
    
101
    
10
    
93
    
9
Total diluted common shares outstanding
    
30,186
    
27,879
    
29,737
    
27,763
                         
Diluted EPS from continuing operations
  
$
0.66
  
$
0.32
  
$
1.01
  
$
0.66
 
(1) For the three and six months ended June 30, 2006, 308,210 shares and 283,869 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, 2005, 102,545 shares and 84,616 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 and six months ended June 30, 2006, 27,203 shares and 15,006 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, 2005, 10,500 shares and 6,613 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.
 
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

7. Significant Clients:
 
      During the six-months ended June 30, 2006, the Company had no clients that accounted for more than 10%, individually, of the Company's total revenues across our inVentiv Clinical, inVentiv Communications and inVentiv Commercial segments. For the six-months ended June 30, 2005, three clients accounted for approximately 16%, 12% and 11%, individually, of the Company's total revenues across our inVentiv Clinical and inVentiv Commercial segments.

8.  Restricted Cash:

Restricted cash balances as of June 30, 2006 and December 31, 2005 were $0.3 million and $3.9 million, respectively. During the first two quarters of 2006, except as described in the following paragraph, the Company replaced most of its existing letters of credit with letters of credit under UBS AG Stamford Branch. These letters of credit were previously cash collateralized for various obligations and represented cash restricted from use for general purposes as of December 31, 2005. The new letters of credit are no longer fully cash collateralized and do not represent restricted cash.

In June 2005, the Company pledged approximately $0.3 million of cash as collateral on an outstanding standby letter of credit to support the security deposit relating to the New York office rental for the inVentiv Clinical segment. The beneficiary has not drawn on this letter of credit. As this cash has been pledged as collateral, it is restricted from use for general purposes and has been classified accordingly in the Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005.
 
9. Goodwill and Other Intangible Assets:

Goodwill consists of the following:
 
 
(in thousands)
  
January 1,
2006
  
2006 Acquisitions
  
Contingent(1) Consideration
  
June 30,
2006
  
inVentiv Clinical
  
$
45,427
  
$
3,235
  
$
1,004
  
$
49,666
  
inVentiv Communications
    
87,538
    
34,014
    
136
    
121,688
  
inVentiv Commercial
    
40,812
    
--
    
(44
)
  
40,768
  
Total
    
173,777
  
$
37,249
    
1,096
    
212,122
  
 
(1) The contingent consideration represents adjustments relating to the finalization of the 2005 earnouts (see Note 4 for further details).
 
Other intangible assets consist of the following:

   
June 30, 2006
  
December 31, 2005
  
(in thousands)
  
 
  
Accumulated
  
 
  
 
  
Accumulated
  
 
  
   
Gross
  
Amortization
  
Net
  
Gross
  
Amortization
  
Net
  
Customer relationships
 
$
57,642
  
$
(4,473
)
$
53,169
  
$
37,787
  
$
(2,098
)
$
35,689
  
Noncompete agreement
   
1,644
    
(266
)
  
1,378
    
690
    
(103
)
  
587
  
Tradenames subject to amortization
   
1,139
    
(64
)
  
1,075
    
--
    
--
    
--
  
Other
   
530
   
(204
)
  
326
   
260
   
(190
)
  
70
 
Total definite-life intangibles
    
60,955
    
(5,007
)
  
55,948
    
38,737
    
(2,391
)
  
36,346
 
Tradenames not subject to amortization
    
96,260
   
--
    
96,260
    
81,260
   
--
   
81,260
 
Total other intangibles (1)
  
$
157,215
  
$
(5,007
)
$
152,208
  
$
119,997
  
$
(2,391
)
$
117,606
  

(1) The $37.2 million increase in total gross other intangibles arises from the acquisitions of Adheris, JSAI and Synergos.

The 2004, 2005 and 2006 business combinations discussed in footnote 4 above resulted in approximately $191.5 million of goodwill (all of which is expected to be deductible for tax purposes) and the following gross intangible assets:

 
Intangible asset
  
Amount
(in thousands)
  
 
Weighted average amortization period
  
Tradename
  
$
97,399
    
(1
)
Customer relationships
   
57,642
    
11.2 years
  
Noncompete agreement
    
1,644
    
4.0 years
  
Technology
    
270
    
4.0 years
  
Total
  
$
156,955
  (2)  
 
 

(1)  
$1.1 million of the tradenames are indefinite-life intangibles. The remaining definite life intangibles have a weighted average amortization period of 6 years.
(2)  
Excludes $0.3 million of a definite-life intangible asset established prior to the 2004-2006 acquisitions.
 
INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

       Amortization expense, based on intangibles subject to amortization held at June 30, 2006, is expected to be $3.1 million for the last six months of 2006, $6.3 million in 2007, $6.1 million in 2008, $5.6 million in 2009, $5.1 million in 2010, $5.0 million in 2011 and $24.7 million thereafter.

Goodwill and other indefinite-life intangibles, such as tradenames, are assessed annually for potential impairment on June 30, pursuant to the guidelines of SFAS 142, Goodwill and Other Intangible Assets. 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, 2006.
 
10. Debt:
 
The Company’s principal external source of liquidity is its syndicated, secured credit agreement, which was entered into with UBS AG, Stamford Branch, and others in connection with the inChord acquisition. The key features of this credit facility are as follows:

·  
A $175 million term loan facility was made available to the Company in a single drawing at the time of the inChord transaction. The credit agreement also includes a $50 million revolving credit facility, of which $5 million is available for the issuance of letters of credit, and a $5 million swingline facility.

·  
The term loan will mature on the sixth anniversary of the Credit Agreement, with scheduled quarterly amortization of 1% per year during years one through five and 95% during year six. The revolving loans will mature on the sixth anniversary of the Credit Agreement. 

·  
Amounts advanced under the credit agreement must be prepaid with a percentage, determined based on a leverage test set forth in the credit agreement, of Excess Cash Flow (as defined in the credit agreement) and the proceeds of certain non-ordinary course asset sales and certain issuances of our debt obligations or equity securities, subject to certain exceptions. The Company 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 that are repaid or prepaid may not be reborrowed.

·  
Interest on the loans accrue, at our election, at either (1) the Alternate Base Rate (which is the greater of UBS’s prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at our option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based on the type of loan and method of interest rate determination elected.
 
 
                 The credit agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends, acquisitions and transactions with affiliates. The credit agreement also includes covenants under which we are required to maintain a maximum leverage ratio and minimum interest rate coverage and fixed charge coverage ratios that vary based on the amount of time elapsed since the initial extension of credit. As of June 30, 2006, the Company complied with the requirements of the credit facility.
 
The three-month LIBOR base rate as of June 30, 2006 was 5.50%. As mentioned in footnote 12, the Company entered into a derivative financial instrument to hedge against its $175 million term loan facility.
 
