KENDLE INTERNATIONAL INC, 424B1, 1997-08-22

KENDLE INTERNATIONAL INC
424B1, 1997-08-22
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: KENDLE INTERNATIONAL INC, 8-A12G, 1997-08-22

Next: OHIO STATE FINANCIAL SERVICES INC, 424B3, 1997-08-22

<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-30581

PROSPECTUS

3,600,000 SHARES

[KENDLE LOGO]

KENDLE INTERNATIONAL INC.
COMMON STOCK
---------------------------

Of the 3,600,000 shares of Common Stock (the "Common Stock") offered hereby
(the "Offering"), 3,000,000 are being offered by Kendle International Inc.
("Kendle" or the "Company") and 600,000 are being offered by certain
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." Prior to the Offering, there has been no public market
for the Common Stock. See "Underwriting" for a list of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"KNDL." The Company will not receive any of the proceeds from the sale of the
shares by the Selling Shareholders.
---------------------------

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 7.
---------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION

TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
============================================================================================================
PROCEEDS TO
PRICE TO PROCEEDS TO SELLING
PUBLIC UNDERWRITING COMPANY (2) SHAREHOLDERS
DISCOUNTS AND
COMMISSIONS (1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................... $14.00 $0.98 $13.02 $13.02
- ------------------------------------------------------------------------------------------------------------
Total (3)........................... $50,400,000 $3,528,000 $39,060,000 $7,812,000
============================================================================================================
</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting" and "Principal and
Selling Shareholders."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $500,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
540,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to the Selling Shareholders
will be $57,960,000, $4,057,200, $46,090,800 and $7,812,000, respectively.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Shareholders. See "Underwriting" and "Principal
and Selling Shareholders."

---------------------------

The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about August 27, 1997.

---------------------------

LEHMAN BROTHERS J.C. BRADFORD & CO.

AUGUST 22, 1997

<PAGE> 2

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to the Registration Statement, including
exhibits, schedules and reports filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete; and, in such instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549, and at the Commission's Regional Offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may be obtained at prescribed rates by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
------------------------

The Company intends to distribute to its shareholders annual reports
containing audited financial statements and will make available copies of
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
------------------------

Kendle(SM), the Kendle logo, TrialWare(SM) and the names of certain other
services offered by Kendle are service marks, trademarks or registered service
marks or trademarks of Kendle. All other trademarks or service marks appearing
in this Prospectus are trademarks, service marks or registered trademarks or
service marks of the respective companies that utilize them.
------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors"
appearing elsewhere in this Prospectus, and the financial statements and notes
thereto. Unless otherwise indicated, the information set forth in this
Prospectus: (i) does not give effect to the exercise of the Underwriters'
over-allotment option and (ii) gives effect to the 36.5 for 1 stock split of the
Company's Common Stock on August 20, 1997.

THE COMPANY

Kendle is a contract research organization ("CRO") that provides a broad
range of clinical research and drug development services to the pharmaceutical
and biotechnology industries. Kendle augments the research and development
activities of pharmaceutical and biotechnology companies by offering high
quality, value added clinical research services and proprietary information
technology designed to reduce drug development time and expense. The Company's
services include Phase II to Phase IV clinical trial design and management,
clinical data management, biostatistical analysis, medical writing and
regulatory consultation and representation. Kendle believes that it is one of a
small number of CROs capable of providing a broad range of services within
multiple therapeutic areas, including cardiovascular, central nervous system,
gastrointestinal, immunology, oncology, respiratory, skeletal disease and
inflammation. Since its inception, Kendle has served more than 40 clients,
including 12 of the world's 20 largest pharmaceutical companies. In 1996, Kendle
participated in 62 studies at approximately 4,100 sites involving approximately
20,000 patients.

In furtherance of the Company's strategy to expand its international
coverage and range of services, the Company purchased U-Gene Research B.V.
("U-Gene"), based in Utrecht, the Netherlands, which provides Phase II to Phase
IV clinical trial design and management, and owns and operates a
state-of-the-art 38-bed Phase I testing unit, and entered into an agreement to
purchase GMI Gesellschaft fur Angewandte Mathematik und Informatik mbH ("gmi"),
based in Munich, Germany, which provides Phase II to Phase IV clinical trial
design and management and specializes in the field of pharmacoeconomic analysis
(the "Acquisitions"). The Company believes that the Acquisitions will make
Kendle the sixth largest CRO in Europe, based on total revenues, and will
enhance its ability to provide customers with a single source for contract
research services throughout North America and Europe.

The CRO industry derives substantially all of its revenue from the
pharmaceutical and biotechnology industries. In 1995, worldwide expenditures on
research and development by pharmaceutical and biotechnology companies are
estimated to have been $35.0 billion, of which the Company estimates $22.0
billion was spent on the type of drug development activities offered by the CRO
industry. The Company believes that approximately $2.5 billion of such spending
was outsourced to CROs in 1995.

The Company believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as these companies strive to increase revenues through faster drug
development while also dealing with cost containment pressures. The CRO
industry, by specializing in clinical trials management, is often able to
perform the needed services with a higher level of expertise or specialization,
more quickly and at a lower cost than a client could perform the services
internally.

The Company believes that pharmaceutical and biotechnology companies are
increasingly selecting CROs that have the following capabilities: (i) a broad
range of therapeutic expertise in designing and managing all phases of clinical
trials; (ii) the ability to efficiently collect, edit and analyze data from
thousands of patients with various clinical conditions from many geographically
dispersed sites; (iii) the ability to provide a full range of services to
clients who desire to use fewer CROs to manage their drug development processes;
and (iv) global capabilities that incorporate diverse populations and allow
simultaneous filings of registration packages in several major jurisdictions.

3
<PAGE> 4

encompass the clinical research process and complement the research and
development departments of its clients; (iii) expedite the drug development
process through innovative information technology offered via the Company's
proprietary TrialWare(sm) software; (iv) continue to build a brand presence that
portrays high quality work; and (v) supplement internal growth through strategic
acquisitions that expand the Company's geographic presence and add to Kendle's
clinical research capabilities in existing or new therapeutic areas or service
offerings. The implementation of this strategy will require Kendle to spend
significant amounts of capital. In 1997 alone, the Company utilized
approximately $24.8 million to fund acquisitions and expects to spend another $3
million to $4 million in 1997 for capital expenditures relating to facilities
and investments in information technology.

ACQUISITIONS

U-Gene Acquisition

On July 1, 1997, Kendle acquired U-Gene for 30 million Dutch guilders
($15.5 million) (the "U-Gene Acquisition"). The Company utilized funds provided
under a bank credit facility (the "Bank Credit Facility") to consummate the
U-Gene Acquisition. U-Gene has been in existence since 1986 and has conducted
trials in several countries including the Netherlands, the United Kingdom and
Italy. U-Gene offers a full range of clinical drug development services
including Phase I to Phase IV national and multinational clinical trials,
biostatistics, quality management and regulatory consultation. In Phase II to
Phase IV clinical trials, U-Gene has experience in a broad range of therapeutic
areas, including cardiovascular, central nervous system, gynecology, hematology
and infectious diseases. Since 1986, U-Gene has served more than 100 clients,
including 19 of the world's 20 largest pharmaceutical companies. In 1996, U-Gene
participated in 115 studies at approximately 500 sites involving approximately
4,700 patients and recorded net revenues of $12.5 million, a 37% increase over
the prior year, and operating profit of $1.3 million, a 47% increase over the
prior year.

gmi Acquisition

On July 2, 1997, the Company entered into a definitive agreement to acquire
gmi for 19.5 million Deutsche marks. Total acquisition costs are expected to be
approximately $9.3 million in cash and $2.8 million in shares of Common Stock,
with the number of shares determined by the initial public offering price (the
"gmi Acquisition"). The Company expects to close the gmi Acquisition
concurrently with the Offering. If the Offering is not completed by September
19, 1997, the cash portion of the gmi Acquisition will be funded with borrowings
under the Bank Credit Facility. Founded in 1983, gmi provides a wide range of
clinical drug development services including Phase II to Phase IV clinical
trials and has experience in a variety of national and international projects
across a wide range of diseases. gmi also engages in scientific consulting, the
planning, realization and evaluation of health economic studies and gmi also
conducts seminars, in-house training programs and presentations. gmi operates
primarily in Germany, but has conducted trials in six additional countries
including Austria, the United Kingdom, Switzerland and France. In 1996, gmi
participated in 119 studies at multiple sites and recorded net revenues of $7.0
million, a 32% increase over the prior year, and operating profit of $1.4
million, a 16% increase over the prior year.

Management believes that the Acquisitions will establish the Company as a
full-service international CRO. On a pro forma basis, the Company is the sixth
largest CRO in Europe, based on total revenues, and is one of a small number of
CROs able to offer clients the full range of Phase I through Phase IV clinical
trials in North America and Europe. U-Gene and gmi will increase both the number
and the geographic scope of the clients served by Kendle, enabling the Company
to cross-sell its services and enhance its relationships with existing clients.
U-Gene and gmi will also add a number of additional areas of therapeutic
expertise that complement Kendle's areas of proficiency.

The Company plans to repay the indebtedness incurred under the Bank Credit
Facility with the proceeds from the Offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources." The gmi Acquisition is subject
to customary closing conditions contained in the definitive agreement, including
satisfactory due diligence investigation, the receipt of regulatory approvals
and the continued accuracy of the representations and warranties. See "The
Acquisitions," "Bank Credit Facility" and "Risk Factors--Risks Associated with
Acquisitions."

4
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 3,000,000 shares
Common Stock Offered by the Selling
Shareholders............................... 600,000 shares
Common Stock to be Outstanding after the
Offering................................... 7,331,669 shares(1)(2)
Use of Proceeds.............................. To repay indebtedness incurred in connection
with the U-Gene Acquisition, fund the cash
portion of the gmi Acquisition (which is
expected to close simultaneously with the
consummation of the Offering), general
corporate purposes, including working
capital, and possible future acquisitions of
related businesses. See "Use of Proceeds."
Nasdaq National Market Symbol................ KNDL
</TABLE>

- ---------------

(1) Excludes: (i) 1,000,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Option and Stock Incentive Plan, of which options
to purchase 270,000 shares will be granted concurrently with the Offering at
an exercise price equal to the initial public offering price of $14.00 to
employees and nonemployee directors; (ii) 15,000 shares of Common Stock
reserved for issuance under the 1997 Directors Compensation Plan; and (iii)
options to purchase 417,560 shares of Common Stock not currently exercisable
granted under the 1995 Stock Option and Stock Incentive Plan. See
"Management -- Employee Benefit Plans," and Note 4 to the Company's
financial statements.

(2) Includes: (i) 3,650,000 shares of Common Stock outstanding prior to the
Offering; (ii) 3,000,000 shares of Common Stock offered by the Company in
the Offering; (iii) 153,738 Common Stock Purchase Warrants issued in
connection with the U-Gene Acquisition; (iv) 198,482 shares of Common Stock
to be issued in connection with the gmi Acquisition (based on the initial
public offering price of $14.00 per share); and (v) options for the purchase
of 329,449 shares of Common Stock, which become immediately exercisable upon
the consummation of the Offering.

5
<PAGE> 6

SUMMARY FINANCIAL AND OPERATING DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------------------------------ -------
PRO
FORMA
1992 1993 1994 1995 1996 1996(1)(5) 1996
------------ ------ ------ ------ ------- ---------- ------
(UNAUDITED) (UNAUDITED)
---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $2,468 $2,555 $4,431 $6,118 $12,959 $ 32,463 $4,693
------ ------ ------ ------ ------- ------- ------
Costs and expenses:
Direct costs.................... 1,689 1,548 2,760 3,564 8,176 21,178 3,176
Selling, general and
administrative................ 1,158 603 1,067 1,776 3,278 6,658 1,017
Depreciation and amortization... 81 111 127 168 316 1,585 92
------ ------ ------ ------ ------- ------- ------
Total costs and expenses........ 2,928 2,262 3,954 5,508 11,770 29,421 4,285
------ ------ ------ ------ ------- ------- ------
Income (loss) from operations..... (460) 293 477 610 1,189 3,042 408
Interest expense.................. (72) (61) (43) (69) (65) (65) (30)
Other income, net................. 37 20 24 6 10 62 4
------ ------ ------ ------ ------- ------- ------
Income (loss) before income
taxes........................... (495) 252 458 547 1,134 3,039 382
Income taxes...................... 1,383
------ ------ ------ ------ ------- ------- ------
Net income (loss)................. $ (495) $ 252 $ 458 $ 547 $ 1,134 $ 1,656 $ 382
====== ====== ====== ====== ======= ======= ======
HISTORICAL PRO FORMA DATA (2):
Net income (loss)................. $ (495) $ 252 $ 458 $ 547 $ 1,134 $ 382
Pro forma income tax expense
(benefit)....................... (198) 101 183 219 454 153
------ ------ ------ ------ ------- ------
Pro forma net income (loss)....... $ (297) $ 151 $ 275 $ 328 $ 680 $ 229
====== ====== ====== ====== ======= ======
Historical pro forma net income
(loss) per share................ $(0.07) $ 0.04 $ 0.07 $ 0.08 $ 0.16 $ 0.05
====== ====== ====== ====== ======= ======
PRO FORMA NET INCOME PER SHARE.... $ 0.22
=======
Historical and pro forma weighted
average common and equivalent
shares outstanding (3).......... 4,026 4,026 4,026 4,074 4,234 7,432 4,177
Dividends declared per share
(4)............................. -- $ 0.02 $ 0.08 $ 0.10 $ 0.15 $ 0.06

<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
PRO
FORMA
1997 1997(1)(5)
------- ----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $13,172 $ 23,488
------ -------
Costs and expenses:
Direct costs.................... 7,347 13,655
Selling, general and
administrative................ 4,024 5,783
Depreciation and amortization... 316 965
------ -------
Total costs and expenses........ 11,687 20,403
------ -------
Income (loss) from operations..... 1,485 3,085
Interest expense.................. (71) (34)
Other income, net................. 4
------ -------
Income (loss) before income
taxes........................... 1,418 3,051
Income taxes...................... 1,327
------ -------
Net income (loss)................. $ 1,418 $ 1,724
====== =======
HISTORICAL PRO FORMA DATA (2):
Net income (loss)................. $ 1,418
Pro forma income tax expense
(benefit)....................... 567
------
Pro forma net income (loss)....... $ 851
======
Historical pro forma net income
(loss) per share................ $ 0.19
======
PRO FORMA NET INCOME PER SHARE.... $ 0.23
=======
Historical and pro forma weighted
average common and equivalent
shares outstanding (3).......... 4,437 7,635
Dividends declared per share
(4)............................. $ 0.28
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------------------
AS PRO FORMA
ACTUAL(5) ADJUSTED(6) AS ADJUSTED(1)
--------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................... $ (180) $21,935 $ 13,910
Total assets................................................. 33,597 55,712 61,006
Total debt, excludes current portion of long-term debt....... 18,355 2,610 2,610
Total shareholders' equity................................... 1,354 38,033 42,314
</TABLE>

- ---------------

(1) The pro forma data give effect to: (i) the acquisition of gmi; (ii) the
Offering; (iii) repayment of amounts borrowed under the Bank Credit
Facility; (iv) the recognition of an estimated $81 of deferred income taxes
upon the termination of Kendle's S corporation election; (v) the payment of
the S corporation distribution of approximately $700; and (vi) the assumed
exercise of the Warrants issued in connection with the U-Gene Acquisition.
The pro forma data also reflect the application of corporate income taxes to
the Company's net income at an assumed statutory combined federal and state
rate of 40%, which would have been recorded if the Company had been a C
corporation during such period. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements," "Termination of S Corporation Status,"
"Use of Proceeds," "Bank Credit Facility" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) The historical pro forma data reflect the application of corporate income
taxes to the Company's net income at an assumed statutory combined federal
and state rate of 40%, which would have been recorded if the Company had
been a C corporation.
(3) Weighted average common and equivalent shares outstanding assumes: (i)
options to purchase shares of Common Stock granted by the Company during the
twelve months preceding the Offering were outstanding for all periods
presented, using the treasury stock method at the initial public offering
price of $14.00 per share; and (ii) the Warrants issued in connection with
the U-Gene Acquisition. See "Termination of S Corporation Status."
(4) The Company currently anticipates that after the Offering all of its
earnings will be retained for development of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future.
(5) The actual data reflects the consolidated financial position of the Company
and its wholly-owned subsidiary U-Gene. The U-Gene Acquisition, which
occurred on July 1, 1997, has been given effect to as of June 30, 1997 since
a binding agreement was in place and consideration had been transferred. The
pro forma statement of operations data gives effect to the U-Gene
Acquisition as if it had occurred on January 1, 1996.
(6) As adjusted to reflect: (i) the sale by the Company of 3,000,000 shares of
Common Stock offered by the Company at the initial public offering price of
$14.00 per share, after deducting underwriting discounts and estimated
offering expenses; (ii) repayment of amounts borrowed under the Bank Credit
Facility; (iii) the recognition of $81 of deferred income taxes upon the
termination of Kendle's S corporation election; and (iv) the payment of the
S corporation distribution of approximately $700. See "Use of Proceeds."

6
<PAGE> 7

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following risk factors, in addition to the other information
contained in this Prospectus, should be considered carefully in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.

DEPENDENCE ON CERTAIN CLIENTS AND INDUSTRIES

During 1996 and the first six months of 1997, revenues from G.D. Searle &
Co. accounted for approximately 48% and 64%, respectively, of the Company's net
revenues. Other Company clients have, from time to time, accounted for more than
10% of the Company's net revenues, with revenues from The Procter & Gamble
Company and Amgen, Inc. accounting for approximately 19% and 13%, respectively,
of the Company's net revenues in 1996 and revenues from The Procter & Gamble
Company accounting for approximately 13% of the Company's net revenues for the
first six months of 1997. In addition, as of June 30, 1997, G.D. Searle & Co.
accounted for $13.9 million, or approximately 54%, of the Company's backlog.
However, on a pro forma basis assuming consummation of the Acquisitions as of
January 1, 1996, revenues from G.D. Searle & Co. were approximately 19% and 36%
of the Company's net revenues in 1996 and for the first six months of 1997,
respectively, and no other client would have accounted for more than 10% of the
Company's net revenues. Nonetheless, the CRO industry in general continues to be
dependent on the research and development efforts of the principal
pharmaceutical and biotechnology companies as major clients, and the Company
believes that this dependence will continue. The loss of business from any of
the Company's major clients would have a material adverse effect on the Company.
See "Business -- Clients and Marketing."

As a provider of integrated product development services to the
pharmaceutical and biotechnology industries, the Company's revenues are highly
dependent on industry research and development expenditures. Decreases in such
expenditures, including decreases resulting from economic downturns in these
industries or from industry mergers or other consolidations, could have a
material adverse effect on the Company. Furthermore, the Company has benefited
to date from the tendency of pharmaceutical and biotechnology companies to
outsource an increasing percentage of their large clinical research projects and
other drug development activities. A reversal of this trend would have a
material adverse effect on the Company. See "Business -- General."

LOSS OR DELAY OF LARGE CONTRACTS

Most of the Company's service contracts are terminable by the client upon
30 days' notice. Clients may terminate or delay contracts for a variety of
reasons, including the failure of products to satisfy safety requirements,
unexpected or undesired clinical results, the client's decision to forego a
particular study, insufficient patient enrollment or investigator recruitment or
production problems resulting in shortages of the drug. The Company believes
that several factors, including increased cost containment pressures associated
with healthcare reform efforts, have caused pharmaceutical and biotechnology
companies to apply more stringent criteria to the decision to proceed with
clinical trials and therefore may have resulted in a greater willingness of
these companies to cancel contracts with CROs. The loss or delay of a large
contract or of multiple contracts could have a material adverse effect on the
Company. See "Business -- Contractual Arrangements."

RISKS ASSOCIATED WITH ACQUISITIONS

The Company intends to make additional strategic acquisitions as part of
its growth strategy. There can be no assurance that the Company will be able to
identify suitable acquisition candidates or that, if identified, the Company
will be able to acquire such companies on favorable terms. Acquisitions involve
numerous risks, including difficulties in the integration of the operations and
services of the acquired company; acquisition and integration expenses; the
diversion of management's attention from other business concerns; the successful
integration of the Company's business culture with those of acquired companies,
both in the United States and internationally; and the potential loss of key
employees. Acquisitions of foreign companies involve the

7
<PAGE> 8

additional risks of, among others, assimilating differences in foreign business
practices, exchange rate fluctuations, managing foreign companies, business
cycle risks in different countries, and overcoming language barriers. If the
Company consummates any acquisitions in the future, there can be no assurance
that such acquired businesses will be successfully integrated into the Company's
operations. See "Use of Proceeds" and "Business -- Company Strategy."

The Acquisitions will expand the Company's client and business bases and
increase the number of Company employees. However, there can be no assurance
that either U-Gene or gmi will be integrated successfully into Kendle's
operations. These Acquisitions could have a material adverse effect on the
Company.