During 2005, the Company incurred costs of approximately $3.3 million related to the credit agreement. These amounts are classified as deferred financing costs and are included as Deposits and Other Assets on the June 30, 2006 Condensed Consolidated Balance Sheet. These deferred financing costs are amortized as interest expense over the life of the loan. At June 30, 2006, the Company had approximately $173.7 million outstanding on the term loan, $3.6 million outstanding with respect to letters of credit under the revolving credit facility and no amounts outstanding under the swingline facility. The aggregate annual scheduled principal payments for the next five years and thereafter related to the term loan facility at June 30, 2006 are summarized as follows:
 
(in thousands)
      
June 30, 2007
  
$
1,750
  
June 30, 2008
    
1,750
  
June 30, 2009
    
1,750
  
June 30, 2010
    
1,750
  
June 30, 2011
    
125,125
  
June 30, 2012 and thereafter
    
41,563
  
   
$
173,688
  

11. 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. During the fourth quarter of 2002, the segment entered into a second agreement with another vendor. Based on the terms of the agreement, management concluded that the leases were capital in nature based on the criteria established by SFAS No. 13, Accounting for Leases. The Company capitalized leased vehicles and recorded the related lease obligations totaling approximately $11.1 million (including rebates of $0.1 million) and $4.9 million during the six-month periods ended June 30, 2006 and 2005, respectively. The Company also incurred net disposals of $4.9 million and $2.0 million during the six-months ended June 30, 2006 and 2005, respectively.
 
12.  Derivative Financial Instruments:

Effective October 2005, the Company entered into a three-year interest rate swap arrangement for $175 million to apply a fixed interest rate against the six-year $175 million loan arrangement entered into to facilitate the acquisition of inChord. The Company entered into this interest rate swap agreement to modify the interest rate characteristics of its outstanding long-term debt. At inception, and at least quarterly thereafter, the Company assesses whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense).

For the six months ended June 30, 2006, the Company did not qualify for hedge accounting and recorded a $2.8 million reduction to interest expense relating to the mark-to-market adjustment required to record hedge ineffectiveness to earnings, and a corresponding derivative asset of approximately $2.8 million, which was recorded in Deposits and Other Assets on the Condensed Consolidated Balance Sheet; to date, this asset totals $3.1 million on the June 30, 2006 Condensed Consolidated Balance Sheet. The fair values of the interest rate swaps are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.

13.  Commitments and Contingencies:

The Company is subject to lawsuits, investigations and claims arising out of the conduct of its business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain claims, suits and complaints have been filed or are pending against the Company. Certain such claims that are pending against Adheris are described in Part I, Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. With the exception of the claims described therein, all pending matters are of a kind routinely experienced in our business and are consistent with our historical experience. In the opinion of management and based on the advice of legal counsel, no matters outstanding as of June 30, 2006 are likely to have a material adverse effect on inVentiv.

Pursuant to the acquisition of inChord, the Company assumed a $7.5 million existing liability on inChord’s balance sheet relating to certain performance thresholds of inChord over a three-year period. The Company will continue to periodically monitor these performance thresholds, which may result in up to an additional $7.5 million of future expenses if and when it is probable that the additional thresholds will be met. As of June 30, 2006, the Company has not recorded any additional liability since the additional performance thresholds have not been met.

INVENTIV HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

14. Deferred Compensation:

On November 22, 2004, inVentiv adopted the Ventiv Health, Inc. Deferred Compensation Plan (the "Plan"), which was approved by inVentiv’s Board of Directors. The Plan provides eligible management and other highly compensated employees with the opportunity to defer, on a pre-tax basis, their salary, bonus, and other specified cash compensation and to receive the deferred amounts, together with a deemed investment return (positive or negative), either at a pre-determined time in the future or upon termination of employment with the Company or an affiliated employer participating in the Plan. The compensation deferrals were initiated in 2005. The deferred compensation liability of approximately $3.5 million was included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2006. The Plan does not provide for the payment of above-market interest to participants.

To assist in the funding of the 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, 2006 was approximately $2.7 million and is currently classified in Deposits and Other Assets on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2006.

15.  Income Taxes

In June 2006, inVentiv recorded a tax benefit of approximately $9.1 million relating to net operating losses of a previously-divested unit. The Company’s management has determined that it is probable that this deferred tax asset will be utilized, thus reducing the valuation allowance during the second quarter of 2006 accordingly. Excluding this one-time tax benefit, inVentiv recorded a provision for income taxes on continuing operations using an estimated effective tax rate of 40.0% for the six-month period ended June 30, 2006. In March 2005, inVentiv recorded a tax benefit of approximately $1.6 million primarily related to prior period tax contingencies, which are no longer required; excluding this one-time tax benefit, inVentiv recorded a provision for income taxes on continuing operations using an estimated effective tax rate of 39.8% for the six-month period ended June 30, 2005. Our 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. Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.

16.  Stockholders’ Equity
 
The following table describes the 2006 activity in the Company’s Stockholders’ Equity accounts for the six months ended June 30, 2006:
 
   
 
 
 
 
Common Stock
  
 
 
 
Additional Paid-In
Capital
  
 
 
 
 
Accumulated earnings
  
 
 
 
Deferred Compen-
Sation
  
 
 
 
Compre-hensive
Income
  
Accumulated Other Comprehen-sive Income (Losses)
  
 
 
 
 
 
Total
  
Balance at December 31, 2005
  
$
28
  
$
233,441
  
$
23,092
  
$
(3,563
)
      
$
221
  
$
253,219
  
Net income
                
31,227
        
$
31,227
          
31,227
  
Foreign currency translation
Adjustment
                            
714
    
714
    
714
  
                             
31,941
              
Reclassification of unvested restricted shares to additional paid-in capital
          
(3,563
)
        
3,563
                
--
  
Vesting of restricted shares
          
1,222
                            
1,222
  
Withhold shares for taxes
         
(85
)
                          
(85
)
Tax benefit from exercise of employee stock options and vesting of restricted stock
          
4,409
                            
4,409
  
Consultant compensation
         
399
                            
399
  
Exercise of stock options
          
2,778
                            
2,778
  
Stock option expense
          
2,114
                            
2,114
  
Issuance of shares in connection with acquisitions
    
1
    
27,176
                            
27,177
  
Cash distribution TSP
                
(552
)
                    
(552
)
Balance at June 30, 2006
  
$
29
  
$
267,891
  
$
53,767
  
$
--
        
$
935
  
$
322,622
  

17. Discontinued Operations:

For the six months ended June 30, 2006 and 2005, earnings from discontinued operations, net of taxes, were approximately $1.2 million and $1.6 million, respectively. The gains on disposals of discontinued operations mainly consisted of contingency payments due from our previously-divested Germany-based unit.
 

18. Related Parties:

The Company is currently in a lease with Olde Worthington Road LLC for inVentiv Communications’ current headquarters facility in Westerville, Ohio. This facility is partially owned by the current inVentiv Communications’ Chief Executive Officer (who is also a member of the Board of Directors), his brothers and other current employees of inVentiv Communications through their ownership in GSW Capital LLC. GSW Capital LLC is a 50% owner of Olde Worthington Road LLC. The term of the lease is fifteen years, and expires on September 30, 2015 (subject to an early termination option effective as of September 30, 2010 in favor of inChord).
 