SUBSTANTIAL INTANGIBLE ASSETS

Following the closing of the Acquisitions, approximately 45% of Kendle's
assets will consist of intangible assets, primarily reflecting the excess of the
consideration paid for U-Gene and gmi over the value of assets acquired.
Material downturns in the business of U-Gene or gmi could erode the value of
those intangible assets and cause write-downs of assets and charges to earnings
thereby adversely affecting Kendle's financial condition and operating results.

VOLATILITY OF QUARTERLY OPERATING RESULTS

The Company's quarterly operating results are subject to volatility due to
such factors as the commencement, completion, cancellation or delay of
contracts; the progress of ongoing projects; cost overruns; the Company's sales
cycle; demand for the Company's services; competitive industry conditions; the
ability of the Company to develop, introduce and market new services on a timely
basis; changes in the mix of services provided to clients; changes in client
research and development expenditures and other general economic factors.
Because a large portion of the Company's operating costs are fixed, variations
in the timing and progress of large contracts or of multiple contracts can
materially affect quarterly results. The Company believes that comparisons of
its quarterly financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance. However, fluctuations in the
Company's quarterly operating results could affect the market price of the
Common Stock in a manner unrelated to the longer term operating performance of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

NEED TO ATTRACT, RETAIN, INTEGRATE AND MANAGE PROFESSIONAL STAFF

The Company's business is labor intensive and involves the delivery of
specialized professional services. The Company's success depends in large part
upon its ability to attract, develop, motivate, integrate and retain highly
skilled employees. There is significant competition from other CROs as well as
from the in-house research departments of pharmaceutical and biotechnology
companies and other enterprises for employees with the skills required to
perform the services offered by the Company. There can be no assurance that the
Company will be able to attract, retain and integrate a sufficient number of
highly skilled employees in the future or that it will continue to be successful
in training, retaining, integrating and motivating its current employees. The
loss of a significant number of employees or the Company's inability to hire
sufficient numbers of qualified employees could have a material adverse effect
on the Company.

LIMITED INTERNATIONAL PRESENCE

Pharmaceutical and biotechnology companies are increasingly attempting to
expand the market for new drugs by pursuing regulatory approvals in multiple
countries simultaneously rather than sequentially as they have in the past. To
compete effectively for large, international contracts, a CRO must demonstrate
its ability to organize and manage large-scale trials on a global basis. Prior
to the U-Gene Acquisition, the Company did not have operations outside of North
America. If the gmi Acquisition is not consummated, there can be no assurance
that the Company will not experience difficulties in developing, integrating, or
acquiring international capabilities successfully or entering into alliances
with foreign CROs that meet the needs of the

8
<PAGE> 9

Company's clients. Foreign operations also involve additional risks of
assimilating differences in foreign business practices; hiring, integrating,
retaining and motivating qualified personnel; exchange rate fluctuations;
managing foreign companies; business cycle risks in different countries and
overcoming language barriers. The Company's limited international experience may
have a material adverse effect on the Company.

COMPETITION; CRO INDUSTRY CONSOLIDATION

The Company primarily competes against in-house research departments of
pharmaceutical and biotechnology companies, universities and teaching hospitals
and other full-service CROs, a number of which possess substantially greater
capital, technical and other resources than the Company. CROs generally compete
on the basis of previous experience, medical and scientific expertise in
specific therapeutic areas, the quality of contract research, the ability to
organize and manage large-scale trials on a global basis, medical database
management capabilities, the ability to provide statistical and regulatory
services, the ability to recruit investigators, the ability to integrate
information technology with systems to improve the efficiency of contract
research, an international presence with strategically located facilities,
financial viability and price. The Company's failure to compete effectively in
any one or more of these areas could have a material adverse effect on the
Company.

The CRO industry is highly fragmented, with several hundred CROs ranging
from small, limited-service providers to full-service, global drug development
corporations. However, the CRO industry is consolidating. This consolidation
trend has been caused, in part, by the decision of pharmaceutical and
biotechnology company clients to contract with fewer CROs, streamlining the
outsourcing process by entering into preferred provider relationships with a few
CROs or awarding a smaller number of large contracts to qualified CROs. This
trend is likely to increase competition among the larger CROs for both clients
and acquisition candidates and may lead to price and other forms of competition
that could have a material adverse effect on the Company. See
"Business -- Competition."

FIXED PRICE NATURE OF CONTRACTS

Most of the Company's service contracts are fixed price contracts, with
some variable components, which place the risk of cost overruns on the Company.
Under-pricing of major contracts or significant cost overruns could have a
material adverse effect on the Company. See "Business -- Contractual
Arrangements."

POTENTIAL LIABILITY RISKS OF CONDUCTING CLINICAL TRIALS

Clinical research services involve the testing of new drugs on human
volunteers pursuant to study protocols. Such testing exposes the Company to the
risk of liability for personal injury or death to study participants resulting
from, among other things, possible unforeseen adverse side effects or improper
administration of the new drug. Many study participants are already seriously
ill and are at risk of further illness or death. In addition, as a result of the
U-Gene Acquisition, the Company conducts Phase I trials and is subject to the
general risks associated with Phase I trials, including but not limited to,
adverse events resulting from the administration of drugs to clinical trial
participants and the professional malpractice of Phase I medical care providers.
The Company has entered into indemnification agreements which it believes
provide protection from these risks. However, if the Company were required to
pay damages or incur defense costs in connection with a personal injury or
wrongful death claim that is outside the scope of indemnification agreements
that may exist with clients, or if any such indemnification agreement, although
in force, is not performed in accordance with its terms, it could have a
material adverse effect on the Company. The Company currently does not maintain
liability insurance with respect to these risks. U-Gene carries professional
liability insurance in connection with its Phase I facility. See
"Business -- Potential Liability and Insurance."

REGULATORY RISKS

The Company's business depends on the continued strict government
regulation of the drug development process. In the United States, the general
trend has been toward continued or increased regulation. In Europe,

9
<PAGE> 10

the general trend has been toward coordination of common standards for clinical
testing of new drugs, leading to changes in the various requirements currently
imposed by each country. Changes in regulations, including a relaxation of
regulatory standards or the introduction of streamlined drug approval
procedures, could materially adversely affect the demand for the Company's
services. Moreover, if the current regulatory structure is not changed, the
failure on the part of the Company to comply with applicable regulations could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. See "Business -- General" and
"Business -- Government Regulation."

UNCERTAINTY IN HEALTH CARE INDUSTRY

The health care industry is subject to changing political, economic and
regulatory influences that may affect the pharmaceutical and biotechnology
industries. Implementation of government health care reform may adversely affect
research and development expenditures by pharmaceutical and biotechnology
companies which could decrease the business opportunities available to CROs. The
Company is unable to predict the likelihood of health care reform legislation
being enacted into law or the effects such legislation would, if enacted, have
on the Company.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends upon the capabilities and continuing efforts
of Candace Kendle Bryan, Pharm. D., its Chief Executive Officer, and Christopher
C. Bergen, its President, who are married to each other. The loss of either of
these persons or other key management personnel, including the strategic
business unit directors, could have a material adverse effect on the Company.

MANAGEMENT OF GROWTH

In addition to the growth anticipated from the Acquisitions, the Company
has experienced rapid growth over the past two years. The Company believes that
sustained growth places a strain on operational, human and financial resources.
In order to manage its growth, the Company must continue to improve its
operating and administrative systems and attract, retain and integrate qualified
management and professional, scientific and technical personnel. Failure to
manage growth effectively could have a material adverse effect on the Company.

CONTROL BY MANAGEMENT; UNDESIGNATED PREFERRED STOCK; CERTAIN ANTI-TAKEOVER
PROVISIONS

After the Offering, Dr. Bryan and Mr. Bergen will control approximately
34.6% of Kendle's outstanding Common Stock (approximately 32.2% if the
Underwriters' over-allotment option is exercised in full) and, if they act
together, will be able to significantly influence all matters requiring approval
by shareholders, including the election of directors. After the Offering, the
Company's executive officers and directors will, as a group, control
approximately 35.9% of Kendle's outstanding Common Stock. The Board of Directors
also has the authority to issue 100,000 shares of undesignated preferred stock
and to determine the rights, preferences, privileges and restrictions of such
shares without further action by shareholders. Any issue of preferred stock
could be given rights which would adversely affect the equity of the holders of
Common Stock and could have a preference over Common Stock with respect to
dividends and liquidation rights. In addition, Ohio law contains provisions that
may discourage takeover bids for the Company that have not been negotiated with
the Board of Directors. The terms of a series of preferred stock and such Ohio
law provisions could have the effect of delaying or preventing a change in
control of the Company and, accordingly, could limit the price that investors
might be willing to pay for the Common Stock, including transactions in which
holders of Common Stock might receive a premium for their shares over the market
price. See "Principal and Selling Shareholders" and "Description of Capital
Stock."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined by negotiations among management of the

10
<PAGE> 11

Company and the representatives of the Underwriters and may not be indicative of
future market prices. See "Underwriting" for factors to be considered in
determining the initial public offering price per share. The Company has applied
for listing of the Common Stock on the Nasdaq National Market, and, even if
approved for listing, there can be no assurance that an active trading market
will develop or be sustained subsequent to the Offering or that the market price
of Common Stock will not decline below the initial public offering price. In
addition, broad market trading and valuation fluctuations have adversely
affected the valuation of health care-focused and technology-based service
companies and may adversely affect the market price of the Common Stock.
Furthermore, the stock market has, from time to time, experienced extreme price
and volume fluctuations in the shares of certain issuers, which in some
circumstances have been unrelated to the operating performance of particular
companies affected. The Common Stock may be subject to wide fluctuations in
price in response to variations in quarterly operating results and other
factors, including the evolving business prospects of the Company's clients,
suppliers and competitors, changes in the financial estimates by securities
analysts, acquisitions or the failure to make acquisitions, general economic or
market conditions and other factors.

DILUTION

The initial public offering price per share of Common Stock is
substantially higher than the net tangible book value per share of the Common
Stock. Purchasers of shares of Common Stock in the Offering will experience an
immediate and substantial dilution of $10.43 in the adjusted pro forma net
tangible book value per share of Common Stock. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of previously issued Common Stock
in the public market following the Offering could adversely affect the market
price for the Company's Common Stock. The number of shares of Common Stock
eligible for sale in the public market is limited by restrictions under the
Securities Act and lock-up agreements entered into by the Company, the Company's
officers and directors and all existing holders of Common Stock. Under these
lock-up agreements, subject to certain specified exceptions, the Company and
such persons have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Underwriters. As a result of these restrictions, only the
3,600,000 shares of Common Stock offered hereby will be eligible for sale on the
date of this Prospectus; and an additional 3,650,000 shares will be eligible for
sale 180 days after the date of this Prospectus, in accordance with Rule 144
promulgated under the Securities Act. The Company also intends, after the
effective date of the Offering, to register on a registration statement on Form
S-8 approximately 1,743,907 shares of Common Stock reserved for issuance under
the Company's 1995 and 1997 Stock Option and Stock Incentive Plans. In addition,
approximately $2.8 million in shares of Common Stock, with the number of shares
determined by the initial public offering price, will be issued to shareholders
of gmi in connection with the gmi Acquisition. Such shares will be eligible for
sale outside of the United States pursuant to Regulation S and in the United
States pursuant to Rule 144 one year after issuance. See "Shares Eligible for
Future Sale."

11
<PAGE> 12

THE ACQUISITIONS

On July 1, 1997, the Company acquired all of the issued and outstanding
capital stock of U-Gene for 30 million Dutch guilders ($15.5 million). Ten
percent of such amount is in the form of a promissory note subject to an escrow
agreement, which expires January 1, 1999.

On July 2, 1997, the Company entered into a definitive stock purchase
agreement to acquire gmi for 19.5 million Deutsche marks. Total acquisition
costs are expected to be approximately $9.3 million in cash and $2.8 million in
shares of Common Stock, with the number of shares determined by the initial
public offering price. The gmi Acquisition is expected to close simultaneously
with the closing of the Offering. If the Offering is not completed by September
19, 1997, the cash portion of the gmi Acquisition will be funded with borrowings
under the Bank Credit Facility. The closing of the gmi Acquisition is subject to
customary closing conditions contained in the definitive agreement, including
satisfactory due diligence investigation, the continued accuracy of
representations and warranties and the receipt of all applicable governmental
approvals and consents.

U-Gene has been in existence since 1986 and has conducted trials in the
Netherlands, the United Kingdom and Italy. U-Gene offers a full range of
clinical drug development services including Phase I to Phase IV national and
multinational clinical trial designs, biostatistics, quality management and
regulatory consultation. In Phase II to Phase IV clinical trials, U-Gene has
experience in a broad range of therapeutic areas, including cardiovascular,
central nervous system, gynecology, hematology and infectious diseases. Since
1986, U-Gene has served more than 100 clients, including 19 of the world's 20
largest pharmaceutical companies. In 1996, U-Gene participated in 115 studies at
approximately 500 sites involving approximately 4,700 patients and recorded net
revenues of $12.5 million, a 37% increase over the prior year, and operating
profit of $1.3 million, a 47% increase over the prior year. U-Gene leases
facilities at two sites in Utrecht. Its clinical headquarters, adjacent to the
University Hospital, house a state-of-the-art 38-bed clinical pharmacology unit,
medical writers and other clinical personnel. The Company's Phase I unit was
originally built in 1991, and was increased from 26 beds to 38 beds and fully
refurbished in early 1996. Facilities include state-of-the-art intensive
monitoring equipment for continuous electrocardiolography, 24-hour ambulatory
blood pressure measurement, and automated vital signs monitors. In addition to
its five wards, the unit has volunteer recreation facilities, a preparative
pharmacy, a meal preparation area and dining room, and a laboratory for sample
processing and certain types of assay. U-Gene's second site houses Phase II to
Phase IV monitoring activities, the biostatistics group, marketing and general
management.

Founded in 1983, gmi provides a wide range of clinical drug development
services including Phase II to Phase IV clinical trials and has experience in a
variety of national and international projects across a wide range of diseases.
gmi also engages in scientific consulting, the planning, realization and
evaluation of health economic studies and conducts seminars, in-house training
programs and presentations. gmi operates primarily in Germany, but has conducted
trials in six additional countries including Austria, the United Kingdom,
Switzerland and France. gmi leases its facility in Munich. The facility includes
approximately 9,000 square feet of primarily office space. In 1996, gmi
participated in 119 studies at multiple sites and recorded net revenues of $7.0
million, a 32% increase over the prior year, and operating profit of $1.4
million, a 16% increase over the prior year.

12
<PAGE> 13

BANK CREDIT FACILITY

In connection with the Acquisitions, NationsBank, N.A. (the "Bank") has
agreed to lend the Company up to $20 million under a senior secured revolving
credit facility (the "Senior Credit Facility") and up to $10 million in
subordinated promissory notes (the "Subordinated Credit Facility") (the Senior
Credit Facility and the Subordinated Credit Facility, together referred to as
the Bank Credit Facility).

Outstanding borrowings under the Senior Credit Facility bear interest at a
rate equal to either LIBOR plus the Applicable Margin (as defined), or the
higher of the Bank's prime rate or the Federal Funds rate plus 0.50%. All
amounts outstanding thereunder become due and payable in June 2000. The
Subordinated Credit Facility consists of 12% Subordinated Series A and B
Promissory Notes which are payable over a five year term (the "Series A Note"
and "Series B Note") and Common Stock Purchase Warrants (the "Warrants"). Each
Warrant is exercisable at $0.01 per share of Common Stock and expires ten years
from issuance.

The Bank Credit Facility contains various restrictive financial covenants,
including limitations on senior and total debt levels, capital expenditures and
future acquisitions, as well as the maintenance of certain fixed coverage ratios
and minimum net worth levels, and is collateralized by all the assets and shares
of Common Stock held by Dr. Bryan, Mr. Bergen, the Kendle Stock Trust and Hazel
Kendle (which shares will be released as collateral upon consummation of the
Offering) and existing and hereafter acquired material subsidiaries.

BANK CREDIT FACILITY UTILIZATION -- U-GENE ACQUISITION

On July 1, 1997 the U-Gene Acquisition and related costs were funded with
approximately $9.3 million from the Senior Credit Facility, an 8% promissory
note of approximately $1.5 million payable to the U-Gene shareholders deposited
in an escrow account pursuant to the U-Gene purchase agreement and $5 million
from the Series A Note. In addition, the Company issued the Warrants to the Bank
to purchase 4% of the outstanding shares of Common Stock of the Company prior to
the Offering (153,738 shares). If the Offering is not completed on or before
December 1, 1997, the number of shares which may be purchased upon exercise of
the Warrants will be increased to 5%, and 6% if not completed by March 1, 1998.

The escrow agreement was established to provide protection for the Company
by the Sellers with regard to warranties and representations contained in the
purchase agreement, such as a recent claim by Collaborative Clinical Research,
Inc. ("Collaborative") (See "Business -- Litigation"). The escrow agreement is
in the form of an 8% interest bearing note and will be paid on January 1, 1999,
provided the Company has not
delivered a claim with respect to breaches by the Seller at that time.

BANK CREDIT FACILITY UTILIZATION -- gmi ACQUISITION

Although the Company expects the gmi Acquisition to close simultaneously
with the closing of the Offering, the Company is required per the gmi definitive
agreement to consummate the gmi Acquisition not later than September 19, 1997.
If the Offering is not completed by September 19, 1997, or a mutually agreed
upon later date, then the Company expects to borrow approximately $4.3 million
from the Senior Credit Facility and $5 million from the Series B Note to fund
the cash portion of the gmi Acquisition. In addition, the non-cash portion of
the gmi Acquisition would be funded through the issuance of a subordinated
security by the Company (mandatory convertible exchangeable preferred stock) to
the gmi shareholders. Upon issuance of the Series B Note, the Company is
required under the Subordinated Credit Facility to issue the Warrants to the
Bank for the purchase of an additional 3% of the outstanding shares of Common
Stock of the Company, and 4% if the Offering is not completed by March 1, 1998.
In addition, under the terms of the gmi definitive agreement, the Bank issued a
standby letter of credit to the gmi shareholders to secure the cash portion of
the gmi Acquisition price due to such shareholders.

The Company intends to repay all outstanding Subordinated Promissory Notes
and amounts outstanding under the Senior Credit Facility related to the U-Gene
Acquisition, with proceeds from the Offering. The Warrants issued in connection
with the U-Gene Acquisition will be exercised by the Bank and converted to
Common Stock concurrently with the consummation of the Offering.

13
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby by the Company are estimated to be approximately
$38.6 million (approximately $45.6 million if the over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses. The Company expects to utilize approximately $14.3
million of the proceeds in order to repay bank indebtedness incurred in
connection with the U-Gene Acquisition, and will use approximately $9.3 million
to fund the cash portion of the gmi Acquisition, which the Company expects to
occur concurrently with the Offering. The Company will also repay amounts
outstanding under the Senior Credit Facility utilized for working capital
purposes and gmi Acquisition costs totaling approximately $1.4 million at June
30, 1997. The Company estimates that it will invest approximately $3 million to
$4 million during 1997 for capital expenditures related to facilities and
investments in information technology. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company expects to use approximately $1.0 million of the net
proceeds from the Offering for working capital and the remainder for general
corporate purposes. A portion of the amount designated for general corporate
purposes may be used to acquire or invest in similar or complementary
businesses; however, there are no agreements or commitments with respect to any
such transactions at the present time. Certain of the proceeds will be used to
make payments related to the termination of the Company's S corporation status
if needed to supplement other available cash. See "Termination of S Corporation
Status" and "Certain Transactions." Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term
interest-bearing, investment-grade obligations. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Shareholders.

TERMINATION OF S CORPORATION STATUS

Since 1989, the Company has been treated as an S corporation for federal
income tax purposes pursuant to an election under Subchapter S of the Internal
Revenue Code of 1986 (the "Code") and for certain state income tax purposes. As
a result, substantially all of the income of the Company has been taxed directly
to its shareholders rather than to the Company. Following the closing of the
Offering, the Company will be subject to federal and state income taxes.

Immediately prior to consummation of the Offering, Kendle will terminate
its S corporation status and will be subject to C corporation taxation.
Accordingly, as of such date, the Company will become fully subject to federal
and state income taxes. In connection with the termination of the Company's S
corporation status, the Company will distribute approximately $700,000 to its S
corporation shareholders primarily representing the Company's undistributed
Subchapter S earnings previously taxed to shareholders. The $700,000 represents
the maximum the Company may distribute at the time of the Offering in accordance
with the provisions of the Bank Credit Facility.

In addition, prior to the Offering, the Company plans to distribute an
amount to enable its shareholders to pay taxes on the S corporation earnings.
The amount of that distribution has not yet been determined.

In connection with the termination of Kendle's S corporation status, the
Company will record deferred income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." As of
June 30, 1997, such deferred income taxes would have totaled approximately
$81,000. This income tax expense will be in addition to income tax expense
otherwise incurred in such quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 to the Company's
financial statements.

14
<PAGE> 15

DIVIDEND POLICY

The Company paid cash dividends of $253,225 in 1995 and $285,291 in 1996 to
enable its shareholders to pay federal, state and local income and earnings
taxes and, beginning in December 1996, to provide for routine, quarterly
distributions of undistributed S corporation earnings previously taxed to
shareholders. The Company currently anticipates that after the Offering all of
its earnings will be retained for development of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future. Future cash
dividends, if any, will be paid at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's results of
operations and earnings, capital requirements and surplus, general financial
conditions, contractual restrictions and such other factors as the Board of
Directors may deem relevant. In any event, the Subordinated Credit Facility
prohibits the declaration and payment of any cash dividends (other than
dividends to enable the Company's shareholders to pay federal, state and local
income and earnings taxes while the Company is an S corporation), excepting only
sums not to exceed $150,000 per quarter in 1997 after the closing of the U-Gene
Acquisition and, immediately prior to the Offering, a distribution equal to the
amount of all undistributed S corporation earnings previously taxed to
shareholders not to exceed $700,000. The Senior Credit Facility contains similar
prohibitions on the declaration and payment of cash dividends. Both facilities,
however, permit the declarations and payment of dividends in shares of the
Company's Common Stock.

15
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis; (ii) on an as adjusted basis to reflect (a) the
sale of 3,000,000 shares of Common Stock offered by the Company at the initial
public offering price of $14.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses; (b) repayment of
amounts borrowed under the Bank Credit Facility; (c) the recognition of an
estimated $81,000 of deferred income taxes upon the termination of the Company's
S corporation status, (d) the payment of the S corporation distribution of
approximately $700,000, and (e) the reclassification of retained earnings to
additional paid-in capital; and (iii) on a pro forma basis as adjusted to give
effect to the items discussed in (ii)(a) through (e) above and the gmi
Acquisition. The table should be read in conjunction with the financial
statements and notes thereto and the Unaudited Pro Forma Condensed Consolidated
Financial Statements included elsewhere in this Prospectus. See "Use of
Proceeds," "Selected Financial and Operating Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------
AS PRO FORMA AS
ACTUAL ADJUSTED ADJUSTED(1)
------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash......................................................... $ 21 $ 22,136 $ 14,587
======= ======= =======
Short-term debt:
Current portion of capital lease obligations............... $ 328 $ 328 $ 328
Note payable............................................... 740 740 740
Obligations under capital leases, less current portion....... 1,080 1,080 1,080
Senior debt.................................................. 10,745
Subordinated debt............................................ 3,500
Stock purchase warrants...................................... 1,500
Note payable -- escrow agreement............................. 1,530 1,530 1,530
Shareholders' equity:
Preferred stock; 100,000 shares authorized; no shares
issued or outstanding...................................
Common stock, 15,000,000 shares authorized; 3,650,000
shares issued and outstanding; 6,650,000 shares issued
and outstanding, as adjusted; and 7,002,220 shares
issued and outstanding, pro forma as adjusted (2)....... 75 75 77
Additional paid-in capital................................. 270 39,058 43,337
Retained earnings (deficit)................................ 1,009 (1,100) (1,100)
------- ------- -------
Total shareholders' equity.............................. 1,354 38,033 42,314
------- ------- -------
Total capitalization............................... $20,777 $ 41,711 $ 45,992
======= ======= =======
</TABLE>

- ---------------

(1) Pro forma as adjusted includes: (i) 198,482 shares to be issued in
conjunction with the gmi Acquisition (based on the initial public offering
price of $14.00 per share); and (ii) the write-off of the unamortized debt
discount (net of a tax benefit) and the conversion of the Warrants to shares
of Common Stock.

(2) Excludes exercisable options for the purchase of 329,449 shares of Common
Stock.

16
<PAGE> 17

DILUTION

The net tangible book value of the Company at June 30, 1997, on a pro forma
basis to reflect the $700,000 S corporation distribution and the recognition of
$81,000 in deferred income taxes upon the termination of the Company's S
corporation election, was approximately $(13.7) million, or $(3.71) per share.
See "Termination of S Corporation Status." Without taking into account any other
changes in net tangible book value after June 30, 1997, other than to give
effect to pro forma adjustments for the sale by the Company of 3,000,000 shares
of its Common Stock offered hereby at $14.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses), the
adjusted pro forma net tangible adjusted book value of the Company at June 30,
1997 would have been approximately $24.9 million, or $3.57 per share. This
amount represents an immediate increase in net tangible book value of $7.28 per
share to existing shareholders of the Company and an immediate dilution in net
tangible book value of $10.43 per share to purchasers of shares of Common Stock
offered hereby as illustrated by the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $14.00
Net tangible book value per share.............................. $(3.71)
Increase per share attributable to new shareholders............ 7.28
-----
Pro forma net tangible book value per share...................... 3.57
------
Dilution per share to new shareholders........................... $10.43
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between existing shareholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share:

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(2).......... 3,690,588 50.3 $ 120,038 0.3 $ 0.03
Options immediately exercisable at
the Offering(3)................. 288,861 4.0 295,276 0.7 1.02
Warrants issued in connection with
the U-Gene Acquisition.......... 153,738 2.1 1,537 * 0.01
Shares to be issued in connection
with the gmi Acquisition........ 198,482 2.7 2,778,750 6.1 14.00
New investors..................... 3,000,000 40.9 42,000,000 92.9 14.00
--------- ----- ----------- -----
Total................... 7,331,669 100.0 $45,195,601 100.0
========= ===== =========== =====
</TABLE>

- ---------------

* Less than 0.1%

(1) Sales by the Selling Shareholders in the Offering will cause the number of
shares held by existing shareholders to be reduced to 3,090,588 or 42.2% of
the total shares of Common Stock to be outstanding after the Offering, and
will increase the number of shares held by new investors to 3,600,000
shares, or 49.1% (4,140,000 shares or 52.6% if the Underwriters'
over-allotment option is exercised in full) of the total shares of Common
Stock to be outstanding after the Offering. See "Principal and Selling
Shareholders."

(2) Existing shares include options exercisable prior to the Offering for the
purchase of 40,588 shares of Common Stock.

(3) Excludes 270,000 options which will be granted concurrently with the
Offering under the Company's 1997 Stock Option and Stock Incentive Plan.

17
<PAGE> 18

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated statements of operations for
the six month period ended June 30, 1997 and the year ended December 31, 1996
give effect to the Acquisitions as if they had occurred on January 1, 1996. The
unaudited pro forma condensed consolidated balance sheet as of June 30, 1997
gives effect to the gmi Acquisition as if it had occurred on June 30, 1997.

The unaudited pro forma condensed consolidated financial statements give
effect only to the reclassifications and adjustments set forth herein. The pro
forma financial information is provided as additional information only and is
not necessarily indicative of actual results that would have been achieved had
the Acquisitions been consummated at the beginning of the periods presented or
of future results.

Kendle has received correspondence from Collaborative asserting claims
against U-Gene and its former shareholders for alleged wrongful termination of a
letter of intent relating to a proposed acquisition by Collaborative of U-Gene
and also alleging that Kendle may have tortiously interfered with
Collaborative's relationship with U-Gene under this letter of intent. Kendle
believes U-Gene has meritorious defenses to Collaborative's claims and further
does not believe that Kendle has engaged in any conduct that could result in
liability to Collaborative. See "Business -- Litigation".

These statements have been prepared from the financial statements of the
Company, U-Gene and gmi and should be read in conjunction with such statements
and the notes thereto which are included elsewhere herein.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
CONSOLIDATED
ACTUAL ACTUAL ACTUAL PRO FORMA PRO FORMA
KENDLE U-GENE gmi ADJUSTMENTS TOTALS(1)
------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $13,172 $6,443 $3,873 $ 23,488
Costs and expenses:
Direct costs......................... 7,347 4,147 2,161 13,655
Selling, general and
administrative.................... 4,024 1,500 259 5,783
Depreciation and amortization........ 316 186 41 $ 422(2) 965
------- ------ ------ ----- -------
Total costs and expenses.......... 11,687 5,833 2,461 422 20,403
------- ------ ------ ----- -------
Income from operations................. 1,485 610 1,412 (422) 3,085
Other income (expense):
Interest expense..................... (71) 12 25 (34)
Other................................ 4 (4)
------- ------ ------ ----- -------
Income before income taxes............. 1,418 622 1,433 (422) 3,051
Income taxes........................... 218 681 428(3) 1,327
------- ------ ------ ----- -------
Net income............................. $ 1,418 $ 404 $ 752 $(850) $ 1,724
======= ====== ====== ===== =======
Weighted average common and equivalent
shares outstanding................... 7,635(4)
Earnings per common and common
equivalent share..................... $ 0.23
</TABLE>

See notes on the following page

18
<PAGE> 19

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
CONSOLIDATED
ACTUAL ACTUAL ACTUAL PRO FORMA PRO FORMA
KENDLE U-GENE gmi ADJUSTMENTS TOTALS (1)
------- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $12,959 $12,508 $6,996 $ 32,463
Costs and expenses:
Direct costs........................ 8,176 8,108 4,894 21,178
Selling, general and
administrative................... 3,278 2,783 597 6,658
Depreciation and amortization....... 316 320 105 $ 844(2) 1,585
------- ------- ------ ------- -------
Total costs and expenses......... 11,770 11,211 5,596 844 29,421
------- ------- ------ ------- -------
Income from operations................ 1,189 1,297 1,400 (844) 3,042
Other income (expense):
Interest expense.................... (65) (65)
Other............................... 10 7 45 62
------- ------- ------ ------- -------
Income before income taxes............ 1,134 1,304 1,445 (844) 3,039
Income taxes.......................... 465 658 260(3) 1,383
------- ------- ------ ------- -------
Net income............................ $ 1,134 $ 839 $ 787 $(1,104) $ 1,656
======= ======= ====== ======= =======
Weighted average common and equivalent
shares outstanding.................. 7,432(4)
Earnings per common and common
equivalent share.................... $ 0.22
=======
</TABLE>

- ---------------

(1) Pro forma adjustments do not give effect to the extraordinary charge for the
write-off of the unamortized debt discount associated with the Bank Credit
Facility of $1,100 (net of tax benefit of $400) upon repayment of the
Subordinated Credit Facility.

(2) Adjusted to reflect amortization expense. The excess of the cost of the
Acquisitions over net assets acquired will be amortized over 30 years using
the straight line method. The cost of the gmi Acquisition was computed using
the exchange rate in effect as of June 30, 1997.

(3) Adjusted to reflect: (i) the application of corporate income taxes to the
Company's net income at an assumed statutory combined federal and state rate
of 40% which would have been recorded if the Company had been a C
corporation during such period; (ii) the application of corporate income
taxes for U-Gene and gmi at effective tax rates of 35% and 43%,
respectively; and (iii) the tax effect of the pro forma adjustments using an
estimated statutory rate of 40%. The pro forma adjustment includes non-
deductible amortization of goodwill relating to the U-Gene Acquisition of
$475 and $238 for the year ended December 31, 1996 and the six months ended
June 30, 1997, respectively.

(4) Pro forma weighted average common and equivalent shares outstanding
includes: (i) the issuance of 3,000 shares of Common Stock through the
Offering; (ii) the issuance of 198 shares of the Company's Common Stock for
the gmi Acquisition; (iii) options to purchase shares of Common Stock
granted by the Company during the twelve months preceding the Offering as if
they were outstanding for all periods presented using the treasury stock
method at the initial public offering price of $14.00 per share; and (iv)
the Warrants issued in connection with the U-Gene Acquisition.

19
<PAGE> 20

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
ACTUAL ACTUAL TO REFLECT TO REFLECT GMI CONSOLIDATED
KENDLE gmi OFFERING ACQUISITION PRO FORMA
------- ------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................. $ 21 $1,785 $ 38,560(1) $ (9,336)(7) $ 14,587
(15,745)(3)
(700)(4)
2(3)
Receivables -- trade............. 9,729 1,551 11,280
Unreimbursed investigator and
project costs.................. 3,167 3,167
Other current assets............. 569 87 656
------- ------ -------- ------- -------
Total current assets........... 13,486 3,423 22,117 (9,336) 29,690
------- ------ -------- ------- -------
Property and equipment, net...... 4,360 149 4,509
Other assets..................... 1,499 1,499
Excess of purchase price over net
assets acquired................ 14,251(5) 11,057(5)(7) 25,308
------- ------ -------- ------- -------
Total assets................ $33,596 $3,572 $ 22,117 $ 1,721 $ 61,006
======= ====== ======== ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Note payable..................... $ 739 $ 739
Amounts payable--outstanding
checks......................... 1,221 1,221
Current portion of obligations
under capital leases........... 328 328
Advances of investigator and
project costs.................. 1,360 1,360
Trade payables................... 3,358 $ 588 3,946
Income taxes payable............. 1,089 $ (400)(3) 689
Accrued liabilities.............. 1,534 748 2,282
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 5,126 89 5,215
------- ------ -------- -------
Total current liabilities...... 13,666 2,514 (400) 15,780
------- ------ -------- -------
Obligations under capital leases,
less current portion........... 1,080 1,080
Pension obligation............... 221 221
Deferred income taxes............ -- 81(2) 81
Senior debt...................... 10,745 (10,745)(3)
Subordinated debt................ 3,500 (3,500)(3)
Stock purchase warrants.......... 1,500 (1,500)(3)
Note payable--excrow agreement... 1,530 1,530
------- ------ -------- -------
Total liabilities........... 32,242 2,514 (16,064) 18,692
------- ------ -------- -------
</TABLE>

See notes on the following page

20
<PAGE> 21

- ---------------

(1) To record the net proceeds from the initial public offering of $38,560,
consisting of 3,000 shares at $14.00 per share, after deducting underwriting
commissions and discounts and estimated Offering expenses of approximately
$3,440.

(2) To record deferred income taxes upon the termination of the Company's S
corporation election.

(3) To record: (i) the repayment of the Bank Credit Facility; (ii) the write-off
of the unamortized debt discount of $1,100 (net of a tax benefit of $400)
resulting from an extraordinary loss incurred on early extinguishment of the
subordinated debt; and (iii) the assumed exercise of the Warrants issued in
connection with the U-Gene Acquisition.

(4) To record payment of the S corporation distribution of $700 upon termination
of S corporation status.

(5) The Company follows the practice of allocating purchase price to
specifically identifiable intangible assets based on their estimated values
as determined by appropriate valuation methods. In the U-Gene and gmi
Acquisitions, no allocation of purchase price was made to specifically
identifiable intangible assets other than excess of purchase price over net
assets acquired as the Company believes it did not acquire any other
significant specifically identifiable intangible assets.

(6) To record the reclassification of the Company's retained earnings to
additional paid-in capital upon terminating S corporation status.

(7) To record the purchase of the net assets of gmi (including the recording of
the excess of acquisition costs over net assets acquired) and eliminate
shareholders' equity. The acquisition costs (converted to U.S. dollars using
an exchange rate of 0.57 (DM/U.S.$ as of June 30, 1997)) consist of
approximately $9,336 in cash and $2,779 in shares of Common Stock at the
initial public offering price of $14.00 per share. No allocation of purchase
price was made to existing contracts as the Company believes that profits to
be earned on contracts will be proportionate to the costs incurred
subsequent to the acquisition.

21
<PAGE> 22

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected financial data set forth below at and for the year ended
December 31, 1992 are derived from unaudited financial statements and include
all adjustments, consisting only of normal recurring adjustments, that the
Company considers necessary for a fair presentation of the financial position
and results of operations for this period. For each of the years in the
four-year period ended December 31, 1996, the selected financial data are
derived from financial statements that have been audited by Coopers & Lybrand
L.L.P., independent accountants. The audited balance sheets as of December 31,
1995 and 1996 and the related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31, 1996
and related notes thereto appear elsewhere in this Prospectus. The balance sheet
data at June 30, 1997 and the statement of operations data for the six months
ended June 30, 1997 and 1996 are derived from unaudited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. The balance
sheet data at June 30, 1997 reflects the consolidated financial position of the
Company and its wholly-owned subsidiary U-Gene. The U-Gene Acquisition, which
closed on July 1, 1997, has been given effect to as of June 30, 1997 since a
binding agreement was in place and consideration had been transferred. Operating
results for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1997.
The selected pro forma financial data are derived from the unaudited pro forma
condensed consolidated financial statements included elsewhere in this
Prospectus and are based on the financial statements of the Company, U-Gene and
gmi, adjusted to give effect to the Acquisitions and certain other matters. The
selected pro forma statement of operations data for the year and six month
period ended December 31, 1996 and June 30, 1997, respectively, give effect to
the Acquisitions as if they had occurred on January 1, 1996. The pro forma
balance sheet data at June 30, 1997 gives effect to the gmi Acquisition as if it
had occurred on June 30, 1997. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and are qualified by reference to the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------- -----------
PRO
FORMA
1992 1993 1994 1995 1996 1996(1) 1996
------------ ------ ------ ------ ------- ------- ------------
(UNAUDITED) (UNAUDITED)
------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $2,468 $2,555 $4,431 $6,118 $12,959 $32,463 $4,693
------ ------ ------ ------ ------- ------- ------
Costs and expenses:
Direct costs.................... 1,689 1,548 2,760 3,564 8,176 21,178 3,176
Selling, general and
administrative................ 1,158 603 1,067 1,776 3,278 6,658 1,017
Depreciation and
amortization.................. 81 111 127 168 316 1,585 92
------ ------ ------ ------ ------- ------- ------
Total costs and expenses...... 2,928 2,262 3,954 5,508 11,770 29,421 4,285
------ ------ ------ ------ ------- ------- ------
Income (loss) from operations..... (460) 293 477 610 1,189 3,042 408
Interest expense.................. (72) (61) (43) (69) (65) (65) (30)
Other income, net................. 37 20 24 6 10 62 4
------ ------ ------ ------ ------- ------- ------
Income (loss) before income
taxes........................... (495) 252 458 547 1,134 3,039 382
Income taxes...................... 1,383
------ ------ ------ ------ ------- ------- ------
Net income (loss)................. $ (495) $ 252 $ 458 $ 547 $ 1,134 $1,656 $ 382
====== ====== ====== ====== ======= ======= ======
HISTORICAL PRO FORMA DATA(2):
Net income (loss)................. $ (495) $ 252 $ 458 $ 547 $ 1,134 $ 382
Pro forma income tax expense
(benefit)....................... (198) 101 183 219 454 153
------ ------ ------ ------ ------- ------
Pro forma net income (loss)....... $ (297) $ 151 $ 275 $ 328 $ 680 $ 229
====== ====== ====== ====== ======= ======
Historical pro forma net income
(loss) per share................ $(0.07) $ 0.04 $ 0.07 $ 0.08 $ 0.16 $ 0.05
====== ====== ====== ====== ======= ======
PRO FORMA NET INCOME PER SHARE.... $ 0.22
=======
Historical and pro forma weighted
average common and equivalent
shares outstanding (3).......... 4,026 4,026 4,026 4,074 4,234 7,432 4,177
Dividends declared per share(4)... $ 0.02 $ 0.08 $ 0.10 $ 0.15 $ 0.06

<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
PRO
FORMA
1997 1997(1)
------- -------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $13,172 $23,488
------- -------
Costs and expenses:
Direct costs.................... 7,347 13,655
Selling, general and
administrative................ 4,024 5,783
Depreciation and
amortization.................. 316 965
------- -------
Total costs and expenses...... 11,687 20,403
------- -------
Income (loss) from operations..... 1,485 3,085
Interest expense.................. (71) (34)
Other income, net................. 4
------- -------
Income (loss) before income
taxes........................... 1,418 3,051
Income taxes...................... 1,327
------- -------
Net income (loss)................. $ 1,418 $ 1,724
======= =======
HISTORICAL PRO FORMA DATA(2):
Net income (loss)................. $ 1,418
Pro forma income tax expense
(benefit)....................... 567
-------
Pro forma net income (loss)....... $ 851
=======
Historical pro forma net income
(loss) per share................ $ 0.19
=======
PRO FORMA NET INCOME PER SHARE.... $ 0.23
=======
Historical and pro forma weighted
average common and equivalent
shares outstanding (3).......... 4,437 7,635
Dividends declared per share(4)... $ 0.28
</TABLE>

22
<PAGE> 23

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
AS OF DECEMBER 31, ---------------------
---------------------------------------------------- PRO
1992 1993 1994 1995 1996 ACTUAL FORMA(1)
------ ------ ------- ------- ------ ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ (972) $ (492) $ (208) $ (139) $ (294) $ (180) $13,910
Total assets............................ 832 2,181 1,874 2,432 8,623 33,597 61,006
Total debt.............................. 278 173 139 151 761 18,355 2,610
Total shareholders' equity (deficit).... (827) (343) 51 345 944 1,354 42,314
</TABLE>

- ---------------

(1) The pro forma data give effect to: (i) the gmi Acquisition; (ii) the
Offering; (iii) repayment of amounts borrowed under the Bank Credit
Facility; (iv) the recognition of an estimated $81 of deferred income taxes
upon the termination of Kendle's S corporation election; (v) the payment of
the S corporation distribution of approximately $700; and (vi) the assumed
exercise of the Warrants issued in connection with the U-Gene Acquisition.
The pro forma data also reflect the application of corporate income taxes to
the Company's net income at an assumed statutory combined federal and state
rate of 40%, which would have been recorded if the Company had been a C
corporation during such periods. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements," "Termination of S Corporation Status,"
"Use of Proceeds," "Bank Credit Facility" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

(2) The historical pro forma data reflect the application of corporate income
taxes to the Company's net income at an assumed statutory combined federal
and state rate of 40%, which would have been recorded if the Company had
been a C corporation during such periods.