19. Segment Information:

The Company currently manages three operating segments: inVentiv Clinical, inVentiv Communications and inVentiv Commercial, and its non-operating reportable segment, “Other”, which is based on the way management makes operating decisions and assesses performance. The following represents our reportable segments:

·  
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional service provision

·  
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, interactive communication development and patient and physician education

·  
inVentiv Commercial, which consists of the Company’s outsourced sales and marketing teams, planning and analytics services, sample accountability and patient assistance businesses, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area.

·  
Other, which encompasses the activities of the corporate management group.
 
In August 2005, the Company acquired PRS, which is reported in the inVentiv Commercial segment from the date of its acquisition. In October 2005, the Company acquired inChord, which created the operating segment, inVentiv Communications, from the date of its acquisition. In February 2006, the Company acquired Adheris, which is reported in the inVentiv Communications segment from the date of its acquisition. In April 2006, the Company acquired Synergos, which is reported in the inVentiv Clinical segment from the date of its acquisition and JSAI, which is reported in the inVentiv Communications segment from the date of its acquisition.
 
Segment information for the three-months ended June 30, 2006 is as follows (in thousands):

   
inVentiv
Clinical
  
inVentiv Communications
  
inVentiv Commercial
  
 
Other
  
 
Total
  
Revenues
  
$
38,541
  
$
64,898
  
$
80,955
  
$
--
  
$
184,394
  
Less: Intersegment revenues
    
(122
)
  
(363
)
  
(930
)
  
--
    
(1,415
)
Reported Revenues
  
$
38,419
  
$
64,535
  
$
80,025
  
$
--
  
$
182,979
  
Depreciation and amortization
    
415
    
1,466
    
3,469
    
22
    
5,372
  
Interest expense
    
--
    
8
    
415
    
1,818
    
2,241
  
Interest income
    
10
    
155
    
--
    
197
    
362
  
Segment income (loss) (1)
  
$
3,597
  
$
8,797
  
$
10,245
  
$
(4,337
)
$
18,302
  
 
Segment information for the three-months ended June 30, 2005 is as follows (in thousands):

   
inVentiv
Clinical
  
inVentiv Communications
  
inVentiv Commercial
  
 
Other
  
 
Total
  
Revenues
  
$
27,757
  
$
--
  
$
104,224
  
$
--
  
$
131,981
  
Less: Intersegment revenues
    
--
    
--
    
(193
)
  
--
    
(193
)
Reported Revenues
  
$
27,757
  
$
--
  
$
104,031
  
$
--
  
$
131,788
  
Depreciation and amortization
    
311
    
--
    
3,203
    
22
    
3,536
  
Interest expense
    
--
    
--
    
315
    
7
    
322
  
Interest income
    
6
    
--
    
33
    
214
    
253
  
Segment income (loss) (1)
  
$
2,153
  
$
--
  
$
14,620
  
$
(1,770
)
$
15,003
  

Segment information for the six-months ended June 30, 2006 is as follows (in thousands): 

   
inVentiv
Clinical
  
inVentiv Communications
  
inVentiv Commercial
  
 
Other
  
 
Total
  
Revenues
  
$
71,011
  
$
117,476
  
$
170,759
  
$
--
  
$
359,246
  
Less: Intersegment revenues
    
(156
)
  
(489
)
  
(1,945
)
  
--
    
(2,590
)
Reported Revenues
  
$
70,855
  
$
116,987
  
$
168,814
  
$
--
  
$
356,656
  
Depreciation and amortization
    
729
    
2,321
    
7,101
    
43
    
10,194
  
Interest expense
    
--
    
19
    
814
    
3,065
    
3,898
  
Interest income
    
22
    
282
    
--
    
792
    
1,096
  
Segment income (loss) (1)
  
$
4,923
  
$
17,506
  
$
21,359
  
$
(7,526
)
$
36,262
  

Segment information for the six months ended June 30, 2005 is as follows (in thousands):

   
InVentiv
Clinical
  
inVentiv Communications
  
inVentiv Commercial
  
 
Other
  
 
Total
  
Revenues
  
$
52,467
  
$
--
  
$
200,527
  
$
--
  
$
252,994
  
Less: Intersegment revenues
    
(8
)
  
--
    
(340
)
  
--
    
(348
)
Reported Revenues
  
$
52,459
  
$
--
  
$
200,187
  
$
--
  
$
252,646
  
Depreciation and amortization
    
621
    
--
    
8,446
    
43
    
9,110
  
Interest expense
    
--
    
--
    
603
    
107
    
710
  
Interest income
    
12
    
--
    
59
    
435
    
506
  
Segment income (loss) (1)
  
$
4,107
  
$
--
  
$
27,063
  
$
(3,556
)
$
27,614
  
 
(1)  
Income from continuing operations before income tax provision, minority interest in income of subsidiary and income (loss) from equity investments

(in thousands)
  
June 30, 2006
 
Dec. 31, 2005
  
Total Assets:
          
inVentiv Clinical
  
$
100,436
  
$
84,731
  
inVentiv Communications
    
349,178
    
248,986
  
inVentiv Commercial
    
153,142
    
171,468
  
Other
    
57,112
    
78,709
  
Total assets
  
$
659,868
  
$
583,894
  

 



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 years ended December 31, 2005, 2004 and 2003.

Overview

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. We support a broad range of clinical development, communications and commercialization activities that are critical to our customers' ability to complete the development of new drug products and medical devices and successfully bring them to market. Our goal is to assist our customers in meeting their objectives in each of these areas by providing our services on a flexible and cost-effective basis. We provide services to over 200 client organizations, including all top 20 global pharmaceutical companies and numerous emerging and specialty biotechnology companies.

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. We have established expertise and leadership in providing the services our clients require at each of these stages of product development and commercialization and seek to address their outsourced service needs on a comprehensive basis throughout the product life cycle. Our services assist our clients in developing, executing and monitoring strategic and tactical sales and marketing plans and programs for the promotion of pharmaceutical, biotechnology and other life sciences products.
 
We currently serve our clients primarily through three business segments:

·  
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional service provision.

·  
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, interactive communication development and patient and physician education.

·  
inVentiv Commercial, which consists of our outsourced sales and marketing teams, planning and analytics services, sample accountability and patient assistance businesses, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area.

inVentiv Clinical was initially built through the acquisition of the Smith Hanley group of companies and HHI during the fourth quarter of 2004 and was augmented with the acquisition of Synergos in April 2006. inVentiv Communications was founded with the acquisition of inChord in October 2005 and also includes Adheris, which was acquired in February 2006, and JSAI, which was acquired in April 2006. inVentiv Commercial includes our outsourced sales and marketing teams, planning and analytics services and other services that we have operated since our inception and also includes Franklin Group, which was acquired in June of 2004 and PRS, which was acquired in August of 2005.
 