(3) Weighted-average common and equivalent shares outstanding includes: (i)
options to purchase shares of Common Stock granted by the Company during the
twelve months preceding the Offering as if they were outstanding for all
periods presented, using the treasury stock method at the initial public
offering price of $14.00 per share; and (ii) the exercise of the Warrants
issued in connection with the U-Gene Acquisition.

(4) The Company currently anticipates that after the Offering all of its
earnings will be retained for development of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future.

23
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The Company provides integrated clinical research services on a contract
basis to the pharmaceutical and biotechnology industries. These services include
Phase II to Phase IV clinical trial management, clinical data management,
biostatistical analysis, medical writing and regulatory consultation and
representation. Historically, the Company has grown through internal expansion.
Its strategy is to build its business in the future through a combination of
internal growth and acquiring businesses that offer services similar or
complementary to those offered by the Company.

Kendle's clinical research and development services contracts are generally
fixed price, with some variable components, and range in duration from a few
months to several years. A portion of the contract fee is typically required to
be paid at the time the contract is entered into and the balance is received in
installments over the contract's duration, in most cases on a milestone
achievement basis. Most of the Company's contracts are terminable upon 30 days'
notice by the client. Clients terminate or delay contracts for a variety of
reasons, including, among others, the failure of the product being tested to
satisfy safety requirements, unexpected or undesired clinical results of the
product, the client's decision to forego a particular study, insufficient
patient enrollment or investigator recruitment or production problems resulting
in shortages of the drug. Although the Company typically is entitled to receive
certain fees for winding down a study which is terminated or delayed and, in
some cases, a termination fee, the loss or delay of a large contract or the loss
or delay of multiple contracts could have a material adverse effect on the
Company.

Kendle recognizes revenues from contracts on the percentage of completion
method, measured by the total costs incurred as a percentage of estimated total
costs for each contract. Kendle uses this method because management considers
total costs incurred to be the best available measure of progress on these
contracts. The estimated total costs of contracts are reviewed and revised
periodically throughout the lives of the contracts with adjustment to revenues
resulting from such revisions being recorded on a cumulative basis in the period
in which the revisions are made. Additionally, the Company incurs costs, in
excess of contract amounts, in subcontracting with third-party investigators.
Such costs, which are reimbursable by its clients, are excluded from direct
costs and net revenues.

The Company's backlog consists of anticipated net revenues from work under
letter agreements and contracts which have not been realized. At June 30, 1997,
Kendle's backlog was approximately $26.0 million compared to $7.8 million at
June 30, 1996, a 234% increase. At June 30, 1997, U-Gene's and gmi's backlogs
were approximately $8.4 million and $5.7 million, respectively. The Company
believes that its backlog as of any date is not necessarily a meaningful
predictor of future results and no assurances can be given that the Company will
be able to fully realize all of its backlog as revenues. See
"Business -- Backlog."

Direct costs consist of compensation and related fringe benefits for
project-related employees, unreimbursed project-related costs and indirect costs
including facilities, information systems and other costs. Selling, general and
administrative expenses consist of compensation and related fringe benefits for
sales and administrative employees, professional services and advertising costs,
as well as unallocated costs related to facilities, information systems and
other costs.

ACQUISITIONS

U-Gene's net revenues increased $3.4 million, or 37.3%, from approximately
$9.1 million in 1995 to approximately $12.5 million in 1996. This increase was
primarily due to an increase in the number of projects, which increased from 69
as of December 31, 1995 to 117 as of December 31, 1996. Net income increased
approximately $254,000, or 43.4% from approximately $584,000 for 1995 to
$838,000 for 1996, due primarily to the increase in net revenues.

gmi's net revenues increased $1.7 million, or 32.1%, from approximately
$5.3 million for 1995 to $7.0 million for 1996. The increase in net revenues was
primarily due to an increase in the number of projects,

24
<PAGE> 25

which increased from 81 as of December 31, 1995 to 116 as of December 31, 1996.
Net income increased approximately $182,000, or 30.1%, from approximately
$604,000 for 1995 to approximately $786,000 for 1996, due primarily to the
increase in net revenues.

Management believes that the Acquisitions will establish the Company as a
full-service international CRO. The U-Gene Acquisition provides the Company with
Phase I capabilities and a European presence, while the gmi Acquisition is
expected to strengthen its European presence and will add a number of additional
areas of therapeutic expertise that complement Kendle's areas of proficiency.
The Acquisitions will increase both the number and geographic scope of the
clients served by the Company, enabling the Company to cross-sell its services
and enhance its relationships with existing clients.

Following the Acquisitions, a significant percentage of the Company's cash
flow from operations will be derived from operations outside the United States.
As the Company's plans are to repatriate earnings from U-Gene and gmi to the
U.S., the Company will be subject to the risks of currency exchange rate
fluctuations.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of net revenues and the percentage change in these items
compared to the prior comparable period. The trends illustrated in the following
table may not be indicative of future results.

<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
PERCENTAGE OF NET REVENUES ------------------------------
---------------------------------------------
SIX MONTHS YEAR YEAR SIX MONTHS
ENDED ----- ----- ----------
YEAR ENDED DECEMBER 31, JUNE 30, 1994 1995 1996
------------------------- --------------- TO TO TO
1994 1995 1996 1996 1997 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 38.1% 111.8% 180.6
Costs and expenses
Direct costs................. 62.3 58.3 63.1 67.7 55.8 29.1 129.4 131.4
Selling, general and
administrative............. 24.1 29.0 25.3 21.7 30.6 66.4 84.6 295.5
Depreciation and
amortization............... 2.9 2.7 2.4 2.0 2.4 32.5 88.1 242.5
Income from operations......... 10.7 10.0 9.2 8.7 11.3 27.9 94.8 263.7
Other income (expenses), net... (0.4) (1.0) (0.4) (0.6) (0.5) 232.6 (13.1) 157.5
Net income..................... 10.3 9.0 8.8 8.1 10.8 19.4 107.2 270.9
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net revenues increased by $8.5 million, or 180.6%, from $4.7 million for
the six months ended June 30, 1996 to $13.2 million for the six months ended
June 30, 1997. The increase in net revenues was primarily due to 68 new projects
started by the Company during the six months ended June 30, 1997, which resulted
in net revenues of $4.9 million for the six months ended June 30, 1997 as
compared to June 30, 1996, and a net increase in revenues recognized on existing
projects net of expansions of existing projects, totaling approximately $3.6
million over the same periods. Revenues from G.D. Searle & Co. and The Procter &
Gamble Company accounted for approximately 64% and 13%, respectively, of net
revenues for the six months ended June 30, 1997. Net revenues from clients other
than G.D. Searle & Co. increased $1.9 million, or 67.9%, from $2.8 million for
the six months ended June 30, 1996 to $4.7 million for the six months ended June
30, 1997.

Direct costs increased by $4.2 million, or 131.4%, from $3.2 million for
the six months ended June 30, 1996 to $7.4 million for the six months ended June
30, 1997. This increase is primarily comprised of an increase of: (i)
approximately $2.4 million in direct salaries and fringe benefits to support the
increases in net revenues for the period; and (ii) an increase of approximately
$1.7 million in indirect costs in connection with projects, including allocated
facility, unreimbursed project-related and other costs which also increased to
support the growth in business activity. Direct costs expressed as a percentage
of net revenues decreased from 67.7% for the six months ended June 30, 1996 to
55.8% for the six months ended June 30, 1997. The decrease in those costs as a
percentage of net revenues is due primarily to the absorption of direct
project-related costs over a larger revenue base, as net revenues increased by
180.6% for the six months ended June 30, 1997 as

25
<PAGE> 26

compared to the six months ended June 30, 1996, while direct costs increased by
131.4% over the same periods.

Selling, general and administrative expenses increased by $3.0 million, or
295.5%, from $1.0 million for the six months ended June 30, 1996 to $4.0 million
for the six months ended June 30, 1997. Selling, general and administrative
expenses as a percentage of net revenues increased from 21.7% for the six months
ended June 30, 1996 to 30.6% for the six months ended June 30, 1997. The
increase is primarily comprised of: (i) an increase of approximately $983,000 in
salaries and fringe benefits, which is the result of the Company's continued
efforts to increase its infrastructure in order to support the growth in
business activity for the six months ended June 30, 1997 as compared to the same
period in 1996; and (ii) increases in training ($479,000), contractual services
($361,000), recruiting ($256,000), conferences and seminars ($153,000) and
marketing and advertising ($146,000) expenses for the six months ended June 30,
1997 as compared to the same period in 1996.

Depreciation and amortization expense increased $223,000, or 242.5%, from
$92,000 for the six months ended June 30, 1996 to $315,000 for the six months
ended June 30, 1997. This increase was due primarily to capital expenditures
associated with the three offices opened by the Company in 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net revenues increased by $6.9 million, or 111.8%, from $6.1 million for
the year ended December 31, 1995 to $13.0 million for the year ended December
31, 1996. The increase in net revenues was due to 47 new projects started by the
Company during the year ended December 31, 1996, which resulted in net revenues
of approximately $9.2 million for the year ended December 31, 1996 as compared
to December 31, 1995, offset by a net decrease in revenues recognized on
existing projects net of expansions of existing projects, totaling approximately
$2.3 million over the same periods. Revenues from G.D. Searle & Co., The Procter
& Gamble Company and Amgen, Inc. accounted for approximately 48%, 19% and 13%,
respectively, of net revenues for the year ended December 31, 1996. Net revenues
from clients other than G.D. Searle & Co. increased $3.1 million, or 86.9%, from
$3.6 million for the year ended December 31, 1995 to $6.7 million for the year
ended December 31, 1996.

Direct costs increased by $4.6 million, or 129.4%, from $3.6 million for
the year ended December 31, 1995 to $8.2 million for the year ended December 31,
1996. This increase is primarily comprised of: (i) an increase of approximately
$1.9 million in direct salaries and fringe benefits to support the increase in
net revenues for the period; and (ii) an increase of approximately $2.1 million
in indirect costs in connection with projects including allocated facility,
unreimbursed project-related and other costs, which increased to support the
increase in net revenues. Direct costs expressed as a percentage of net revenues
increased from 58.3% for the year ended December 31, 1995 to 63.1% for the year
ended December 31, 1996. The increase in these costs as a percentage of net
revenues is due primarily to the hiring and contracting of additional
project-related personnel to meet the needs of current and future projects,
increased occupancy and other costs associated with three additional offices
opened by the Company during 1996. This is evidenced by the increase in net
revenues of 111.8% for the year ended December 31, 1996 as compared to the year
ended December 31, 1995, while direct costs increased by 129.4% over the same
periods.

Selling, general and administrative expenses increased by $1.5 million, or
84.6%, from $1.8 million for the year ended December 31, 1995 to $3.3 million
for the year ended December 31, 1996. The increase in selling, general and
administrative expenses was primarily due to: (i) an increase of approximately
$292,000 in salaries and benefits as the Company began to increase its
infrastructure in order to support the growth in business activity for the year
ended December 31, 1996 as compared to 1995; and (ii) increases in contractual
services ($324,000), marketing and advertising ($124,000), recruiting ($334,000)
and training ($190,000) costs for the year ended December 31, 1996 as compared
to the year ended December 31, 1995. Selling, general and administrative
expenses increased at a significantly lower rate than net revenues for the year
ended December 31, 1996, declining as a percentage of net revenues from 29.0%
for the year ended December 31, 1995 to 25.3% for the year ended December 31,
1996.

26
<PAGE> 27

Depreciation and amortization expense increased $148,000, or 88.1%, from
$168,000 for the year ended December 31, 1995 to $316,000 for the year ended
December 31, 1996. The increase was due primarily to capital expenditures
associated with the three offices opened by the Company in 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net revenues increased by $1.7 million, or 38.1%, from $4.4 million in 1994
to $6.1 million in 1995. The increase in net revenues was primarily due to 18
new projects started by the Company during the year ended December 31, 1995,
which resulted in net revenues of $1.6 million for the year ended December 31,
1995 as compared to December 31, 1994, and a net increase in revenues recognized
on existing projects net of expansions of existing projects, totaling
approximately $122,000 over the same periods. Revenues from G.D. Searle & Co.,
Rhone-Poulene Rorer, Inc. and Parke-Davis, a division of Warner-Lambert Co.,
accounted for approximately 42%, 12% and 11%, respectively, of net revenues for
the year ended December 31, 1995. Net revenues from clients other than G.D.
Searle & Co. increased $1.4 million, or 63.1%, from $2.2 million for the year
ended December 31, 1994 to $3.6 million for the year ended December 31, 1995.

Direct costs increased by $804,000, or 29.1%, from $2.8 million in 1994 to
$3.6 million in 1995. This increase is primarily comprised of: (i) an increase
of approximately $272,000 in direct salaries and fringe benefits as a result of
increases in project related employees to support the increase in net revenues
for the period; and (ii) an increase of approximately $382,000 in indirect costs
in connection with projects including allocated facility, unreimbursed
project-related costs and other costs, which also increased to support the
increase in net revenues. Direct costs as a percentage of net revenues decreased
from 62.3% in 1994 to 58.3% in 1995. The decrease was due primarily to the
absorption of indirect project-related costs over a larger revenue base as the
Company's volume of business increased. This is evidenced by the increase in net
revenues of 38.1% for the year ended December 31, 1995 as compared to 1994,
while direct costs increased by 29.1% over the same periods.

Selling, general and administrative expenses increased by $708,000, or
66.4%, from $1.1 million in 1994 to $1.8 million in 1995. Selling, general and
administrative expenses as a percentage of net revenues increased from 24.1% in
1994 to 29.0% in 1995. The increase in selling, general and administrative
expenses was due to increases in: (1) salaries and fringe benefits of $384,000;
and (ii) conferences and seminars ($121,000) and recruiting ($100,000) costs for
the year ended December 31, 1995 as compared to 1994.

Depreciation and amortization expenses increased by $41,000, or 32.5%, from
$127,000 in 1994 to $168,000 in 1995. This increase was primarily due to
purchases of furniture, fixtures and equipment as a result of increases in the
Company's operations.

QUARTERLY RESULTS

The following table presents unaudited quarterly operating results for the
Company for each of the nine most recent quarters in the period ended June 30,
1997. In the opinion of the Company, this information is prepared on the same
basis as the financial statements appearing elsewhere in this Prospectus and
reflects all the adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for those periods.
This quarterly financial data should be read in conjunction with the financial

27
<PAGE> 28

statements and notes thereto appearing elsewhere in this Prospectus. The
operating results for any quarter are not indicative of the results of any
future period.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JUNE SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
30, 30, 31, 31, 30, 30, 31, 31, 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues...................... $1,638 $1,453 $1,429 $2,063 $2,630 $3,607 $4,659 $5,962 $7,210
------ ------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Direct costs.................... 852 866 971 1,395 1,781 2,441 2,560 3,376 3,971
Selling, general and
administrative................ 510 507 323 372 646 818 1,442 1,893 2,131
Depreciation and amortization... 42 47 40 45 46 51 173 150 166
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............... 1,404 1,420 1,334 1,812 2,473 3,310 4,175 5,419 6,268
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations............ 234 33 95 251 157 297 484 543 942
Other expense, net................ 17 19 18 16 10 3 26 14 53
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income........................ $ 217 $ 14 $ 77 $ 235 $ 147 $ 294 $ 458 $ 529 $ 889
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

Direct costs as a percentage of net revenues increased from 52.0% in the
quarter ended June 30, 1995, to 67.9% in the quarter ended December 31, 1995,
followed by a decline to 50.9% for the quarter ended June 30, 1997. The increase
from the quarter ended June 30, 1995 to the quarter ended December 31, 1995, was
due primarily to increases in salaries and benefits, contractual services and
rent and utilities. The decline through the quarter ended June 30, 1997 is due
primarily to the absorption of direct project-related costs over a larger
revenue base.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its operations and growth with cash
flow from operations and borrowings. Investing activities have primarily
consisted of capital expenditures for furniture, fixtures and equipment.

As a result of $3.3 million in cash provided by operating activities and
$0.4 million and $0.8 million cash used by investing and financing activities,
respectively, cash and cash equivalents increased by $2.1 million during the
year ended December 31, 1996. Net cash provided by operating activity resulted
primarily from net income and the net change in working capital items. Most of
the Company's contracts for its services provide for bills to be rendered based
upon the achievement of certain project goals or milestones. These milestones,
while related to the work performed, may provide for installment payments that
are not reflective of work performed for purposes of revenue recognition. As a
result, billings by the Company (and therefore collection of receivables) and
recognition of revenue do not necessarily coincide.

Investing activities for the year ended December 31, 1996 consisted
primarily of capital expenditures of $407,000. Financing activities for the year
ended December 31, 1996 consisted primarily of a net repayment of $320,000 under
the Company's revolving line of credit, the payment of $236,000 on capital lease
obligations and distributions to shareholders of $285,000.

Cash and cash equivalents decreased by $329,000 in 1995 as a result of cash
used by operating, investing and financing activities of $75,000, $166,000 and
$88,000, respectively. The decrease in net cash used by operating activities
resulted primarily from net income offset by the net change in working capital
items.

Investing activities in 1995 consisted of capital expenditures of $166,000.
Financing activities in 1995 consisted of $320,000 in net borrowings under a
revolving line of credit, offset by payments of capital lease obligations of
$156,000 and distributions to shareholders of $253,000.

Cash and cash equivalents decreased by $2.0 million for the six months
ended June 30, 1997 as a result of cash used by operating and investing
activities of $1.7 million and $14.8 million, respectively, and cash provided by
financing activities of $14.5 million. Net cash used by operating activities
resulted primarily from net income offset by the net change in working capital
items.

28
<PAGE> 29

Investing activities for the six months ended June 30, 1997 consisted
primarily of costs related to the U-Gene Acquisition of $14.3 million. Financing
activities for the six months ended June 30, 1997 consisted of borrowings under
the Bank Credit Facility for the U-Gene Acquisition and working capital purposes
totaling $15.7 million and debt issue costs relating to the Bank Credit Facility
of $917,000.

In connection with the Acquisitions, the Bank has agreed to lend the
Company up to $20 million under a Senior Credit Facility and up to $10 million
under a Subordinated Credit Facility. The Senior Credit Facility bears interest
at a rate equal to either LIBOR plus the Applicable Margin (as defined), or the
higher of the Bank's prime rate or the Federal Funds rate plus 0.50%. All
amounts outstanding thereunder become due and payable in June, 2000. The
Subordinated Credit Facility consists of Series A and B Notes, bearing interest
at 12% and maturing in June, 2002, and the Warrants.

This Bank Credit Facility contains various restrictive financial covenants,
including limitations on senior and total debt levels, capital expenditures and
future acquisitions as well as the maintenance of certain fixed coverage ratios
and minimum net worth levels, and is collateralized by all the assets and shares
of Common Stock held by Dr. Bryan, Mr. Bergen, the Kendle Stock Trust and Hazel
Kendle (which shares will be released as collateral upon consummation of the
Offering) and existing and hereafter acquired material subsidiaries.

On July 1, 1997 the U-Gene Acquisition and related costs were funded with
approximately $9.3 million from the Senior Credit Facility, a 8% promissory note
of approximately $1.5 million payable to the U-Gene shareholders deposited in an
escrow account pursuant to the U-Gene purchase agreement and $5 million from the
Series A Note. In addition, the Company issued the Warrants to the Bank to
purchase 4% of the outstanding shares of Common Stock of the Company (153,738
shares). If the Offering is not completed on or before December 1, 1997, the
number of shares which may be purchased upon exercise of the Warrants will be
increased to 5%, and 6% if not completed by March 1, 1998.

Although the Company expects the gmi Acquisition to close simultaneously
with the closing of the Offering, the Company is required, per the gmi
definitive agreement, to consummate the gmi Acquisition not later than September
19, 1997. If the Offering is not completed by September 19, 1997, or a mutually
agreed upon later date, then the Company expects to borrow approximately $4.3
million from the Senior Credit Facility and $5 million from the Series B Note to
fund the cash portion of the gmi Acquisition. In addition, the non-cash portion
of the gmi Acquisition would be funded through the issuance of a subordinated
security by the Company (mandatory convertible exchangeable preferred stock) to
the gmi shareholders. Upon issuance of the Series B Note, the Company is
required under the Subordinated Credit Facility to issue Warrants to the Bank
for the purchase of an additional 3% of the outstanding shares of Common Stock
of the Company, and 4% if the Offering is not completed by March 1, 1998. In
addition, the Bank has issued a standby letter of credit to the gmi shareholders
to secure the cash portion of the gmi Acquisition price due to such
shareholders.

The Company intends to repay all outstanding Subordinated Promissory Notes
and all of the Senior Credit Facility with proceeds from the Offering. The
Warrants will be exercised by the Bank and converted to shares of Common Stock
concurrently with the Offering.

The Company had a revolving line of credit arrangement with a bank totaling
$2.0 million which was terminated on June 26, 1997. The line was collateralized
by all the Company's assets, other than assets leased under the Company's
capital lease line, and was subject to various covenants and restrictions
relating to, among others, minimum tangible capital base, other liabilities and
indebtedness. Amounts borrowed under the line were payable upon demand and bore
interest at either the bank's prime rate or LIBOR plus 2.5%, at the election of
Company management, for each borrowing.

The Company had amounts outstanding for working capital and gmi Acquisition
costs at June 30, 1997 under the Senior Credit Facility totaling approximately
$1.4 million. Such borrowings will be repaid with the proceeds of the Offering.

The Company has a $1.5 million computer and a $500,000 furniture lease line
of credit with a bank. Amounts drawn on these lines are payable over a five year
term from the date of funding. These lines expire on

29
<PAGE> 30

December 31, 1997. The monthly installment payments are equal to 1.80% and 1.71%
of the total computer and furniture draws, respectively. Amounts drawn on these
lines of credit totaled $1,109,000 at June 30, 1997. In April 1997, the Company
obtained an additional $370,000 computer and $130,000 furniture lease line of
credit with the same bank. These lines expire March 31, 1998, with monthly
installment payments equal to 2.23% and 1.76% of the total computer and
furniture borrowings, respectively. Amounts drawn on the computer and furniture
lines of credit are payable over four and five year terms, respectively, from
the date of funding. At June 30, 1997, the Company had approximately $740,000
outstanding with the same bank in the form of a note payable which is expected
to be funded on the lease line of credit during the third quarter of 1997.

The Company's primary cash needs on both a short-term and long-term basis
are for the payment of salaries and fringe benefits, capital expenditures,
facility-related expenses, business development expenses and travel
expenditures. The Company estimates that during 1997 it will invest
approximately $3.0 million to $4.0 million in capital expenditures related to
its facilities and investments in its information technology. The Company
believes that available cash, together with cash flow from operations,
borrowings under the Bank Credit Facility and other existing lines of credit and
net proceeds from the Offering, will be sufficient to meet foreseeable cash
needs. See "Use of Proceeds."

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 is designed to simplify the existing
computational guidelines for computing earnings per share and provides for the
elimination of primary Earnings Per Share ("EPS") and replacing it with basic
EPS, with the principal difference of common stock equivalents not being
considered in computing basic EPS. SFAS No. 128 is effective for the Company for
the year ending December 31, 1997. The effect of the adoption of this statement
would have increased the Company's 1996 earnings per share calculation by 16%.
The effect on the six months ended June 30, 1997 is to increase earnings per
share by approximately 21%.

30
<PAGE> 31

BUSINESS

OVERVIEW

The Company is a CRO that provides a broad range of clinical research and
drug development services to the pharmaceutical and biotechnology industries.
Kendle augments the research and development activities of pharmaceutical and
biotechnology companies by offering high quality, value added clinical research
services and proprietary information technology designed to reduce drug
development time and expense. The Company's services include Phase II to Phase
IV clinical trial design and management, clinical data management,
biostatistical analysis, medical writing and regulatory consultation and
representation. Kendle believes that it is one of a small number of CROs capable
of providing a broad range of services within multiple therapeutic areas,
including cardiovascular, central nervous system, gastrointestinal, immunology,
oncology, respiratory, skeletal disease and inflammation.

Kendle's strategy is to continue to enhance its reputation as a
high-quality provider of a full range of CRO services. The Company's strategy
consists of the following key elements: (i) continue to expand its broad range
of therapeutic expertise; (ii) offer its clients "one-stop shopping" with a full
range of services that encompass the clinical research process and complement
the research and development departments of its clients; (iii) expedite the drug
development process through innovative information technology offered via the
Company's proprietary TrialWare(SM) software; (iv) continue to build a brand
presence that portrays high quality work; and (v) supplement internal growth
through strategic acquisitions that expand the Company's geographic presence and
add to Kendle's clinical research capabilities in existing or new therapeutic
areas or service offerings.

In furtherance of the Company's strategy to expand its range of services
and international coverage, the Company purchased one European CRO and entered
into an agreement to purchase another European CRO: U-Gene based in Utrecht, the
Netherlands, which provides Phase II to Phase IV clinical trial design and
management, and owns and operates a state-of-the-art 38-bed Phase I testing
unit; and gmi, based in Munich, Germany, which provides Phase II to Phase IV
clinical trial design and management and specializes in the field of
pharmacoeconomic analysis. The Company believes that these two strategic
acquisitions will make Kendle the sixth largest CRO in Europe, based on total
revenues, and enhance its ability to provide customers with a single source for
contract research services throughout North America and Europe.

INDUSTRY TRENDS

The CRO industry provides integrated product development services to the
pharmaceutical and biotechnology industries. In general, CROs derive
substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing limited clinical services in the 1970s to a full-service
industry that today encompasses much of the clinical research process (including
pre-clinical evaluations), study design, clinical trial management, data
collection and biostatistical analysis and product registration support. These
services are provided in accordance with government regulations covering
clinical trials and the drug approval process.

According to industry sources, in 1995, worldwide expenditures on research
and development by pharmaceutical and biotechnology companies are estimated to
have been approximately $35.0 billion, of which the Company estimates $22.0
billion was spent on drug development activities of the type offered by the CRO
industry. The Company believes that approximately $2.5 billion of such spending
was outsourced to CROs in 1995.

31
<PAGE> 32

The CRO industry is highly fragmented, with several hundred CROs ranging
from small, limited-service providers to full-service, global drug development
corporations. Although the CRO industry is not capital intensive and there are
few barriers to entry for small, limited-service providers, the Company believes
that there are significant barriers to becoming a full-service CRO. These
barriers include the cost and experience necessary to develop expertise in a
number of therapeutic areas, the ability to manage complex clinical trials, the
experience to prepare regulatory submissions and integrated clinical data
management capabilities. The barriers to becoming a full-service CRO combined
with the expansion of some larger CROs has led to an increased rate of industry
consolidation.

The Company believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as these companies strive to enhance revenues through faster drug
development while also dealing with cost containment pressures. The CRO
industry, by specializing in clinical trials management, is often able to
perform the needed services with a higher level of expertise or specialization,
more quickly and at a lower cost than a client could perform the services
internally.

The Company believes that pharmaceutical and biotechnology companies are
increasingly seeking to select CROs that have the following capabilities:

Therapeutic Expertise. Extensive therapeutic expertise is essential
in order to most efficiently design and manage all phases of the clinical
trials. A lack of therapeutic expertise can cause delays and cost overruns
ranging from additional time to recruit the proper investigative sites to
the need to recruit additional patients in order to obtain the necessary
data to support the efficacy of the drug. Thus, the level of therapeutic
expertise has a significant effect on the overall drug development time and
has become one of the leading factors that pharmaceutical and biotechnology
companies evaluate when choosing a CRO.

Broad Range of Services. As pharmaceutical and biotechnology
companies are utilizing fewer CROs to manage their drug development process
more efficiently, these companies are increasingly requiring CROs to
provide a full range of services. CROs must be able to manage a project
from the initial stages of protocol and study design, through clinical
trials management and data management, to regulatory and medical affairs
consulting.

Integrated Clinical Data Management. A key constraint in accelerating
the drug development process is the ability to collect, edit and analyze
the data from up to several thousand patients with various clinical
conditions from many geographically dispersed sites in an efficient manner.
The data must then be standardized and integrated into the client's
computer system prior to submission to the FDA. Currently, there is no
industry standard process for managing the clinical data and there is a
wide range of capabilities among CROs in managing the clinical data.
Pharmaceutical and biotechnology companies are increasingly requiring CROs
to have advanced clinical data management systems that are integrated with
their internal systems in order to reduce drug development time.

Proximity to Clients. Clients and potential clients frequently
consider the proximity of a company as a factor in selecting a CRO for a
project. Kendle currently has four domestic offices and plans either to
acquire or develop additional domestic or international offices where
existing and potential client relationships will be enhanced. Management
believes that the availability of offices that are convenient to clients
will be an increasingly important factor in gaining and retaining client
business.

International Support. To expedite the drug development process,
pharmaceutical and biotechnology companies increasingly require access to
diverse clinical trial participants from various countries. In an effort to
maximize profits of a given drug, such companies are now pursuing
regulatory approvals in multiple countries simultaneously rather than
sequentially as they have in the past. The studies to support such
registration packages may include a combination of multinational and
domestic trials. Pharmaceutical and biotechnology companies may turn to
CROs for assistance with such trials as well as to collect, analyze and
report the data. The Company believes that CROs with an international
presence and management experience in the simultaneous filing of multiple
applications may benefit from these trends.

32
<PAGE> 33

COMPANY STRATEGY

The Company's objective is to grow as a high-quality provider of a
full-range of CRO services. Kendle seeks to differentiate itself from its
competitors by focusing on those services that will significantly reduce the
time for drug development.

The Company's strategy consists of the following key elements:

Hiring, Training and Retaining Employees. The Company's success is
based on the quality and dedication of its employees. The Company strives
to hire the best available people in terms of ability, attitude, experience
and fit with the Company's performance philosophy. The Company believes
that it is an industry leader in the thoroughness of its training programs.
The Company trains employees extensively and encourages employees to
upgrade their skill level through internal and external training. As new
technologies develop, employees are equipped with, and trained to make use
of, such technological innovations. The Company also places significant
emphasis on retention of its employees in order to achieve a high degree of
consistency and continuity as it provides services to its clients.

Excellent Client Relationships. The Company invests significant time
and effort in building excellent relationships with its clients. It
accomplishes this through a combination of high quality, timely and cost
effective services that are designed to be highly responsive to its
clients' needs. The Company believes that the relationships developed by
its regional offices have been a key factor in gaining and retaining
certain client business. The Company has four domestic offices and plans to
establish additional domestic or international offices where client
relationships would be enhanced.

Therapeutic Area Expertise. The Company believes that it is better
able to serve its clients' needs by offering therapeutic expertise in
addition to a full range of drug development services. The Company has
expertise in several major therapeutic areas including cardiovascular,
central nervous system, gastrointestinal disease, immunology, oncology,
respiratory, and skeletal disease and inflammation. The Company's
experience in these therapeutic areas, along with the experience of the
Company's therapeutic area strategic business unit ("SBU") directors, has
enabled Kendle to grow its revenues from existing clients and win new
client business. The Company plans to continue to add to its expertise in
its existing therapeutic areas and to develop new areas of expertise by
hiring experienced personnel and by strategic acquisitions.

Full Service Clinical Research. The Company offers a full range of
services that encompasses the clinical research process and complements the
research and development departments of its clients. These services include
clinical trials management, clinical data management, biostatistical
analysis, study design, and regulatory affairs services, including product
registration with regulatory authorities. The Company emphasizes
efficiencies in each phase of clinical trials, data management and
analysis, report writing and report filing, in order to reduce the time and
cost of obtaining regulatory approval for its clients' products. The
Company's breadth of services, along with its process for conducting
clinical trials on a timely basis, have been key factors in the Company's
success in obtaining additional and larger contracts.

Key Acquisitions; Expand Geographic Presence. The Company intends to
supplement its internal growth through strategic acquisitions, including
the acquisitions of U-Gene and gmi, and the opening of regional offices.
The Company believes that significant acquisition opportunities exist due
to the highly fragmented nature of the CRO industry. The Company intends to
focus on acquisitions of businesses that expand its geographic presence,
add to its clinical expertise in existing or new therapeutic areas and
broaden its range of services. In addition, the Company believes that
opening regional offices is invaluable in developing client relationships
and obtaining clients. In 1996, the Company opened offices in Chicago,
Illinois, Los Angeles, California and Princeton, New Jersey.

International Support. As part of the Company's strategy to expand
its geographic presence, the Company recently acquired U-Gene and signed a
definitive agreement to acquire gmi. Following the consummation of the
Acquisitions, the Company will have significant international operations.
On a pro forma basis, assuming the consummation of the Acquisitions as of
January 1, 1996, the Company is the

33
<PAGE> 34

sixth largest CRO in Europe, based on total revenues. U-Gene and gmi have
served clients in the Netherlands, Germany, the Czech Republic, the United
Kingdom, Israel and several additional countries in Europe. U-Gene and gmi
will increase both the number and the geographic scope of the clients
served by Kendle, enabling the Company to cross-sell its services and
enhance its relationships with existing clients. The Company will continue
to explore strategic acquisitions that will further enhance its
international capabilities.

Marketing and Brand Name Recognition. Due to the recent growth of the
CRO industry and the highly fragmented nature of the competition, the
Company believes it has been difficult for many CROs to achieve brand name
recognition with potential clients. Kendle's marketing strategy is to
continue to build a brand presence that portrays high quality work. The
Company's brand presence is reinforced through direct mail, professional
exhibits, journal advertising and an experienced sales force. See "Clients
and Marketing."

The implementation of this strategy will require Kendle to spend
significant amounts of capital. In 1997 alone, the Company utilized
approximately $24.8 million to fund acquisitions and expects to spend
another $3 million to $4 million for capital expenditures in 1997 related
to facilities and investments in information technology.

INFORMATION TECHNOLOGY

The Company believes that superior information technology is essential to
providing its clients with innovative services which expedite the clinical
trials process. The Company offers its clients access to its proprietary,
award-winning TrialWare(SM) software to help reduce the time required for drug
development. The TrialWare(SM) application system consists of state-of-the-art
modules, featuring intuitive graphical user interfaces, which allow scanning of
clinical case report forms ("CRFs") into electronic images, fast database
creation and automated workflow through the clinical data process. The CRF
images can be reviewed on-line and are compatible for inclusion in a Computer
Aided New Drug Application ("CANDA"). The TrialWare(SM) product family includes:

TrialBase, which is a database management system, saves up to 75% of
the time normally required to develop databases supporting the data entry
and clean up of CRFs from clinical trial sites. It also provides improved
data management quality by supporting extensive automated data checking and
quick feedback to study sites. TrialBase has an electronic imaging
component that allows a non-technical user to perform all the activities
necessary to build a clinical database and program data edits.

TrialFax, which enables Kendle personnel to rapidly review CRFs from
trial sites and to immediately resolve data queries. Using a standard fax
machine, CRFs are transmitted to Kendle's computer network and are stored
as an electronic image. These electronic CRF images can then be reviewed
for any problems or discrepancies and queries generated automatically.
Kendle personnel then interact with site personnel via fax or telephone to
resolve any discrepancies.

TriaLine, which uses interactive voice response and touch-tone
telephone entry to enroll, randomize and track patients, as well as
facilitate just-in-time management of test product inventory, thereby
reducing drug waste by up to 30% or more. TriaLine supports multiple
telephone lines for high enrollment trials, and has customized scripting
and multilingual capabilities.

TrialView, which enables Kendle personnel to access CRF images at any
time directly at a desktop computer without having to retrieve the actual
forms from the central file room. This can greatly reduce the amount of
time needed to find key information and enhance Kendle's ability to respond
to client requirements.

TriAlert, which is used to assign standard codes to key textual
parameters from clinical trials. In order to process such variables as
verbatim terms for adverse events, concomitant drug names, diagnoses,
physical exam results and medical history data, these items must be coded
to a standard dictionary of values used by the various regulatory agencies.
TriAlert supports assigning codes for multiple standard dictionaries
including COSTART, WHO-ART, WHO-Drug and ICD9-CM, as well as loading a
client specific dictionary. The system provides greater flexibility in
meeting the client's coding requirements.

34
<PAGE> 35

TrialStats, which is used by the Company's biostatistics department to
produce data listings, summary tables and analysis tables. The Company uses
TrialStats to accelerate the generation of statistical reports by reducing
the time spent on programming and validation of data listings, tables and
standard analyses. TrialStats also provides access to data for clinical
data management, report writing and client inquiries while a trial is in
process.

The Company believes that its TrialWare(SM) family of products provides a
competitive advantage by more fully integrating the Company's operations with
the investigative site clinical trial activities. Kendle also has the ability to
meet its clients' computer interfacing needs by utilizing SAS, Oracle, DLB
Recorder and other software.

The Company's Web Site on the Internet includes a description of the
Company and its services, a browser survey and the Company's e-mail address. In
addition, the Web Site provides information about the Company's proprietary
technology, employment opportunities, medical research and opportunities for
patients and investigators. The Company believes the Web Site demonstrates the
Company's commitment to using state-of-the-art technology while also providing
an excellent opportunity to communicate its capabilities on a worldwide basis.
The Web Site address is http://www.kendle.com/.

SERVICES

The Company's services assist its clients in optimizing their research and
development spending through the clinical stages of the drug development
process. The Company provides Phase II to Phase IV clinical trial management,
clinical data management and biostatistical analysis and medical writing and
regulatory services. Following the Acquisitions, the Company will also provide
Phase I clinical trial management. See "The Acquisitions."

Phase II to Phase IV Clinical Trial Management. The core of the Company's
business offerings is a comprehensive package of services to conduct Phase II to
Phase IV clinical trials. The Company has significant experience in the
therapeutic areas of cardiovascular, central nervous system, gastrointestinal
disease, immunology, oncology, respiratory and skeletal disease and inflammation
and has conducted several large clinical trials, including the management of a
10,000 patient heart failure trial at over 2,200 investigational sites and an
approximately 2,000 patient clinical trial at up to 125 investigational sites
relating to the treatment of cardiac arrhythmia.

Through its clinical experience, the Company has developed the expertise to
manage every aspect of clinical trials in Phase II to Phase IV of the drug
development process, including protocol development, CRF design, feasibility
studies, investigator selection, recruitment and training, site initiation and
monitoring, accelerated patient enrollment and development of training materials
for investigators and training of clients' staff. In managing clinical trials,
the Company has adopted standard operating procedures that are intended to
satisfy regulatory requirements and serve as a tool for controlling and
enhancing the quality of its clinical trials. The Company often provides its
clients with one or more of the following core Phase II to Phase IV clinical
trials management services, frequently performed in tandem with one another in
order to accelerate the drug development process.

- Study Design. The Company has broad experience in the preparation of
study protocols and CRFs. The study protocol defines the medical issues
to be examined in evaluating the safety and efficacy of the drug under
study, the number of patients required to produce statistically valid
results, the clinical tests to be performed in the study, the time period
over which the study will be conducted, the frequency and dosage of drug
administration, the exact inclusion and exclusion criteria to be met for
the patients enrolled in the study and the planned data summarization,
statistical analysis and interpretation of the results of the study. The
success of the study depends not only on meeting regulatory requirements,
but also on achieving a coherent fit between the protocol, the other
aspects of the development process and the marketing strategy for the
drug.

- Case Report Form Design. Once the study protocol is finalized, the
Company develops CRFs for investigators to record the desired information
obtained from the clinical studies. The Company

35
<PAGE> 36

organizes all disciplines involved in the drug development process to
assure a design that is efficient for subsequent data entry, management
and reporting. Proper CRF design is critical for investigators and field
monitors to conduct their respective jobs quickly, accurately and
effectively.

- Site and Investigator Recruitment. The Company solicits the
participation of physicians, also referred to as investigators, who
contract directly with either the Company or its client to supervise the
administration of the drug under development at investigational sites,
including hospitals and clinics or other locations. In order to target
the appropriate physicians, the Company has access to a computerized
database of approximately 3,000 experienced investigators that includes
information regarding the Company's prior experience with these
investigators and their ability to rapidly initiate clinical studies. The
Company believes that its ability to rapidly identify and recruit
investigators who have the appropriate expertise and an adequate base of
patients who satisfy the requirements of the study protocol is critical
to completing trials in a timely manner.

- Study Monitoring. The Company provides study monitoring services that
include investigational site initiation, patient enrollment assistance
and data collection through subsequent site visits. These visits also
serve to assure that data are gathered according to Good Clinical
Practices ("GCP"), the study protocol, the requirements of the client and
applicable regulations.

Since the ability to complete projects on time is generally determined by
meeting deadlines during the first few months of study initiation, the Company
focuses on identifying and quickly completing the critical rate-limiting steps
of screening and selecting investigators, processing pre-study regulatory
paperwork, obtaining institutional review board approvals and scheduling
investigational site initiation visits. As clinical studies progress, the
Company collects data via visits by its field monitors to investigative sites
and by electronic means. The Company must ensure that data from investigative
sites is obtained efficiently, quickly and accurately to speed subsequent data
entry, data management and analysis and report writing.