On June 14, 2006, we changed our name to inVentiv Health, Inc. as part of a re-branding initiative that began when we acquired inChord.
 
Acquisitions and Divestitures
 
    The pursuit of strategic acquisitions is a core part of our business strategy. We believe that our expertise in identifying potential acquisition targets, assessing their importance to our operational and growth objectives, diligencing and completing the acquisition of appropriate businesses and effectively integrating them with our existing operations is a significant competitive advantage. The following is a summary of our acquisitions to date:
 
Target
Type of Business
Location
Month Acquired
JSAI
Marketing and communications agency
Canada
April 2006
Synergos
Clinical trial management services
Texas
April 2006
Adheris
Patient pharmaceutical compliance
Massachusetts
February 2006
inChord
Advertising and communications support
Ohio
October 2005
PRS
Regulatory compliance
Pennsylvania
August 2005
HHI
Data management and statistical analyses
Maryland
November 2004
Smith Hanley
Contract research and clinical trial support
Connecticut
October 2004
Franklin
Patient support programs
New Jersey
June 2004

Our acquisition activity adds complexity to the analysis of period-to-period financial results and makes direct comparison of those financial results difficult. Our acquisitions are accounted for using purchase accounting and the financial results of the acquired businesses are included in our financial statements from their acquisitions dates. A prior year period that ended before an acquisition was completed, however, will not include the corresponding financial results of the acquired business.

Our financial statements for the second quarter and the first six months of 2006 include the financial results of inChord, PRS, Adheris, JSAI and Synergos. Each of those businesses was acquired after the completion of the corresponding 2005 fiscal periods.

During 2002 and 2003, we divested our Communications and European Contract Sales businesses. We have been receiving payments subsequent to some of these divestitures based on the subsequent earnings of the divested unit. For the six months ended June 30, 2006 and 2005, we received approximately $0.1 million and $1.6 million, respectively, relating to the Germany-based contract sales organization.

Critical Accounting Policies

The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2005. There has been no change, update or revision to the Company’s critical accounting policies subsequent to the filing of the Company’s Form 10-K for the year ended December 31, 2005, except for the adoption of Statement of Financial Accounting Standards No. 123 (“SFAS 123 (R)”), Share-Based Payment, as more fully described below.
 
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (R), which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the effective dates for SFAS 123 (R). In accordance with the new rule, the Company adopted the accounting provisions of SFAS 123 (R) as of January 1, 2006.

inVentiv adopted SFAS 123 (R) using the modified prospective transition method beginning January 1, 2006. Accordingly, during the six-month period ended June 30, 2006, inVentiv recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under FAS 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, inVentiv recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these awards, compensation expense was recognized using a ratable amortization method.

In the process of implementing FAS 123(R), during the fourth quarter of 2005, inVentiv analyzed certain key variables, such as expected volatility and expected term to determine an accurate estimate of these variables. As a result of this analysis, inVentiv determined that the expected volatility should be 45%, while the expected term should range from 5.5 to 6 years. During the three months ended June 30, 2005, the Company utilized an expected volatility of 84% and an expected term of 4 years. The variables used in early 2005 and prior years were based solely on historical data, while the current rates are more reflective of current and future periods. FAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest. Stock-based compensation for the six-month period ended June 30, 2006 has been reduced for estimated forfeitures. When estimating forfeitures, inVentiv considers voluntary termination behaviors as well as trends of actual option forfeitures.
 

Three-Months Ended June 30, 2006 Compared to Three-Months Ended June 30, 2005

Results of Operations

The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
 
   
For the Three-Months Ended June 30,
  
   
2006
  
2005
  
   
(in thousands, except for per share data)
  
Revenues:
      
Percentage (1)
      
Percentage(1)
  
inVentiv Clinical
  
$
38,419
    
21.0
%
$
27,757
    
21.1
%
inVentiv Communications
    
64,535
    
35.3
%
  
--
    
--
  
inVentiv Commercial
    
80,025
    
43.7
%
  
104,031
    
78.9
%
Total revenues
    
182,979
    
100.0
%
  
131,788
    
100.0
%
                           
Cost of services (2):
                          
inVentiv Clinical
    
25,028
    
65.1
%
  
18,154
    
65.4
%
inVentiv Communications
    
40,469
    
62.7
%
  
--
    
--
  
inVentiv Commercial
    
62,363
    
77.9
%
  
81,607
    
78.4
%
Total cost of services
    
127,860
    
69.9
%
  
99,761
    
75.7
%
                           
Selling, general and administrative expenses
    
34,938
    
19.1
%
  
16,955
    
12.9
%
                           
Total operating income
  
$
20,181
    
11.0
%
$
15,072
    
11.4
%
Interest expense
    
(2,241
)
  
(1.2
)%
  
(322
)
  
(0.2
)%
Interest income
    
362
    
0.2
%
  
253
    
0.2
%
Income from continuing operations before income tax provision,
minority interest in income of subsidiary and income from equity
investments
   
18,302
    
10.0
%
  
15,003
    
11.4
%
Income tax benefit (provision)
    
1,748
    
1.0
%
  
(5,971
)
  
(4.5
)%
Income from continuing operations before minority interest in
income of subsidiary and income from equity investments
    
20,050
    
11.0
%
  
9,032
    
6.9
%
Minority interest in subsidiary
    
(352
)
  
(0.2
)%
  
--
    
--
  
Income from equity investments
    
166
    
0.1
%
  
--
    
--
  
Income from continuing operations
    
19,864
    
10.9
%
  
9,032
    
6.9
%
                           
Income from discontinued operations:
                          
Gains on disposals of discontinued operations, net of taxes
    
1,115
    
0.6
%
  
1,463
    
1.1
%
Income from discontinued operations
    
1,115
    
0.6
%
  
1,463
    
1.1
%
                           
Net income
  
$
20,979
    
11.5
%
$
10,495
    
8.0
%
                           
Earnings per share:
                          
Continuing operations:
                          
Basic
  
$
0.68
        
$
0.34
        
Diluted
  
$
0.66
        
$
0.32
        
Discontinued operations:
                          
Basic
  
$
0.04
        
$
0.05
        
Diluted
  
$
0.03
        
$
0.06
        
Net earnings:
                          
Basic
  
$
0.72
        
$
0.39
        
Diluted
  
$
0.69
        
$
0.38
        

(1)  
Cost of services is expressed as a percentage of segment revenue. All other line items are displayed as a percentage of total revenues.
(2)  
Cost of services includes reimbursed out of pocket expenses.



Revenues: Revenues increased by approximately $51.2 million, or 38.8%, to $183.0 million during the second quarter of 2006, from $131.8 million during the second quarter of 2005.
 
inVentiv Clinical’s revenues were $38.4 million during the second quarter of 2006, an increase of $10.6 million compared to $27.8 million during the second quarter of 2005. inVentiv Clinical revenues accounted for 21.0% of total inVentiv revenues during the second quarter of 2006. Revenues in the clinical staffing division were higher in 2006 predominantly due to increased placement of temporary personnel. The acquisition of Synergos in April 2006 also contributed to revenues for the second quarter of 2006.
 
inVentiv Communications’ revenues were $64.5 million during the second quarter of 2006. inVentiv Communications revenues accounted for 35.3% of total inVentiv revenues during the second quarter of 2006. inVentiv Communications was established in October 2005 with the acquisition of inChord and also includes the operations of Adheris, which was acquired in February 2006, and JSAI, which was acquired in April 2006.
 
Revenues in our inVentiv Commercial segment were $80.0 million during the second quarter of 2006, a decrease of $24.0 million, or 23.1% from the $104.0 million during the second quarter of 2005. inVentiv Commerical revenues accounted for 43.7% of total inVentiv revenues for the second quarter of 2006. This decrease resulted primarily from anticipated wind-downs of certain contracts, and was partially offset by additional revenue during 2006 from PRS, which was acquired in August 2005. The sales teams business is expected to resume its growth trajectory in the second half of the year with the addition of several new contract wins.

Cost of Services: Cost of services increased by approximately $28.1 million or 28.2%, to $127.9 million during the second quarter of 2006 from $99.8 million in the second quarter of 2005. Cost of services as a percentage of revenues decreased to 69.9% during the second quarter of 2006 from 75.7% during the second quarter of 2005. In addition to increases in variable costs associated with increased revenues, cost of services includes $0.6 million of share-based compensation expense not recorded in prior years.  On January 1, 2006, inVentiv adopted the provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123R"), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. In prior periods, inVentiv recorded compensation expense for unvested restricted shares over the applicable vesting periods. Starting in January 2006, as a result of adopting FAS 123 (R), inVentiv has also recorded compensation expense for its stock options. For further details on the new accounting policy, see section on Critical Accounting Policies.  

inVentiv Clinical’s cost of services increased by approximately $6.8 million, or 37.9%, to $25.0 million during the second quarter of 2006 from $18.2 million during the second quarter of 2005. Cost of services as a percentage of revenues slightly decreased from 65.4% during the second quarter of 2005 to 65.1% during the same period in 2006.

inVentiv Communications, which was established in October 2005 and contributed approximately $40.5 million to cost of sales during the second quarter of 2006. Cost of sales was 62.7% of this segment’s revenues.

Cost of services at inVentiv Commercial decreased by approximately $19.2 million, or 23.6%, to $62.4 million in the second quarter of 2006 from $81.6 million in the second quarter of 2005, mainly due to the decrease in revenues. Cost of services was 77.9% of inVentiv Commercial revenues during the second quarter of 2006, compared to 78.4% during the second quarter of 2005. The decrease of cost of services as a percentage of revenue in 2006 as compared to 2005 was attributable to a shift toward higher-margin businesses.

Selling, General and Administrative Expenses ("SG&A"): SG&A expenses increased by approximately $17.9 million, or 106.1%, to $34.9 million during the second quarter of 2006 from $17.0 million during the second quarter of 2005. This increase was primarily due to SG&A expenses at inVentiv Communications, which was acquired in October 2005; increased compensation levels in 2006 versus 2005; and $1.1 million of share-based compensation expense, for which there was no corresponding expense during 2005.
 
SG&A expenses at inVentiv Clinical were approximately $9.8 million during the second quarter of 2006, compared to $7.5 million during the second quarter of 2005. Additional staffing was required as the division has grown over the past year.
 
SG&A expenses at inVentiv Communications, which was acquired in October 2005, were approximately $15.4 million during the second quarter of 2006.
 
SG&A expenses at inVentiv Commercial decreased by approximately $0.5 million, or 6.9%, to $7.0 million during the second quarter of 2006 from $7.5 million during the second quarter of 2005. This decrease was attributable to ongoing cost savings measures implemented by management to align our support and infrastructure with the current level of operations and was partially offset by expenses related to PRS, for which there were no corresponding expenses during the second quarter of 2005 since the acquisition did not occur until August 2005.
 
Other SG&A was approximately $2.7 million for the second quarter of 2006, an increase of approximately $0.7 million or 36.5% from $2.0 million during the second quarter of 2005. The increase was mainly related to increases in stock-based compensation expense that was required to be accounted for beginning in 2006, additional staff hired in internal audit and higher compensation than in the previous year.
 
Provision for Income Taxes: In June 2006, inVentiv recorded a tax benefit of approximately $9.1 million relating to net operating losses of a previously-divested unit. Management has determined that it is probable that this deferred tax asset will be utilized and has reduced the valuation allowance during the second quarter of 2006 accordingly. Excluding this one-time tax benefit, inVentiv recorded a provision for income taxes on continuing operations using an estimated effective tax rate of 40.0% for the three-month period ended June 30, 2006. For the three months ended June 30, 2005, inVentiv used an effective tax rate of 39.8%. Our 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. Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.

Discontinued Operations: Earnings from discontinued operations, net of taxes, were approximately $1.1 million and $1.5 million for the second quarter of 2006 and the second quarter of 2005, respectively. The gains on disposals of discontinued operations mainly consisted of contingency payments due from our previously-divested Germany-based unit.

Net Income and Earnings Per Share: inVentiv’s net income increased by approximately $10.5 million to $21.0 million during the second quarter of 2006 from net income of $10.5 million during the second quarter of 2005.  Diluted earnings per share increased to $0.69 per share during the second quarter of 2006 from $0.38 per share during the second quarter of 2005.  Operating results were higher due to improved results in inVentiv Clinical, new acquisitions, and a one-time tax benefit, offset by stock-based compensation expense recorded as a result of adopting FAS 123R.


Six-Months Ended June 30, 2006 Compared to Six-Months Ended June 30, 2005

Results of Operations

The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as percentage of revenues:
 
   
For the Six-Months Ended June 30,
  
   
2006
  
2005
  
   
(in thousands, except for per share data)
  
Revenues:
      
Percentage(1)
      
Percentage(1)
  
inVentiv Clinical
  
$
70,855
    
19.9
%
$
52,459
    
20.8
%
inVentiv Communications
    
116,987
    
32.8
%
  
--
    
--
  
inVentiv Commercial
    
168,814
    
47.3
%
  
200,187
    
79.2
%
Total revenues
    
356,656
    
100.0
%
  
252,646
    
100.0
%
                           
Cost of services (2):
                          
inVentiv Clinical
    
47,872
    
67.6
%
  
34,278
    
65.3
%
inVentiv Communications
    
72,635
    
62.1
%
  
--
    
--
  
inVentiv Commercial
    
132,160
    
78.3
%
  
159,195
    
79.5
%
Total cost of services
    
252,667
    
70.8
%
  
193,473
    
76.6
%
                           
Selling, general and administrative expenses
    
64,925
    
18.2
%
  
31,355
    
12.4
%
                           
Total operating income
  
$
39,064
    
11.0
%
$
27,818
    
11.0
%
Interest expense
    
(3,898
)
  
(1.1
)%
  
(710
)
  