The Company is currently managing a 10,000 patient heart failure trial that
is evaluating two doses of an ACE-inhibitor for the incidence of cardiovascular
hospitalizations and deaths in congestive heart failure patients. To date over
9,300 patients have been enrolled at over 2,200 investigative sites since the
study began in May 1994, generating 78,000 total pages of clinical case report
forms. In another example, the Company recently began the organization and
management of clinical trials relating to a major New Drug Application ("NDA")
in the treatment of cardiac arrhythmia (irregular heartbeats). These trials
involve approximately 2,000 patients at up to 125 investigational sites.
Patients in both the heart failure and arrhythmia programs are monitored for up
to twelve months. The Company previously had managed an identical program in
cardiac arrhythmia for another major existing client that involved 1,420
patients at 130 investigative sites. Programs of similar size and scope have
been completed in the areas of seasonal allergic rhinitis and asthma.

Clinical Data Management and Biostatistical Analysis.

The Company's data management and biostatistical analysis operations are
managed by professionals with extensive pharmaceutical industry experience in
processing data from local and multinational trials. The Company provides
assistance to clients in all areas of clinical data management and
biostatistical analysis, including study design, sample size determinations, CRF
design and production, fax-based monitoring, database design and construction,
data entry, data assessment for accuracy and consistency (data cleanup) and
statistical analyses. The Company offers data management and biostatistical
services as discrete products and as part of an integrated drug development
program. The Company has the ability to meet client needs by utilizing SAS,
Oracle, DLB Recorder and other software in addition to the Company's proprietary
TrialWare(SM) software. Approximately 58% of the Company's current clients use
TrialWare(SM).

The Company's automated work flow process using the TrialWare(SM) software
system makes possible the rapid development of databases by facilitating data
entry and cleanup of data from clinical trial sites. The first step in this
process is to scan completed CRF pages as they are received. This electronic
image of the CRF page with an overlay mask is the paradigm for data entry. This
significantly decreases the time required to develop databases. After data entry
is completed, the system performs computerized data checks. CRF pages

36
<PAGE> 37

are available on-line at all stages of the data entry process. Thus, initial
data entry and verification can occur at the same time.

The system provides for multiple levels of automated data checks. All
computerized edit check failures are reviewed on-line to ensure data consistency
and to provide optimum feedback on data quality. The system automatically
produces the materials that are used to interact with the investigational site
personnel to resolve data issues and maintains an extensive audit trail of the
results of the edit review process and of any updates that are made to the
database. This allows detailed reporting to clients on the progress of data
handling for their trial.

The Company's biostatistics department provides a full range of
biostatistical services and develops sponsor-compatible data sets, data display
and report forms. Additionally, the department is capable of managing all
statistical aspects of clinical trials, including overall clinical development
plans, individual analyses, report preparation of statistical sections of
regulatory dossiers and regulatory liaison and representation. The group has
highly experienced professionals (biostatisticians and statistical programmers)
with a wide therapeutic area background who can work with clients in all phases
of drug development.

Medical Writing and Regulatory Services

The Company provides report writing and regulatory services to its clients
in a manner designed to complement parallel development processes to reduce
overall development time. The Company provides its clients with strategic plan
and protocol design services at the beginning of projects, combined with clear,
concise data presentation, analysis and discussion at the completion of the
project to assist its clients in obtaining regulatory approvals. The Company
fully integrates these services with its other services to assure maximum speed,
quality service and regulatory compliance.

The Company maintains an internal compliance and quality assurance
department to offer its customers in-process monitoring of compliance with GCP.
The Company also offers this service to clients to assess their own trials.

CLIENTS AND MARKETING

The Company has provided services to 12 of the world's largest 20
pharmaceutical companies, as ranked by 1996 research and development spending.
During 1996, the Company provided services under approximately 62 contracts to
approximately 19 clients.

During 1996 and the first six months of 1997, revenues from G.D. Searle &
Co. accounted for approximately 48% and 64%, respectively, of the Company's net
revenues. Other Company clients have, from time to time, accounted for more than
10% of the Company's net revenues, with revenues from The Procter & Gamble
Company and Amgen, Inc. accounting for approximately 19% and 13%, respectively,
of the Company's net revenues in 1996 and revenues from The Procter & Gamble
Company accounting for approximately 13% of the Company's net revenues for the
first six months of 1997. In addition, as of June 30, 1997, G.D. Searle & Co.
accounted for $13.9 million, or approximately 54%, of the Company's backlog. The
CRO industry depends on the research and development efforts of the major
pharmaceutical and biotechnology companies as major clients, and the Company
believes that this dependence will continue. The loss of business from any of
the Company's major clients could have a material adverse effect on the Company.
See "Business -- Clients and Marketing." However, on a pro forma basis assuming
consummation of the Acquisitions as of January 1, 1996, revenues from G.D.
Searle & Co. would have accounted for approximately 19% and 36% of the Company's
net revenues in 1996 and for the first six months of 1997, respectively, and no
other client would have accounted for more than 10% of the Company's net
revenues. Backlog, as of June, 1997, on a pro forma combined basis, was
approximately $40.1 million.

The Company has a new business development group made up of 3 components:
sales, proposals and client services and corporate communications. The Company
employs 16 individuals with responsibilities for the marketing and selling
activities within the new business development group. Kendle's salespeople
market to pharmaceutical and biotechnology firms and concentrate primarily on
obtaining business from potential new

37
<PAGE> 38

clients. The Company's sales efforts helped to increase its non-G. D. Searle &
Co. business from $3.6 million in net revenues in 1995 to $6.7 million in net
revenue in 1996, an 86.9% increase.

Since inception, U-Gene has served more than 100 clients, including 19 of
the world's 20 largest pharmaceutical companies. gmi has served more than 80
clients, including 19 of the world's 20 largest pharmaceutical companies.

CONTRACTUAL ARRANGEMENTS

Most of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Generally,
for multi-year contracts involving clinical trials, a portion of the contract
fee is paid at the time the trial is initiated with the balance of the contract
fee payable in installments over the trial duration. The installment payments
are typically performance-based, relating payments to milestone events such as
investigator recruitment, patient enrollment or delivery of databases. Most of
the Company's contracts for the provision of its services are terminable by the
client upon 30 days' notice. Clients terminate or delay contracts for a variety
of reasons, including the failure of a product to satisfy safety requirements,
unexpected or undesired clinical results, insufficient patient enrollment or
investigator recruitment or production problems resulting in shortages of the
drug. Although the contracts typically require payment of certain fees for
winding down the study, the loss or delay of a large contract or the loss of
multiple contracts could have a material adverse effect on the Company. See
"Risk Factors -- Loss or Delay of Large Contracts" and "Risk Factors -- Fixed
Price Nature of Contracts."

BACKLOG

Backlog consists of anticipated net revenues from letter agreements or
contracts that have been signed but not yet realized. Once contracted work
begins, revenues generally are recognized over the life of the contract, which
usually lasts for 12 months or more. In certain cases, the Company begins work
for a client before a contract is signed. Backlog excludes anticipated net
revenues from projects for which the Company has commenced work but for which
the Company does not have a signed letter of intent or contract. Backlog for the
Company at June 30, 1997 was approximately $26.0 million, as compared to
approximately $10.2 million at June 30, 1996.

At June 30, 1997, U-Gene's and gmi's backlog was approximately $8.4 million
and $5.7 million, respectively.

The Company believes that its backlog as of any date is not necessarily a
meaningful predictor of future results. Clinical studies under contracts
included in backlog are subject to delay or termination upon 30 days' notice by
clients. See "Risk Factors-Loss or Delay of Large Contracts" and "Business --
Contractual Arrangements."

COMPETITION

The Company primarily competes against in-house research and development
departments of pharmaceutical and biotechnology companies, universities,
teaching hospitals and other full-service CROs, many of which possess
substantially greater capital, technical and other resources than the Company.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, the quality of contract
research, the ability to manage large-scale trials on a global basis, medical
database management capabilities, the ability to provide statistical and
regulatory services, the ability to recruit investigators, the ability to
integrate information technology with systems to improve the efficiency of
contract research, an international presence with strategically located
facilities, financial viability and price.

The CRO industry is highly fragmented with several hundred CROs ranging
from small, limited-service providers to full-service, global drug development
corporations. The Company's competitors include, among other companies,
ClinTrials Research Inc., Covance, Inc., IBAH, Inc., PAREXEL International
Corporation, Pharmaceutical Product Development, Inc. and Quintiles
Transnational Corporation. See "Risk Factors -- Competition."

38
<PAGE> 39

POTENTIAL LIABILITY AND INSURANCE

The Company attempts to manage its risk of liability for personal injury or
death to clinical trial participants from administration of products under study
through measures such as contractual indemnification provisions with clients and
through insurance maintained by clients. The contractual indemnifications
generally do not protect the Company against certain of its own actions, such as
negligence. The contractual arrangements are subject to negotiation with clients
and the terms and scope of such indemnification vary from client to client and
from trial to trial. Although most of the Company's clients are large,
well-capitalized companies, the financial performance of these indemnities is
not secured. Therefore, the Company bears the risk that an indemnifying party
may not have the financial ability to fulfill its indemnification obligations.
The Company could be materially adversely affected if it were required to pay
damages or incur defense costs in connection with a claim that is beyond the
scope of an indemnity provision or beyond the scope or level of insurance
coverage maintained by the client or where the indemnifying party does not
fulfill its indemnification obligations. The Company does not currently maintain
liability insurance with respect to these risks. U-Gene carries professional
liability insurance in connection with its Phase I facility to protect it from
the risk of professional malpractice of Phase I medical care providers. See
"Risk Factors -- Potential Liability from Risks of Conducting Clinical Trials."

GOVERNMENT REGULATION

Before a new drug is marketed, it must undergo extensive testing and
regulatory review in order to determine that it is safe and effective. The
development process consists of two stages: preclinical and clinical. The first
stage is the preclinical research, in which the new drug is tested in vitro
(test tube) and in animals, generally over a one-to-three-year period, in order
to determine the basic biological activity and safety of the drug. If the drug
is perceived to be safe for human testing, the drug then undergoes a series of
clinical tests in humans. During the clinical stage, one of the most time
consuming and expensive parts of the drug development process, the drug
undergoes a series of tests in humans, including healthy volunteers and patients
with the targeted disease or condition.

The services provided by the Company are ultimately subject to FDA
regulation in the United States and comparable agencies in other countries,
although the level of applicable regulation in other countries is generally less
comprehensive than the regulation present in the United States.

Prior to commencing human clinical trials in the United States, the sponsor
must file an Investigational New Drug ("IND") application with the FDA. In order
to receive IND status, the sponsor of the new drug must provide available
manufacturing data, pre-clinical data, information about any use of the drug in
humans in other countries or in the United States for other purposes, and a
detailed plan for the conduct of the proposed clinical trials. The design of
these trials, also referred to as the study protocols, is essential to the
success of the drug development effort because the protocols must correctly
anticipate the nature of the data to be generated and results that the FDA will
require before approving the drug. In the absence of any FDA comments within 30
days after the IND filing, human clinical trials may begin.

Although there is no statutory definition of the structure or design of
clinical trials, human trials usually start on a small scale to assess safety
and then expand to larger trials to test efficacy. These trials are usually
grouped into the following three phases, with multiple trials generally
conducted within each phase:

- Phase I. Phase I trials involve testing the drug on a limited number of
healthy individuals, typically 20 to 80 people, to determine the drug's
basic safety data relating to tolerance, absorption, metabolization and
excretion as well as other pharmacological indications and actions. This
phase lasts an average of six months to one year.

- Phase II. Phase II trials involve testing a small number of patients,
typically 100 to 200 people who suffer from the targeted disease or
condition, to determine the drug's effectiveness and dose response
relationship. This phase lasts an average of one to two years.

39
<PAGE> 40

- Phase III. Phase III trials involve testing large numbers of patients,
typically several hundred to several thousand people, to verify efficacy
on a large scale as well as long-term safety. These trials involve
numerous sites and generally last two to three years.

After the successful completion of all three clinical phases, the sponsor
of a new drug in the United States submits an NDA to the FDA requesting that the
product be approved for marketing. The NDA is a comprehensive, multi-volume
filing that includes, among other things, the results of all pre-clinical and
clinical studies, information about the drug's composition and the sponsor's
plans for producing, packaging and labeling the drug. In addition, while the FDA
does not use price as a criterion for approving a new drug, advisory panels of
scientists that help the FDA evaluate new types of therapies have started taking
cost into consideration. The FDA's review of an NDA can last from a few months,
for drugs related to life threatening circumstances, to many years, with the
average review lasting two and one-half years. Drugs that successfully complete
this review may be marketed in the United States, subject to the conditions
imposed by the FDA.

- Phase IV. As a condition to its approval of a drug, the FDA may require
that a sponsor conduct additional clinical trials following receipt of NDA
approval to monitor long-term risks and benefits, study different dosage
levels, or evaluate different safety and efficacy parameters in target
patient populations. In recent years the FDA has increased its reliance on
these trials, known as Phase IV trials, which allow new drugs that show
early promise to reach patients without the delay associated with the
conventional review process. Phase IV trials usually involve thousands of
patients.

The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations include: (i)
complying with FDA regulations governing the selection of qualified
investigators; (ii) obtaining specific written commitments from the
investigators; (iii) verifying that patient informed consent is obtained; (iv)
monitoring the validity and accuracy of data; (v) verifying drug or device
accountability; and (vi) instructing investigators to maintain records and
reports. The Company must also maintain reports for each study for specified
periods for inspection by the study sponsor and the FDA during audits. Non-
compliance with GCP can result in the disqualification of data collected during
the clinical trial.

INTELLECTUAL PROPERTY

Kendle has developed certain computer software and related methodologies
that the Company has sought to protect through a combination of contracts,
copyrights and trade secrets. However, the Company would not consider the loss
of exclusive rights to any of this software or methodology to be material to the
Company's business.

EMPLOYEES

At June 30, 1997, the Company had 298 full-time employees, approximately 16
of whom hold Ph.D., M.D., Pharm.D. or N.D. degrees. The Company's performance
depends on its ability to attract, develop, motivate and retain qualified
professional, scientific and technical staff. There is significant competition
for employees with the skills required to perform the services offered by the
Company from other CROs as well as from the in-house research departments of
pharmaceutical and biotechnology companies and other enterprises. None of the
Company's employees are covered by a collective bargaining agreement. The
Company has never experienced any work stoppages or slowdowns and considers its
relationship with its employees to be good. At June 30, 1997, U-Gene and gmi had
112 and 58 full-time employees, respectively.

FACILITIES

The Company leases all of its facilities. The Company's principal executive
offices are located in Cincinnati, Ohio, where it leases approximately 55,000
square feet under a lease expiring in May 2006. The lease requires annual base
rentals of approximately $775,000 increasing to approximately $970,000 by May

40
<PAGE> 41

2006. The Company also maintains offices in Chicago, Illinois, Los Angeles,
California, and Princeton, New Jersey.

U-Gene leases facilities at two sites in Utrecht. Leased space totals
approximately 24,000 square feet, under operating leases expiring in December
1997 and November 1998. The latter operating lease, for U-Gene's main premises,
calls for annual base rental of $232,000 (excluding value added tax). U-Gene
also maintains offices in London, England and Milan, Italy. gmi leases its
facility in Munich. Leased space totals approximately 9,000 square feet with the
lease expiring in March 2001.

Kendle's facilities and those of U-Gene and gmi are well maintained and
suitable for their current and reasonably foreseeable uses.

LITIGATION

On July 16, 1997, Kendle received a letter from Collaborative. The letter
communicated Collaborative's intention to commence legal action in the
Netherlands against U-Gene for damages of at least $1,250,000 based upon an
alleged breach by U-Gene and its former shareholders of a February 7, 1997
letter of intent relating to a proposed acquisition of U-Gene by Collaborative.
As of August 13, 1997, U-Gene management indicated that U-Gene had not, to their
knowledge, been served with papers with respect to any such legal action by
Collaborative.

Kendle believes that U-Gene has meritorious defenses to Collaborative's
claims. Even if there were to be an outcome adverse to U-Gene in any such legal
action, Kendle believes that such outcome would not have a material effect on
its financial position or results of operations because, among other things,
claims of this nature are the subject of an indemnification from the former
U-Gene shareholders that is secured, in part, by a bank guarantee.

The July 16, 1997 letter further alleges that Kendle may have engaged in
improper conduct in its acquisition of U-Gene by tortiously interfering with
Collaborative's relationship with U-Gene under the February 7, 1997 letter of
intent. Kendle does not believe that it engaged in any improper conduct that
would result in liability to Collaborative and has communicated this belief to
Collaborative. A second letter from Collaborative dated July 25, 1997 requested
that Kendle provide documentary support for its position. Certain information
has been provided to Collaborative in response to that request.

41
<PAGE> 42

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and other key employees of the Company as
of June 30, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Candace Kendle Bryan, Pharm.D.(1).... 50 Chairman of the Board and Chief Executive Officer
Christopher C. Bergen(2)............. 47 President, Chief Operating Officer, Secretary and
Member, Board of Directors
Timothy M. Mooney.................... 49 Vice President -- Finance, Chief Financial
Officer, Treasurer and Member, Board of Directors
Philip E. Beekman(1)(2).............. 65 Member, Board of Directors
Charles A. Sanders, M.D.(1)(2)....... 65 Member, Board of Directors
Michael F. Bayer..................... 49 Director, Clinical Services
Peter F. Djuric, Pharm.D............. 48 Director, Clinical Research
Ann Hagen, M.D....................... 40 Director, Safety Surveillance
Jere M. Hardy........................ 53 Director, Clinical Data Management
Lois B. Rosenberger, Ph.D............ 47 Director, Regulatory Affairs
Stephen G. Scheurer.................. 48 Director, Human Resources
William K. Sietsema, Ph.D............ 41 Director, Clinical Research
Mandyam K. Srirama, Ph.D............. 64 Director, Biostatistics
Gary M. Wedig........................ 47 Director, Information Technology
</TABLE>

- ---------------

(1) Member of Compensation Committee

(2) Member of Audit Committee

CANDACE KENDLE BRYAN, PHARM. D., co-founded the Company in 1981 and has
served as Chief Executive Officer and as a director of Kendle since its
incorporation and has been Chairman of the Board since 1991. From 1979-1981, Dr.
Bryan served as Clinical Associate Professor of Pediatrics at University of
Pennsylvania School of Medicine; Clinical Assistant Professor at Philadelphia
College of Pharmacy and Sciences and Director, Department of Pharmacy, The
Children's Hospital of Philadelphia. From 1974 to 1978, Dr. Bryan served in a
variety of positions at the University of North Carolina School of Pharmacy and
School of Medicine. Dr. Bryan has published more than 15 scientific articles.
Dr. Bryan is the wife of Christopher C. Bergen, President and Chief Operating
Officer of the Company.

CHRISTOPHER C. BERGEN co-founded the Company in 1981 and has served as
President and Chief Operating Officer of Kendle since 1981 and has served as a
director of the Company since its incorporation. From 1977 through 1981, Mr.
Bergen served in various capacities at The Children's Hospital of Philadelphia,
most recently as Associate Vice President. Mr. Bergen is the husband of Candace
Kendle Bryan, Chief Executive Officer of the Company.

TIMOTHY M. MOONEY joined the Company in May 1996 and was elected to the
Board of Directors in January 1997. Prior to joining Kendle as Vice
President -- Finance, Chief Financial Officer and Treasurer, Mr. Mooney was the
Vice President, Chief Financial Officer and Treasurer of The Future Now, Inc., a
computer reseller. From May 1988 to July 1994, Mr. Mooney served as Senior Vice
President and Chief Financial Officer of Hook-SupeRx, Inc., a retail drugstore
chain. Mr. Mooney was previously a partner with Coopers & Lybrand L.L.P. Mr.
Mooney serves as a director of Winton Financial Corporation, a unitary savings
and loan holding company.

42
<PAGE> 43

PHILIP E. BEEKMAN was elected a member of the Board of Directors of the
Company in January 1997. Mr. Beekman is the President of Owl Hollow Enterprises,
a consulting and investment company. Prior to July 1994, Mr. Beekman served as
Chairman of the Board and Chief Executive Officer of Hook-SupeRx, Inc. Mr.
Beekman is a director of Fisher Scientific Inc., a provider of scientific
products and services; MAFCO, Inc., a tobacco products company; the National
Association of Chain Drug Stores; General Chemical Group Inc., a supplier of
soda ash and other chemicals; B.T. Office Products International, a distributor
of commercial office supply products; Linens 'N Things, a retail chain of home
furnishings; the Ladies Professional Golf Association, and the National
Organization on Disability.

CHARLES A. SANDERS, M.D., was elected a member of the Board of Directors of
the Company in January 1997. From 1989 to 1994, Dr. Sanders was Chief Executive
Officer of Glaxo Inc., and he served as Chairman of that company from 1992 to
1995. Prior to joining Glaxo Inc., Dr. Sanders spent eight years with Squibb
Corp. where he held a number of senior positions including Vice Chairman.
Previously, Dr. Sanders was general director of Massachusetts General Hospital
and Professor of Medicine at Harvard Medical School. He is currently a member of
the Institute of Medicine of the National Academy of Sciences, a trustee of the
University of North Carolina at Chapel Hill, chairman of Project HOPE and
chairman of the Commonwealth Fund. Dr. Sanders serves as a director of Magainin
Pharmaceuticals, Inc., a biopharmaceutical company engaged in the development of
medicines for serious diseases; Vertex Pharmaceuticals Incorporated, a company
engaged in the development of small molecule pharmaceuticals for the treatment
of diseases; and StaffMark, Inc., a provider of diversified staffing services to
businesses, healthcare providers and government agencies.