(0.3
)%
Interest income
    
1,096
    
0.3
%
  
506
    
0.2
%
Income from continuing operations before income tax provision,
minority interest in income of subsidiary and loss from equity
investments
   
36,262
    
10.2
%
  
27,614
    
10.9
%
Income tax provision
    
(5,436
)
  
(1.5
)%
  
(9,390
)
  
(3.7
)%
Income from continuing operations before minority interest in
income of subsidiary and loss from equity investments
    
30,826
    
8.7
%
  
18,224
    
7.2
%
Minority interest in subsidiary
    
(676
)
  
(0.2
)%
  
--
    
--
  
Loss from equity investments
    
(144
)
  
--
    
--
    
--
  
Income from continuing operations
    
30,006
    
8.5
%
  
18,224
    
7.2
%
                           
Income from discontinued operations:
                          
Gains on disposals of discontinued operations, net of taxes
    
1,221
    
0.3
%
  
1,562
    
0.6
%
Income from discontinued operations
    
1,221
    
0.3
%
  
1,562
    
0.6
%
                           
Net income
  
$
31,227
    
8.8
%
$
19,786
    
7.8
%
                           
Earnings per share:
                          
Continuing operations:
                          
Basic
  
$
1.05
        
$
0.69
        
Diluted
  
$
1.01
        
$
0.66
        
Discontinued operations:
                          
Basic
  
$
0.04
        
$
0.06
        
Diluted
  
$
0.04
        
$
0.05
        
Net earnings:
                          
Basic
  
$
1.09
        
$
0.75
        
Diluted
  
$
1.05
        
$
0.71
        

(1)  
Cost of services is expressed as a percentage of segment revenue. All other line items are displayed as a percentage of total revenues.
(2)  
Cost of services includes reimbursed out of pocket expenses.



Revenues: Revenues increased by approximately $104.1 million, or 41.2%, to $356.7 million in the six-month period ended June 30, 2006, from $252.6 million in the six-months ended June 30, 2005.
 
inVentiv Clinical’s revenues were $70.9 million during the six months ended June 30, 2006, an increase of $18.4 million compared to $52.5 million during the six-months ended June 30, 2005. Revenues in the clinical staffing division were higher in 2006 predominantly due to increased placement of temporary personnel. The clinical staffing division also typically experiences a decrease in personnel during the first quarter of a year as clients may decide not to continue to employ these temporary personnel. This “falloff” was less significant in 2006 than 2005. Finally, in April 2006, the Company acquired Synergos, which complements the segment by strengthening the functional outsourcing service.
 
inVentiv Communications was acquired in October 2005 and contributed approximately $117.0 million of revenues during the six-months ended June 30, 2006. This segment specializes in pharmaceutical advertising, branding, marketing and medical education.
 
Revenues in our inVentiv Commercial business were $168.8 million, a decrease of $31.4 million or 15.7% from the $200.2 million in the same period in 2005. This decrease resulted primarily from anticipated wind-downs of certain contracts, and was partially offset by additional revenue during 2006 from PRS, which was acquired in August 2005. The sales teams business is expected to resume its growth trajectory in the second half of the year with the addition of several new contract wins.

Cost of Services: Cost of services increased by approximately $59.2 million or 30.6%, to $252.7 million for the six-months ended June 30, 2006 from $193.5 million in the six-months ended June 30, 2005. Cost of services decreased as a percentage of revenues to 70.8% from 76.6% in the six-months ended June 30, 2006 and 2005, respectively. Overall cost of services increased due to increased revenue over the same period; in addition, cost of services increased partially due to $1.2 million of share-based compensation expense not recorded in prior years. On January 1, 2006, inVentiv adopted the provisions of Statement of Financial Accounting Standards No. 123 (FAS 123R), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. In prior periods, inVentiv recorded compensation expense for unvested restricted shares over the applicable vesting periods. Starting in January 2006, as a result of adopting FAS 123 (R), inVentiv has also recorded compensation expense for its stock options. For further details on the new accounting policy, see section on Critical Accounting Policies.  

inVentiv Clinical’s cost of services increased by approximately $13.6 million, or 39.7%, to $47.9 million during the six months ended June 30, 2006 from $34.3 million during the six-months ended June 30, 2005. Cost of services as a percentage of revenues increased from 65.3% during the six-months ended June 30, 2005 to 67.6% during the same period in 2006.

inVentiv Communications was acquired in October 2005 and incurred approximately $72.6 million of cost of sales during the six months ended June 30, 2006. Cost of sales was 62.1% of this segment’s revenues. This segment specializes in pharmaceutical advertising, branding, marketing and medical education.

Cost of services at inVentiv Commercial decreased by approximately $27.0 million, or 17.0%, to $132.2 million in the six months ended June 30, 2006 from $159.2 million in the six months ended June 30, 2005, mainly due to the decrease in revenues. Cost of services was 78.3% of inVentiv Commercial revenue in the six months ended June 30, 2006, compared to 79.5% in the six months ended June 30, 2005. The decrease of cost of services as a percentage of revenue in 2006 as compared to 2005 was attributable to a shift toward higher-margin businesses.

Selling, General and Administrative Expenses: SG&A expenses increased by approximately $33.5 million, or 107.1%, to $64.9 million from $31.4 million in the six months ended June 30, 2006 and 2005, respectively. This increase was primarily due to SG&A expenses at inVentiv Communications, which was acquired in October 2005; increased compensation levels in 2006 versus 2005; and $2.1 million of share-based compensation expense, which was new in 2006, as described above in the cost of services section.
 
SG&A expenses at inVentiv Clinical was approximately $18.1 million in the first half of 2006, compared to $14.1 million during the first half of 2005. Additional staffing requirements were required as the division has grown over the past year.
 
SG&A expenses at inVentiv Communications, which was acquired in October 2005, was approximately $27.1 million in the first half of 2006.
 
SG&A expenses at inVentiv Commercial increased by approximately $1.1 million, or 8.2%, to $14.5 million in the six months ended June 30, 2006 from $13.4 million incurred in the six months ended June 30, 2005. This increase was attributable to expenses related to PRS that were not included in the first half of 2005 since the acquisition did not occur until August 2005, offset by ongoing cost savings measures implemented by management to align our support and infrastructure with the current level of operations.
 
Other SG&A was approximately $5.3 million for the six-months ended June 30, 2006, an increase of approximately $1.4 million or 35.3% from $3.9 million for the six-months ended June 30, 2005. The increase was mainly related to increases in stock-based compensation expense in 2006, additional staff hired in internal audit and higher compensation from the previous year.
 
Provision for Income Taxes: In June 2006, inVentiv recorded a tax benefit of approximately $9.1 million relating to net operating losses of a previously-divested unit. The Company’s management has determined that it is probable that this deferred tax asset will be utilized, thus reducing the valuation allowance during the second quarter of 2006 accordingly. Excluding this one-time tax benefit, inVentiv recorded a provision for income taxes on continuing operations using an estimated effective tax rate of 40.0% for the six-month period ended June 30, 2006. In March 2005, inVentiv recorded a tax benefit of approximately $1.6 million primarily related to prior period tax contingencies, which are no longer required; excluding this one-time tax benefit, inVentiv recorded a provision for income taxes on continuing operations using an estimated effective tax rate of 39.8% for the six-month period ended June 30, 2005. Our 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. Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.