MICHAEL F. BAYER joined Kendle in 1993 as Assistant Director, Clinical
Research and has served as Director, Clinical Services since 1994. From 1973 to
1993, Mr. Bayer served in several capacities at Marion Merrell Dow
Pharmaceuticals, Inc., most recently as Manager, Global Product
Safety/International.

PETER E. DJURIC, PHARM. D., joined Kendle in 1991 as Assistant Director,
Clinical Research and has served as Director, Clinical Research since December
1995. Dr. Djuric is responsible for physical and resource management of large
trials and antiarrhythmia compounds as well as the development of new business
in the cardiovascular area.

ANN HAGEN, M.D., joined Kendle as Medical Director/Safety Officer in April
1992 and currently serves as Director, Safety Surveillance. Her responsibilities
include reporting and handling of all serious and nonserious adverse safety
experiences. Prior to joining Kendle, Dr. Hagen spent six years with Marion
Merrell Dow Inc. where she held various positions including: Site Director,
Global Epidemiology Group, Product Safety Assurance; Manager, Clinical Affairs,
Clinical and Medical Research; Associate Project Director, Phase II
Cardiovascular Group, Medical Research; Manager, Medical Drug Experience
Surveillance Center, Global Medical Services; and Associate Group Director,
Medical Drug Experience Surveillance Center, Medical Directions and Global
Medical Services.

JERE M. HARDY, joined Kendle in July 1994 as Director, Clinical Data
Management. He has over 20 years of experience in the pharmaceutical industry.
From June 1990 through June 1994, he served as Director, Special Projects at
SmithKline Beecham where he provided management and technical support for
Clinical Research and Development computing activities with emphasis on new
technologies. He was also responsible for the development and global
coordination of the implementation of strategic software systems in support of
Clinical Data Management worldwide.

LOIS B. ROSENBERGER, PH.D., joined Kendle as Director, Regulatory Affairs
in September 1996. She has over 20 years of cardiovascular research experience
in both academia and the pharmaceutical industry. From April 1996 to August
1996, she served as President, Comprehensive Regulatory Compliance, Inc., a
provider of consulting services in global regulatory affairs. From November 1994
to March 1996, she served as Director, Regulatory Affairs/Safety for Medisorp
Technologies International, L.P. where she was responsible for all compliance
issues. From September 1991 to March 1994, she held various positions at The
Procter & Gamble Company most recently as Section Head, Regulatory Affairs.

43
<PAGE> 44

STEPHEN G. SCHEURER joined Kendle in February 1997 as the Director, Human
Resources. He has over 18 years of human resources experience primarily in the
professional/financial services and retail industries. Prior to joining Kendle,
Mr. Scheurer served as the Vice President Human Resources for Western-Southern
Life Insurance Company from April 1995 to February 1997. From 1988 to 1995, Mr.
Scheurer held various human resource positions with Lazarus Department Stores, a
division of Federated and from 1984 and 1988 Mr. Scheurer was personnel manager
for Coopers & Lybrand L.L.P.

WILLIAM K. SIETSEMA, PH.D., joined Kendle as Assistant Director, Clinical
Research in January 1996 after 12 years in various clinical positions at The
Procter & Gamble Company. His most recent position was Section Head, Bone
Research. He is an expert in bone therapeutics, histology, histomorphometry and
biomechanics. Dr. Sietsema is currently Director, Clinical Research. His
responsibilities include project management and new business development in the
skeletal disease and inflammation area.

MANDYAM K. SRIRAMA, PH.D., joined Kendle as Director of Biostatistics in
January 1995. Dr. Srirama has over 26 years of experience in all biostatistical
aspects of clinical trials. From 1977 to 1994, he was employed at the
Parke-Davis Pharmaceuticals Research Division of Warner-Lambert, where his most
recent position was Director, Biometrics. Prior to such position, he held
various positions in the statistics and biometrics areas at Warner-Lambert. He
is an expert in design, statistical monitoring and analysis of clinical trials.
His therapeutic areas of experience include: central nervous system (Alzheimer's
disease, epilepsy, depression), gastrointestinal, anti-inflammatory (NSAID),
endocrine (reproductive), anti infective, and dermatologics.

GARY M. WEDIG, joined Kendle as Director, Information Technology in
September 1995, after 15 years in developing and managing various information
systems functions supporting pharmaceutical research and development. From 1977
to 1995, he held various positions at Marion Merrell Dow Inc., most recently as
Director, Information Systems Services, in which capacity he provided management
and technical support for Information Systems, Research and Development for
Global Systems & Quality Improvement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Following the Offering, the Company's Compensation Committee, composed of
Mr. Beekman (Chairman), Dr. Bryan and Dr. Sanders, will determine the
compensation of the Company's executive officers and will administer the 1997
Stock Option and Stock Incentive Plan. See "Certain Transactions."

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered in 1996 for
the Company's Chief Executive Officer and each of the Company's executive
officers whose total salary and bonus exceeded $100,000 during 1996.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION(1)
----------------------------------------- ----------- -------- ----- ---------------
<S> <C> <C> <C> <C>
Dr. Candace Kendle Bryan, Chief Executive
Officer................................ 1996 $122,400 0 $ 3,773
Christopher C. Bergen, President......... 1996 122,400 0
</TABLE>

- ---------------

(1) Other annual compensation represents club membership dues.

PROTECTIVE COMPENSATION ARRANGEMENTS

The Company maintains Protective Compensation and Benefit Agreements with
19 employees, including Dr. Bryan and Mr. Bergen. These agreements expire
December 31, 1999 and the term of these agreements will be automatically
extended in one year increments, subject to review and approval by the Board of
Directors. On the first anniversary of the agreements and with each anniversary
thereafter, unless notice of intent not to so extend any agreement is given by
either party at least 60 days before such anniversary date, the agreements will
continue in effect for an additional year. If a Change of Control (as defined in
the

44
<PAGE> 45

agreements) occurs while the agreement is in effect, such agreement shall not
expire before the second anniversary of the Change of Control. The agreements
are intended, in the event of a Change of Control, to induce key personnel to
remain in the employment of the Company.

In the event of a Change of Control, the agreements provide that if the
covered individual is terminated from employment by the Company within 24 months
following the Change of Control (except for Death, Disability or Cause, each as
defined in the agreements) or if the individual resigns for Good Reason (as
defined in the agreements) within 12 months following the Change of Control, the
Company, in addition to those payments to which the individual is otherwise
entitled pursuant to the terms of the Company's benefit plans (other than any
severance pay), will pay to the individual Change of Control Compensation (as
defined in the agreements).

The Change of Control Compensation includes (i) a lump sum cash payment in
an amount equal to two times the individual's annual compensation (base salary
and bonus) in effect immediately prior to his or her termination of employment
or the date of the Change of Control, if greater, and (ii) benefit continuation
for a period of two years. The agreements also provide that the Company shall be
required to make an additional payment to each covered individual to compensate
for the effect of any excise tax under Section 4999 of the Internal Revenue Code
that may be imposed on the Change of Control Compensation and any other payments
received by the individual. At July 15, 1997, the total cost to the Company, for
Dr. Bryan and Mr. Bergen, assuming each became entitled to Change of Control
Compensation as of that date, would be approximately $670,000 excluding payment
for excise taxes, if any. The total cost to the Company for other employees
covered by these agreements, assuming each such individual is entitled to Change
of Control Compensation as of that date, would be approximately $3,522,000,
excluding payment for excise taxes, if any.

The Company also intends to adopt a bonus plan under which each Company
employee may be eligible for merit-based bonuses up to 100% of her or his base
salary.

PROFIT SHARING AND 401(k) PLAN

The Company has a profit sharing and 401(k) plan covering substantially all
full-time employees. Under the plan, an employee must complete one year of
service and attain the age of 18 to be eligible to participate in the plan. To
satisfy the required period of service, an employee must complete at least 1,000
hours of service during a consecutive twelve month period. Eligible employees
may elect to have between 1% and 15% of their before-tax pay contributed to the
plan. The Company's contribution under the profit sharing provision is
determined annually by the Board of Directors. The Company made no profit
sharing contribution in 1994, 1995 or 1996.

STOCK-BASED INCENTIVES

The Company's 1997 Stock Option and Stock Incentive Plan (the "Plan")
provides for the grant of incentive stock options, non-qualified stock options,
stock appreciation rights ("SARs"), restricted stock awards, unrestricted stock
awards and performance unit awards with respect to up to 1,000,000 shares of
Common Stock. The Plan also provides for the grant of options to purchase shares
of Common Stock by non-employee directors of Kendle.

Options, SARs and restricted stock awards may be granted to any employee of
Kendle, or any advisor or consultant to Kendle. Incentive stock options can only
be granted to Kendle employees. The Plan will be administered by the
Compensation Committee, consisting of not less than three members of the Board
of Directors. The Plan provides that all exercise prices for options must equal
at least 95% of market value of the Common Stock on the date of grant. A SAR
entitles the grantee to receive upon exercise cash equal to the excess of the
fair market value of the shares of Common Stock covered by the SAR at the time
of exercise over a base price which shall be established by the Committee in
connection with a particular grant of SARs. Both Options and SARs expire ten
years after the date of grant, though the Committee can provide for a shorter
term for a particular grant. The Compensation Committee has broad discretion in
delineating the terms of the grant of awards under the Plan, subject to the
restrictions outlined above.

45
<PAGE> 46

The Company will grant options to purchase approximately 250,000 shares
concurrently with the closing of the Offering at the initial public offering
price to certain employees, including options for approximately 6,000 shares to
certain executive officers.

The Company has outstanding options granted in 1995, 1996, and 1997 for ten
year periods under the 1995 Stock Option and Stock Incentive Plan to a total of
37 employees for the purchase of an aggregate of 747,009 shares of Common Stock
at prices ranging from $0.91 to $2.01. Of these options, 40,588 are immediately
exercisable (as of June 30, 1997) at prices ranging from $0.91 to 1.21 per
share, while 329,449 options at prices ranging from $0.91 to $1.21 become
immediately exercisable upon the consummation of the Offering. Neither Dr. Bryan
nor Mr. Bergen hold any options.

COMPENSATION OF DIRECTORS

Non-employee members of the Board of Directors will receive $1,000 for each
meeting of the Board of Directors held. Meeting fees will be paid quarterly, in
arrears, in shares of Common Stock pursuant to the terms of the 1997 Directors'
Compensation Plan. The Common Stock issued under such plan will be valued based
on the average of the closing price of the Common Stock on the Nasdaq National
Market for the ten immediately preceding trading days.

Each non-employee director will also receive a ten year option to purchase
10,000 shares of Common Stock concurrently with the closing of the Offering at
the initial public offering price, and ten year options to purchase Common Stock
at fair market value on the date of grant to the extent of 5,000 shares on the
next annual election to the Board and 1,000 shares on each subsequent election.

46
<PAGE> 47

CERTAIN TRANSACTIONS

The Company made payments in 1996 and for the first six months of 1997 of
approximately $97,500 and $185,900, respectively, to a construction company
owned by a relative of Dr. Bryan for construction and renovations at its
principal executive offices. Such work is continuing. Management believes that
payments to the construction company are on terms no less favorable then those
that could have been negotiated with unaffiliated third parties.

Immediately prior to the Offering, the Company will terminate its S
corporation status. See "Termination of S Corporation Status." In connection
with such termination, the former shareholders of the S corporation, consisting
of Dr. Bryan, Mr. Bergen, a trust for the benefit of their children, and Dr.
Bryan's mother, will receive payments totaling $700,000.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock, and as adjusted to reflect the sale of the shares
offered hereby for: (i) each person known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock; (ii) each of the
Company's executive officers and directors; (iii) all directors and executive
officers of the Company as a group; and (iv) each Selling Shareholder. The
Company believes that each person or entity named below has sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such holder, subject to community property laws where
applicable. The Selling Shareholders will bear none of the expenses of the
Offering other than the underwriting commissions applicable to the shares to be
sold by them.

<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP BENEFICIAL
PRIOR TO OWNERSHIP
OFFERING(1) SHARES TO AFTER OFFERING(1)
------------------- BE SOLD -------------------
NUMBER OF IN THIS NUMBER OF
NAME SHARES PERCENT OFFERING(1) SHARES PERCENT
- ----------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Dr. Candace Kendle Bryan (2)(3)................ 1,706,740 46.8 338,024 1,368,716 19.5
Christopher C. Bergen (2)(3)................... 1,322,760 36.2 261,976 1,060,784 15.1
Kendle Stock Trust(2).......................... 620,500 17.0 620,500 8.9
Timothy M. Mooney(4)........................... 27,010 * 135,050 1.9
All executive officers and directors as a group
(3 persons)(5)............................... 3,056,510 83.1 600,000 2,564,550 35.9
</TABLE>

- ---------------
* less than 1%.

(1) Applicable percentage of ownership prior to this Offering is based upon
3,650,000 shares of Common Stock outstanding as of June 30, 1997. Applicable
percentage ownership after the Offering includes an additional 3,000,000
shares of Common Stock which are being included for sale by the Company in
the Offering as well as the Warrants issued in conjunction with the U-Gene
Acquisition (153,738 shares) and 198,482 shares of the Company's Common
Stock to be issued in connection with the gmi Acquisition (based on the
initial public offering price of $14.00 per share). Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to the
shares shown as beneficially owned. Shares of Common Stock subject to
options currently exercisable or exercisable on or before June 30, 1997 are
deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person.

(2) Beneficial ownership for Dr. Bryan and Mr. Bergen does not include 620,500
shares held in trust by the Kendle Stock Trust, under which Dr. Bryan's and
Mr. Bergen's children are beneficiaries. Neither Dr. Bryan nor Mr. Bergen
have any voting or dispositive power with respect to these shares. Such
powers are held by a trust committee composed of William J. Keating, Jr.,
Kendle Bryan and Mark Brettschneider. Mr. Keating is a partner of Keating,
Muething & Klekamp, P.L.L., counsel to Kendle.

(3) Individual is considered a Selling Shareholder.

(4) Represents currently outstanding exercisable stock options for the purchase
of shares of Common Stock, of which 108,040 options will immediately vest
upon the Offering.

(5) Includes outstanding exercisable stock options for the purchase of shares of
Common Stock.

47
<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, without par value, and 100,000 shares of undesignated preferred
stock. The following description is a summary and is qualified in its entirety
by the provisions of the Company's Amended Articles of Incorporation and Code of
Regulations and by provisions of Ohio law.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Shareholders do not
have the right to cumulate their votes in the election of directors. Subject to
preferences granted to holders of preferred stock, holders of Common Stock are
entitled to share in such dividends as the Board of Directors, in its
discretion, may validly declare from funds legally available. In the event of
liquidation, each outstanding share of Common Stock entitles its holder to
participate ratably in the assets remaining after payment of liabilities and any
preferred stock liquidation preferences. See "Dividend Policy." Shareholders
have no preemptive or other rights to subscribe for or purchase additional
shares of any class of stock or any other securities of the Company. There are
no redemption or sinking fund provisions with regard to the Common Stock. All
outstanding shares of Common Stock are fully paid, validly issued and
non-assessable. The affirmative vote of a majority of all outstanding shares of
Common Stock is required to amend the Articles of Incorporation and to approve
mergers, reorganizations and similar transactions.

PREFERRED STOCK

The Company has authorized 100,000 shares of preferred stock which may be
issued from time to time in series having such designated preferences and
rights, qualifications and limitations as the Board of Directors may determine
without any approval of shareholders. Preferred stock could be given rights
which would adversely affect the equity of holders of Common Stock and could
have preference over Common Stock with respect to dividend and liquidation
rights. The preferred stock could have the effect of acting as an anti-takeover
device to prevent a change of control of the Company.

PROVISIONS AFFECTING BUSINESS COMBINATIONS

Chapter 1704 of the Ohio Revised Code may be viewed as having an
anti-takeover effect. This statute, in general, prohibits an "issuing public
corporation" (the definition of which would include the Company) from entering
into a "Chapter 1704 Transaction" with the beneficial owner (or affiliates of
such beneficial owner) of 10% or more of the outstanding shares of the
corporation (an "interested shareholder") for at least three years following the
date on which the interested shareholder attains such 10% ownership, unless the
board of directors of the corporation approves, prior to such person becoming an
interested shareholder, either the transaction or the acquisition of shares
resulting in a 10% ownership. A "Chapter 1704 Transaction" is broadly defined to
include, among other things, a merger or consolidation with, a sale of
substantial assets to, or the receipt of a loan, guaranty or other financial
benefit (which is not proportionately received by all shareholders) from, the
interested shareholder. Following the expiration of such three-year period, a
Chapter 1704 Transaction with the interested shareholder is permitted only if
either: (i) the transaction is approved by the holders of at least two-thirds of
the voting power of the corporation (or such different proportion as is set
forth in the corporation's articles of incorporation), including a majority of
the outstanding shares, excluding those owned by the interested shareholder; or
(ii) the business combination results in the shareholders other than the
interested shareholder receiving a prescribed "fair price" for their shares. One
significant effect of Chapter 1704 is to cause a person or entity desiring to
become an interested shareholder to negotiate with the board of directors of a
corporation prior to becoming an interested shareholder.

In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.

48
<PAGE> 49

While the Company believes that these provisions are in its best interests,
potential shareholders should be aware that such provisions could be
disadvantageous to them because the overall effect of these statutes may be to
render more difficult or to discourage the removal of incumbent management or
the assumption of effective control by other persons.

LIABILITY OF DIRECTORS AND EXECUTIVE OFFICERS

Under Ohio law, shareholders are entitled to bring suit, generally in an
action on behalf of the corporation, to recover damages caused by breaches of
the duty of care and the duty of loyalty owed to a corporation and its
shareholders by directors and, to a certain extent, executive officers. Ohio law
has codified the traditional business judgement rule. Ohio law provides that the
business judgement presumption of good faith may only be overcome by clear and
convincing evidence, rather than the preponderance of the evidence standard
applicable in most states.

Further, Ohio law provides specific statutory authority for directors to
consider, in addition to the interests of the corporation's shareholders, other
factors such as the interests of the corporation's employees, suppliers,
creditors and customers; the economy of the state and the nation; community and
societal considerations; the long-term and short-term interests of the
corporation and the shareholders; and the possibility that these interests may
be best served by the continued independence of the corporation.

Directors of Ohio corporations are, unless the corporation's articles or
regulations otherwise provide, liable to the corporation for money damages for
actions taken or failed to be taken as a director only if it is proven by clear
and convincing evidence that the act or failure to act involved an act or
omission undertaken with deliberate intent to cause injury to the corporation or
reckless disregard for the best interests of the corporation.

Kendle's Code of Regulations provides that the Company shall indemnify
directors and officers to the fullest extent provided by Ohio law and shall
advance to officers and directors under certain circumstances funds for expenses
and liabilities incurred in connection with defending pending or threatened
suits.

TRANSFER AGENT AND REGISTRAR

The registrar and transfer agent for the Company's Common Stock is The
Fifth Third Bank.

49
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
7,331,669 shares of Common Stock, including Warrants issued in the U-Gene
Acquisition and shares to be issued to shareholders of gmi in connection with
the gmi Acquisition. On the date of this Prospectus, the 3,600,000 shares
offered hereby will be eligible for sale in the public market without
restriction. Beginning 90 days later, approximately 3,050,000 shares previously
outstanding will become eligible for sale under Rule 144. The 3,031,020
previously outstanding shares are subject to "lock-up" agreements between the
Underwriters and the holders of such shares which will expire 180 days after the
date of this Prospectus (or earlier if the Underwriters agree to release shares
from the "lock-up" agreements). If the shares are held by an affiliate of the
Company, the sale is subject to the availability of current public information
about the Company, the sale must be made in a "broker's transaction" or
transaction directly with a market maker for the Common Stock, the seller must
file a notice on Form 144 prior to the sale, and the number of shares sold by
the seller in any three-month period must not exceed the greater of 1% of the
then-outstanding shares of the Common Stock (approximately 6,980,000 shares
immediately after the Offering) or the average weekly trading volume during the
four calendar weeks immediately preceding the date on which the required notice
is filed with the Securities and Exchange Commission.