Discontinued Operations: For the six months ended June 30, 2006 and 2005, earnings from discontinued operations, net of taxes, were approximately $1.2 million and $1.6 million, respectively. The gains on disposals of discontinued operations mainly consisted of contingency payments due from our previously-divested Germany-based unit.

Net Income and Earnings Per Share: inVentiv’s net income increased by approximately $11.4 million to $31.2 million, from net income of $19.8 million in the six months ended June 30, 2006 and 2005, respectively. Diluted earnings per share increased to earnings of $1.05 per share for the six-month period ended June 30, 2006 from earnings of $0.71 per share for the six-month period ended June 30, 2005.  Operating results were higher due to increased results in inVentiv Clinical, new acquisitions, and a one-time tax benefit, offset by stock-based compensation expense recorded as a result of adopting FAS 123R.

Liquidity and Capital Resources

At June 30, 2006, inVentiv had $50.4 million of unrestricted cash and equivalents, a decrease of $22.7 million from December 31, 2005. For the six-months ended June 30, 2005 compared to June 30, 2006, cash provided by operations increased by $37.0 million from $2.8 million to $39.8 million. Cash used in investing activities increased from $9.7 million to $61.7 million for the six-months ended June 30, 2005 and 2006, respectively. Cash used in financing activities decreased from $3.0 million to $1.5 million over the same comparative periods.

Cash provided by operations was $39.8 million during the six-months ended June 30, 2006, while cash provided by operations was $2.8 million in the six-months ended June 30, 2005. This increase was, in large part, due to the collection of certain payments due under various contracts. The accounts receivable and unbilled services balances decreased by approximately $4.5 million during the first half of 2006, versus an increase of approximately $25.6 million during the first half of 2005, both net of acquired balances from acquisitions. This was mainly due to the timing of collection of certain receivables during the first half of 2006.

Cash used in investing activities was $61.7 million for the six-months ended June 30, 2006 compared to $9.7 million used during the same period in 2005. During the six months ended June 30, 2006, the Company paid approximately $50.4 million of cash, net of cash acquired, for the acquisitions of Adheris, JSAI and Synergos. In addition, the Company paid approximately $3.1 million more in the cash portion of earnout contingency payments during the first half of 2006 then during the first half of 2005, mainly due to the additional earnout payments for the businesses acquired during 2005.

Cash used in financing activities was $1.5 million and $3.0 million, respectively, for the first half of 2006 and 2005. During the first half of 2006, inVentiv adopted FAS 123 R, resulting in a financing inflow and corresponding operating outflow of $4.0 million. This financing inflow was partially offset by repayment of debt under the new credit facility established in October 2005, as more fully described below, and lower proceeds from the exercise of stock options during the first half of 2006 versus the same period in 2005.

The acquisition agreements entered into in connection with inVentiv’s 2004, 2005 and 2006 acquisitions include earn-out provisions pursuant to which the sellers will become entitled to additional consideration, which may be material, if the acquired businesses achieve specified performance measurements. See footnote 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Our principal external source of liquidity is our syndicated, secured credit agreement, which we entered into with UBS AG, Stamford Branch, and others in connection with the inChord acquisition. As of June 30, 2006, the Company complied with the requirements of the credit facility. The key features of this credit facility are as follows:
 
 
·  
A $175 million term loan facility was made available to inVentiv in a single drawing at the time of the inChord transaction. The credit agreement also includes a $50 million revolving credit facility, of which $5 million is available for the issuance of letters of credit, and a $5 million swingline facility.
 
·  
The term loan will mature on the sixth anniversary of the Credit Agreement, with scheduled quarterly amortization of 1% per year during years one through five and 95% during year six. The revolving loans will mature on the sixth anniversary of the Credit Agreement.
 
·  
Amounts advanced under the credit agreement must be prepaid with a percentage, determined based on a leverage test set forth in the credit agreement, of Excess Cash Flow (as defined in the credit agreement) and the proceeds of certain non-ordinary course asset sales and certain issuances of debt obligations or equity securities of inVentiv and its subsidiaries, subject to certain exceptions. We may elect to prepay the loans, in whole or in part at any time, in certain minimum principal amounts, without penalty or premium (other than normal LIBOR break funding costs). Amounts borrowed under the credit agreement that are repaid or prepaid may not be reborrowed.
 
·  
Interest on the loans accrue, at our election, at either (1) the Alternate Base Rate (which is the greater of UBS’s prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at our option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based on the type of loan and method of interest rate determination elected.
 
·  
The credit agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends, acquisitions and transactions with affiliates. The credit agreement also includes covenants under which we are required to maintain a maximum leverage ratio and minimum interest rate coverage and fixed charge coverage ratios that vary based on the amount of time elapsed since the initial extension of credit.

Effective October 2005, we entered into a three- year swap arrangement for $175 million to hedge against the six-year $175 million loan arrangement entered into to facilitate the acquisition of inChord.

We believe that our cash and equivalents, cash to be provided by operations and available credit under our credit facility will be sufficient to fund our current operating requirements over the next 12 months. However, we cannot assure you that these sources of liquidity will be sufficient to fund all internal growth initiatives, investments and acquisition activities that we may wish to pursue. If we pursue significant internal growth initiatives or if we wish to acquire additional businesses in transactions that include cash payments as part of the purchase price, we may pursue additional debt or equity sources to finance such transactions and activities, depending on market conditions.

Contractual Obligations 

During 2006, we acquired Synergos for approximately $5.8 million in cash and stock, JSAI for approximately $8.6 million in cash and stock and Adheris for approximately $67.0 million in cash and stock (in each case excluding direct acquisition costs and post-closing adjustments). Pursuant to the related acquisition agreements, we will be obligated to make certain earnout payments, which may be material, contingent on the financial performance of the acquired businesses during 2006 and in subsequent years, as described more fully in footnote 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

With the foregoing exceptions, there have been no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2005. 

Off-Balance Sheet Arrangements

As of June 30, 2006, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this report contains forward-looking statements regarding:

 
·
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 expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions; and

 
·
our expectations regarding the impact of the adoption of certain accounting standards.

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:
 
 
·
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 convenants and terms of our credity facility and to access sufficient capital to fund our operations;
 
 
·
the actual impact of the adoption of certain accounting standards; and

 
·
changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing.
 
Investors should carefully consider these risk factors and the matters discussed under Item 1A, Risk Factors, of the Company’s Form 10-K for the year ended December 31, 2005.






Long-Term Debt Exposure

At June 30, 2006, inVentiv had $173.7 million debt outstanding under its term loan and $3.6 million outstanding with respect to letters of credit under its revolving credit facility. See Liquidity and Capital Resources section for further detail on inVentiv’s credit agreement. inVentiv will incur variable interest expense with respect to its outstanding loan. This interest rate risk may be partially offset by our derivative financial instrument, as described below. Based on our debt obligation outstanding at June 30, 2006, a hypothetical increase or decrease of 10% in the variable interest rate would have an immaterial effect on interest expense due to the fixed rate associated with the derivative financial instrument.

Derivative Financial Instrument

Effective October 2005, the Company entered into a three-year interest rate swap arrangement for $175 million to apply a fixed interest rate against the six-year $175 million loan arrangement entered into to facilitate the acquisition of inChord. The Company entered into this interest rate swap agreement to modify the interest rate characteristics of its outstanding long-term debt. At inception, and at least quarterly thereafter, the Company assesses whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense).

For the six months ended June 30, 2006, the Company did not qualify for hedge accounting and recorded a $2.8 million reduction to interest expense relating to the mark-to-market adjustment required to record hedge ineffectiveness to earnings, and a corresponding derivative asset of approximately $2.8 million, which was recorded in Deposits and Other Assets on the Condensed Consolidated Balance Sheet; to date, this asset totals $3.1 million on the June 30, 2006 Condensed Consolidated Balance Sheet. The fair values of the interest rate swaps are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.

Foreign Currency Exchange Rate Exposure

inVentiv is not currently affected by foreign currency exchange rate exposure, except for any fluctuations in the foreign bank accounts remaining from the divestitures of inVentiv’s European business units and our equity investments and minority interests in inVentiv Communications’ foreign business units, which are not material to our financial statements. At June 30, 2006, the accumulated other comprehensive earnings was approximately $0.9 million.
 
 
Based on their evaluation as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of June 30, 2006. There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 



PART II. OTHER INFORMATION


The Company is subject to lawsuits, investigations and claims arising out of the conduct of its business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain claims, suits and complaints have been filed or are pending against the Company. Certain such claims that are pending against Adheris are described in Part I, Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. With the exception of the claims described therein, all pending matters are of a kind routinely experienced in our business and are consistent with our historical experience.


There have been no material changes in the risk factors discussed in Item 1A of the Company’s Form 10-K for the year ended December 31, 2005.


On June 2006, we issued 63,750 shares of common stock pursuant to the earnout provision in the stock purchase agreement relating to our acquisition of the outstanding capital stock of inChord Communications, Inc. These shares were issued in reliance on Section 4(2) of the Securities Act.
 

         At an annual meeting of the stockholders of the Company, held on June 14, 2006, the following matters were submitted to a vote of our stockholders, with the following votes cast:

(i)  the election of eight directors to the Board of Directors for a term of one year, expiring at the 2007 Annual Meeting:

 
For
Withheld
Eran Broshy
23,648,739
2,378,229
A. Clayton Perfall
24,962,279
1,064,689
Donald Conklin
24,201,396
1,825,032
John R. Harris
25,232,251
794,717
Per G.H. Lofberg
25,228,009
798,959
Mark E. Jennings
25,232,254
794,714
Terrell G. Herring
23,530,014
2,496,954
R. Blane Walter
23,529,452
2,497,516


(ii) the amendment of the Company’s Certificate of Incorporation changing the name of the Company to inVentiv Health, Inc:
 
 
For
Withheld
Abstain
Unvoted
inVentiv Health, Inc. name change
25,951,085
61,866
14,016
--

(iii) the approval of the Company’s 2006 Long-Term Incentive Plan;

 
For
Withheld
Abstain
Unvoted
2006 Long-Term incentive plan approval
16,851,781
4,078,170
84,535
5,012,482

 
(iv) the ratification of  the appointment of Deloitte and Touche LLP as the Company’s independent auditors for 2006:

 
For
Withheld
Abstain
Unvoted
Deloitte & Touche LLP ratification
25,986,453
27,367
13,148
--

 

 


 
Exhibits
31.1
  
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
  
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
  
Chief Executive Officer’s Certification of Financial Statements Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
  
Chief Financial Officer’s Certification of Financial Statements Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certain portions omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
     
  INVENTIV HEALTH, INC.
 
 		  
 		  
 
Date: August 9, 2006 By:   /s/ John R. Emery
 
John R. Emery    
 
Title Chief Financial Officer
(Principal financial officer and duly authorized signatory)



  




 EX-31.1 2 certpurtosect302sarboxleyeb.htm CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 - ERAN BROSHY Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Eran Broshy
Exhibit 31.1
CERTIFICATIONS
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
I, Eran Broshy, Chief Executive Officer of inVentiv Health, Inc., certify that:
 
 
1.
 I have reviewed this quarterly report on Form 10-Q of inVentiv Health, Inc.;
 
 
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
. 
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information.

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
     
   
 
 		  
 		  
 
Date:  August 9, 2006 By:   /s/ ERAN BROSHY
 
Eran Broshy
  Chief Executive Officer

 
 
 
 
 EX-31.2 3 certpurtosect302sarboxleyje.htm CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 Certification Pursuant to Section 302 of Sarbanes Oxley Act of 2002
Exhibit 31.1
CERTIFICATIONS
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
I, John R. Emery, Chief Financial  Officer of inVentiv Health, Inc., certify that:
 
 
1.
 I have reviewed this quarterly report on Form 10-Q of inVentiv Health, Inc.;
 
 
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
. 
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information.

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
     
   
 
 		  
 		  
 
Date:  August 9, 2006 By:   /s/ JOHN R. EMERY
 
John R. Emery
  Chief FinancialOfficer

 
 
 
 EX-32.1 4 certpurto18eb.htm CERFICATION PURSUANT TO 18 USC SECTION 1350 - ERAN BROSHY Cerfication Pursuant to 18 USC Section 1350 - Eran Broshy
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of inVentiv Health, Inc. (“the Company”) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eran Broshy, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and to the best of my knowledge and belief, that:
 
(1)  The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (16 U.S.C. 78m or 78o(d)); and
 
(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
   
 
 		  
 		  
 
Date: August 9, 2006 By:   /s/ ERAN BROSHY
 
Eran Broshy
  Title Chief Executive Officer
 
 


A signed original of this written statement required by Section 906 has been provided to inVentiv Health, Inc. and will be retained by inVentiv Health, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


 
 EX-32.2 5 certpurto18je.htm CERTIFICATION PURSUANT TO 18 USC SECTION 1350 - JOHN R. EMERY Certification Pursuant to 18 USC Section 1350 - John R. Emery
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of inVentiv Health, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Emery, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and to the best of my knowledge and belief, that:
 
(1)  The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (16 U.S.C. 78m or 78o(d)); and
 
(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
   
 
 		  
 		  
 
Date: August 9, 2006 By:   /s/ JOHN R. EMERY
 
John R. Emery
  Title Chief Financial Officer
 
 

A signed original of this written statement required by Section 906 has been provided to inVentiv Health, Inc. and will be retained by inVentiv Health, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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