Approximately 367,000 shares will be eligible for sale outside the United
States under Regulation S one year after the date of this Prospectus. Regulation
S applies to public sales of restricted shares outside of the United States.
Secondary sales of such shares may be made provided that such sales are made in
offshore transactions (where the offer is made outside the United States and
either the buyer is or is reasonably believed to be abroad or the transaction is
executed in, on or through certain offshore securities markets) and that such
sales are not accompanied by directed selling efforts in the United States by
the seller, an affiliate of the seller or any person acting on their behalf.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 1,743,907 shares of Common Stock reserved for
issuance under the 1995 and 1997 Stock Option and Incentive Plans. See
"Management -- Stock Incentive Plan." Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above. In conjunction with the closing of the Offering, the Company
will grant options to purchase 250,000 shares under the 1997 Plan to employees
and options to purchase 10,000 shares to each non-employee director.

Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock. Furthermore, since
certain contractual and legal restrictions on resale described below restrict
the ability of the Company and current shareholders of the Company from selling
shares of Common Stock, sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.

50
<PAGE> 51

UNDERWRITING

The underwriters of the Offering named below (the "Underwriters"), for whom
Lehman Brothers Inc. and J.C. Bradford & Co. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus is a part, to purchase from the
Company, the aggregate number of shares of Common Stock set forth opposite their
respective names below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc............................................................... 1,400,000
J.C. Bradford & Co................................................................ 1,400,000
Credit Suisse First Boston Corporation............................................ 100,000
Hambrecht & Quist LLC............................................................. 100,000
Montgomery Securities............................................................. 100,000
UBS Securities LLC................................................................ 100,000
Adams Harkness & Hill, Inc........................................................ 50,000
William Blair & Company, L.L.C.................................................... 50,000
Cowen & Company................................................................... 50,000
Equitable Securities Corporation.................................................. 50,000
McDonald & Company Securities, Inc................................................ 50,000
Pennsylvania Merchant Group Ltd................................................... 50,000
Scott & Stringfellow, Inc......................................................... 50,000
Vector Securities International, Inc.............................................. 50,000
--------
Total............................................................. 3,600,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, and that, if any of the foregoing shares of Common
Stock are purchased by the Underwriters pursuant to the Underwriting Agreement,
all of the shares of Common Stock agreed to be purchased by the Underwriters
pursuant to the Underwriting Agreement (other than those covered by the
over-allotment option described below), must be so purchased.

The Company and the Selling Shareholders have been advised that the
underwriters propose to offer the shares of Common Stock directly to the public
initially at the public offering price set forth on the cover page of the
Prospectus, and to certain selected dealers (who may include the Underwriters)
at such public offering price less a selling concession not in excess of $0.54
per share. The Underwriters may allow, and such dealers may reallow a concession
not in excess of $0.10 per share to certain brokers and dealers. After the
initial public offering, the public offering price, the concession to selected
dealers and the reallowance may be changed by the Representatives.

The Company and the Selling Shareholders have granted to the Underwriters
an option to purchase up to an additional 540,000 shares of Common Stock at the
public offering price, less the aggregate underwriting discounts and commissions
shown on the cover page of the Prospectus, solely to cover over-allotments, if
any. The option may be exercised at any time up to 30 days after the date of the
Underwriting Agreement. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.

The Company has agreed that, without the prior written consent of the
Representatives, it will not, subject to certain limited exceptions, directly or
indirectly, offer, sell, contract to sell or otherwise issue or dispose of any
shares of Common Stock or any other capital stock of the Company for 180 days
after the date of the Prospectus. All of the shareholders of the Company,
including the Selling Shareholders, have agreed that, without the prior written
consent of the Representatives, they will not, subject to certain limited
exceptions, directly or indirectly, offer, sell or otherwise dispose of any
shares of Common Stock or any other capital stock of the Company for a period of
180 days after the date of the Prospectus.

51
<PAGE> 52

LEGAL MATTERS

Certain legal matters in connection with the Offering will be passed upon
for the Company by Keating, Muething & Klekamp, P.L.L. and for the Underwriters
by Kramer, Levin, Naftalis & Frankel, New York, New York.

EXPERTS

The balance sheets of the Company, U-Gene and gmi as of December 31, 1995
and 1996, and the statements of operations, shareholders' equity and cash flow
for each of the three years in the period ended December 31, 1996 for the
Company and each of the two years in the period ended December 31, 1996 for
U-Gene and gmi included in this Prospectus have been included herein in reliance
upon the reports of Coopers & Lybrand L.L.P. as relates to the Company, Coopers
& Lybrand N.V. (The Netherlands) as relates to U-Gene, and Coopers & Lybrand
GmbH (Germany) as relates to gmi, independent accountants, given on the
authority of those firms as experts in accounting and auditing.

52
<PAGE> 53

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
KENDLE INTERNATIONAL INC. FINANCIAL STATEMENTS
Report of Independent Accountants..................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996; and June 30, 1997
(Unaudited)...................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996; and for the six months ended June 30, 1996 and 1997 (Unaudited)........ F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996; and for the six months ended June 30,
1997 (Unaudited)................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996; and for the six months ended June 30, 1996 and 1997 (Unaudited)........ F-6
Notes to Consolidated Financial Statements............................................ F-8
GMI GESELLSCHAFT FUR ANGEWANDTE MATHEMATIK UND INFORMATIK mbH FINANCIAL STATEMENTS
Report of Independent Accountants..................................................... F-18
Financial Statements:
Balance Sheets as of December 31, 1995 and 1996; and June 30, 1997 (Unaudited)...... F-19
Statements of Operations for the years ended December 31, 1995 and 1996; and for the
six months ended June 30, 1996 and 1997 (Unaudited).............................. F-20
Statements of Changes in Shareholders' Equity for the years ended December 31, 1995
and 1996; and for the six months ended June 30, 1997 (Unaudited)................. F-21
Statements of Cash Flows for the years ended December 31, 1995 and 1996; and for the
six months ended June 30, 1996 and 1997 (Unaudited).............................. F-22
Notes to Financial Statements......................................................... F-23

U-GENE RESEARCH B.V. FINANCIAL STATEMENTS
Report of Independent Accountants..................................................... F-26
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996........................ F-27
Consolidated Statements of Operations for the years ended December 31, 1995 and
1996; and for the six months ended June 30, 1996 and 1997 (Unaudited)............ F-28
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1995 and 1996; and for the six months ended June 30, 1997
(Unaudited)...................................................................... F-29
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1996; and for the six months ended June 30, 1996 and 1997 (Unaudited)............ F-30
Notes to Consolidated Financial Statements............................................ F-31
</TABLE>

F-1
<PAGE> 54

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
Kendle International Inc.

We have audited the accompanying consolidated balance sheets of Kendle
International Inc. (formerly Kendle Research Associates, Inc.) as of December
31, 1995 and 1996, and the related consolidated statements of operations,
changes in shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kendle
International Inc. as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 21, 1997, except as to
the information presented in Notes 10 and 11,
for which the date is August 20, 1997.

F-2
<PAGE> 55

KENDLE INTERNATIONAL INC.
(FORMERLY KENDLE RESEARCH ASSOCIATES, INC.)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- JUNE 30, JUNE 30,
1995 1996 1997 1997
---------- ---------- ----------- ------------
(UNAUDITED)
(NOTE 8)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 15,267 $2,047,476 $ 21,096
Accounts receivable........................... 1,655,289 3,583,210 9,729,407 $ 9,729,407
Unreimbursed investigator and project costs... 88,191 980,597 3,167,336 3,167,336
Other current assets.......................... 37,812 12,806 568,793 568,793
---------- ---------- ---------- ----------
Total current assets.................. 1,796,559 6,624,089 13,486,632 13,465,536
---------- ---------- ---------- ----------
Property and equipment:
Furnishings, equipment and other.............. 770,443 1,177,416 3,505,855 3,505,855
Equipment under capital leases................ 471,716 1,588,135 2,089,074 2,089,074
Less: accumulated depreciation and
amortization............................... (617,008) (930,550) (1,234,765) (1,234,765)
---------- ---------- ---------- ----------
Net property and equipment................. 625,151 1,835,001 4,360,164 4,360,164
---------- ---------- ---------- ----------
Excess of purchase price over net assets
acquired...................................... 14,250,113 14,250,113
Other assets.................................... 9,829 164,020 1,499,683 1,499,683
---------- ---------- ---------- ----------
Total assets.......................... $2,431,539 $8,623,110 $33,596,592 $ 33,575,496
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable................................. $ 320,000 $ 739,684 $ 739,684
Current portion of obligations under capital
leases..................................... 129,265 $ 360,203 328,059 328,059
Amounts payable -- book overdraft............. 1,220,929 1,220,929
Trade payables................................ 253,550 913,371 3,357,636 3,357,636
Dividends payable............................. 250,000
Advances against investigator and project
costs...................................... 723,016 776,565 1,360,075 1,360,075
Advance billings.............................. 397,235 4,303,809 5,126,211 5,126,211
Accrued compensation and related payroll
withholdings and taxes..................... 79,225 250,758 745,235 745,235
Other accrued liabilities..................... 33,144 62,914 788,619 788,619
---------- ---------- ---------- ----------
Total current liabilities.................. 1,935,435 6,917,620 13,666,448 13,666,448
---------- ---------- ---------- ----------
Obligations under capital leases, less current
portion....................................... 112,041 761,029 1,079,726 1,079,726
Pension obligation.............................. 220,663 220,663
Senior debt..................................... 10,745,439 11,424,343
Subordinated debt............................... 3,500,000 3,500,000
Stock purchase warrants......................... 1,500,000 1,500,000
Note payable -- escrow agreement................ 1,530,000 1,530,000
Deferred taxes.................................. 81,000
Deferred rent................................... 38,667
---------- ---------- ---------- ----------
Total liabilities.......................... 2,086,143 7,678,649 32,242,276 33,002,180
---------- ---------- ---------- ----------
Shareholders' equity:
Preferred stock -- no par value; 100,000
shares authorized; no shares issued and
outstanding................................
Common stock -- no par value; 15,000,000
shares authorized; 3,650,000 shares issued
and outstanding............................ 75,000 75,000 75,000 75,000
Additional paid-in capital.................... 270,396 270,396 270,396 498,316
Retained earnings............................. 599,065 1,008,920
---------- ---------- ---------- ----------
Total shareholders' equity................. 345,396 944,461 1,354,316 573,316
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity.............................. $2,431,539 $8,623,110 $33,596,592 $ 33,575,496
========== ========== ========== ==========
</TABLE>

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

F-3
<PAGE> 56

KENDLE INTERNATIONAL INC.
(FORMERLY KENDLE RESEARCH ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS

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

F-4
<PAGE> 57

KENDLE INTERNATIONAL INC.
(FORMERLY KENDLE RESEARCH ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------- ADDITIONAL RETAINED SHAREHOLDERS'
NUMBER OF PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994......... 3,650,000 $75,000 $ 515,477 $ (933,060) $ (342,583)
Capital contribution by
shareholders................ 365,630 365,630
Net income..................... 458,278 458,278
Distributions to
shareholders................ (304,067) (304,067)
--------- ------- --------- ---------- ----------
Balance, December 31, 1994....... 3,650,000 75,000 577,040 (474,782) 177,258
Net income..................... 547,363 547,363
Distributions to
shareholders................ (306,644) (72,581) (379,225)
--------- ------- --------- ---------- ----------
Balance, December 31, 1995....... 3,650,000 75,000 270,396 345,396
Net income..................... 1,134,356 1,134,356
Distributions to
shareholders................ (535,291) (535,291)
--------- ------- --------- ---------- ----------
Balance, December 31, 1996....... 3,650,000 75,000 270,396 599,065 944,461
--------- ------- --------- ---------- ----------
Net income (unaudited)......... 1,418,203 1,418,203
Distributions to shareholders
(unaudited)................. (1,008,348) (1,008,348)
--------- ------- --------- ---------- ----------
Balance, June 30, 1997
(unaudited).................... 3,650,000 $75,000 $ 270,396 $1,008,920 $1,354,316
========= ======= ========= ========== ==========
</TABLE>

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

F-5
<PAGE> 58

KENDLE INTERNATIONAL INC.
(FORMERLY KENDLE RESEARCH ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31,
JUNE 30,
-------------------------------------- -----------------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $458,278 $ 547,363 $1,134,356 $ 382,369 $ 1,418,203
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization................ 126,620 167,769 315,541 92,107 315,452
Changes in assets and liabilities, net of effects
from acquisition of U-Gene:
Accounts receivable.......................... (408,432) (691,144) (1,927,921) 132,025 (2,039,890)
Other current assets......................... 47,690 (37,812) 25,007 (27,757) (42,683)
Other assets................................. (1,163) 2,191 (116,186) (15,888) (289,097)
Investigator and project costs............... (167,319) 267,927 (838,857) (432,025) (1,603,230)
Trade payables............................... 79,380 94,471 659,821 88,143 1,218,426
Advance billings............................. (294,786) (254,972) 3,906,574 846,404 (1,347,697)
Accrued liabilities.......................... 106,931 (137,834) 201,303 112,074 681,400
Deferred rent................................ (33,143) (33,144) (38,667) (16,571)
-------- ---------- ---------- ---------- -----------
Net cash provided by (used in) operating
activities..................................... (85,944) (75,185) 3,320,971 1,160,881 (1,689,116)
-------- ---------- ---------- ---------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment......... (95,129) (165,928) (406,974) (115,151) (458,481)
Additions to software costs.................... (40,005) (84,432)
Acquisition of U-Gene.......................... (14,303,041)
-------- ---------- ---------- ---------- -----------
Net cash used in investing activities............ (95,129) (165,928) (446,979) (115,151) (14,845,954)
-------- ---------- ---------- ---------- -----------
Cash flows from financing activities:
Borrowings under line of credit................ 1,825,000 4,267,000 1,555,000 3,100,000
Repayments under line of credit................ (1,505,000) (4,587,000) (1,875,000) (3,100,000)
Borrowings under senior credit facility........ 10,745,439
Proceeds from subordinated debt borrowings..... 5,000,000
Debt issue costs............................... (917,133)
Net cash advanced to shareholders.............. (121,763)
Distributions to shareholders.................. (304,067) (253,225) (285,291) (219,290) (1,258,351)
Payments on capital lease obligations.......... (90,495) (155,238) (236,492) (69,231) (214,386)
Amounts payable -- book overdraft.............. 1,153,121
-------- ---------- ---------- ---------- -----------
Net cash provided by (used in) financing
activities..................................... (516,325) (88,463) (841,783) (608,521) 14,508,690
-------- ---------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... (697,398) (329,576) 2,032,209 437,209 (2,026,380)
Cash and cash equivalents:
Beginning of period............................ 1,042,241 344,843 15,267 15,267 2,047,476
-------- ---------- ---------- ---------- -----------
End of period.................................. $344,843 $ 15,267 $2,047,476 $ 452,476 $ 21,096
======== ========== ========== ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....... $ 42,609 $ 69,361 $ 65,127 $ 30,291 $ 71,224
======== ========== ========== ========== ===========
</TABLE>

Continued

F-6
<PAGE> 59

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

F-7
<PAGE> 60

KENDLE INTERNATIONAL INC.
(FORMERLY KENDLE RESEARCH ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Kendle International Inc. (formerly Kendle Research Associates, Inc.) (the
"Company") is a clinical research organization providing a broad range of
integrated product development services to complement the research and
development activities of the pharmaceutical and biotechnology industries. The
Company's services include Phase II-IV clinical trial management, clinical data
management and biostatistical analysis, medical writing and regulatory
consultation and representation. The Company operates primarily in the United
States.

Principles of Consolidation

The consolidated financial statements include the financial information of
Kendle International Inc. and its wholly-owned subsidiary U-Gene Research B.V.
("U-Gene"), based in Utrecht, The Netherlands. The U-Gene Acquisition, which
closed on July 1, 1997, has been given effect to as of June 30, 1997 since a
binding agreement was in place and consideration had been transferred.

All intercompany accounts and transactions have been eliminated. The
results of operations of U-Gene will be included in the consolidated financial
statements of the Company from the date of acquisition (See Note 10).

Foreign Currency Translation

Assets and liabilities of U-Gene are translated into U.S. dollars at
period-end exchange rates. Operating statement accounts will be translated at
average exchange rates for the year. These translation adjustments will be
recorded as a separate component of shareholders' equity. Foreign currency
transaction gains and losses will be included in the consolidated statement of
operations.

Subsequent to the U-Gene Acquisition, a significant percentage of the
Company's cash flow from operations will be derived from operations outside the
United States. As the Company's plans are to repatriate earnings from U-Gene to
the U.S., the Company will be subject to the risks of currency exchange rate
fluctuations.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and money market funds
held with a financial institution, with an initial maturity of three months or
less at the date of purchase.

The Company maintains its demand deposits with certain financial
institutions. The balances of one account from time-to-time exceeds the maximum
U.S. federally insured amount. Additionally, there is no state insurance
coverage on bank balances held in The Netherlands.

Revenue Recognition

Revenues are earned by performing services primarily under fixed-price
contracts. Revenues are recognized on the percentage of completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. This method is used because management considers total costs
incurred to be the best available measure of progress on these contracts. The
estimated total costs of contracts are reviewed and revised periodically
throughout the lives of the contracts with adjustment to revenues resulting from
such revisions being recorded on a cumulative basis in the period in which the
revisions are made. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates had been the
original estimates. Because of the inherent uncertainties in estimating costs,
it

F-8
<PAGE> 61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
is at least reasonably possible that the estimates used will change in the near
term and could result in a material change.

Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed. Advance billings represent amounts
billed in excess of revenue recognized.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of three to ten years using the straight-line method.
Repairs and maintenance are charged to expense as incurred. Upon disposition,
the asset and the related accumulated depreciation are relieved and any gains or
losses are reflected in operations.

Equipment under capital lease is recorded at the present value of future
minimum lease payments and is amortized over the terms of the related leases.
Accumulated amortization on these leases was $158,072, $352,804 and $575,677
(unaudited) at December 31, 1995 and 1996 and June 30, 1997, respectively.

Internally Developed Software

The Company capitalizes costs incurred to develop internally its
proprietary software products used in the Company's clinical trial and data
management, and amortizes these costs on a straight-line basis over the
estimated useful life of the product, generally not to exceed five years.
Accumulated amortization totaled $2,000 and $13,012 (unaudited) at December 31,
1996 and June 30, 1997, respectively.

Excess of Purchase Price Over Net Assets Acquired

The excess of cost of the U-Gene Acquisition over the value of the net
assets acquired is being amortized on a straight-line basis over a thirty year
period. Excess of purchase price over net assets acquired will be evaluated
periodically as events or circumstances indicate a possible inability to recover
their carrying amount. Such evaluation will be based on various analyses,
including cash flow and profitability projections that incorporate, as
applicable, the impact on existing company businesses. The analyses will
necessarily involve significant management judgment to evaluate the capacity of
an acquired business to perform within projections. If future expected
undiscounted cash flows are insufficient to recover the carrying amount of the
asset, then an impairment loss will be recognized.

Investigator and Project Costs

In addition to various contract costs previously described, the Company
incurs costs, in excess of contract amounts, which are reimbursable by its
clients. Such pass-through costs incurred, but not yet reimbursed, are reflected
as a current asset in the accompanying balance sheet. Advances from clients for
such costs not yet incurred are reflected as a current liability. Such costs and
reimbursement for such costs are excluded from direct costs and net revenues and
totaled $2,151,992, $1,983,948 and $3,043,802, $1,840,576 (unaudited) and
$14,335,527 (unaudited) for years ended December 31, 1994, 1995 and 1996 and the
six months ended June 30, 1996 and 1997, respectively.

F-9
<PAGE> 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Current Liabilities

Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes. As a
result, such overdraft balances have been classified as "Amounts payable--book
overdraft" in the accompanying balance sheet.

Income Taxes

The consolidated financial statements of the Company for periods prior to
the proposed initial public offering described in Note 11 do not include a
provision for income taxes because taxable income or loss of the Company is
included in the income tax return of the individual shareholders under the S
corporation election. The statements of operations include the pro forma income
tax provision on taxable income for financial reporting purposes using statutory
federal, state and local rates that would have resulted if the Company had filed
corporate tax returns during these periods.

Prior to the effectiveness of a proposed initial public offering of the
Company's common stock described in Note 11, the Company will cease to be
treated as an S corporation for tax purposes and will be subject to federal,
state and local income taxes and will recognize deferred taxes in accordance
with Statement of Financial Accounting Standard No. 109 ("SFAS 109"),
"Accounting for Income Taxes." SFAS 109 requires companies subject to income
taxes to adjust their deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Based upon temporary differences existing
as of June 30, 1997, the estimated net deferred tax liabilities would have been
approximately $81,000 (unaudited) had the Company been subject to income taxes
at that date (See Note 8). The establishment of the deferred tax liability will
result in a charge to earnings in 1997 equal to the deferred tax liability at
the time the Company ceases to be an S Corporation.

U-Gene is subject to corporate income tax in The Netherlands and recognizes
deferred taxes in accordance with SFAS 109. Dutch Corporation Tax Law provides
for a tax rate of 35%.

Stock Options

The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees." Under APB No. 25, the Company recognized expense based on
the intrinsic value of the options.

Earnings Per Share

Earnings per share are computed based on the weighted average number of
common shares outstanding including common share equivalents. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock options granted by the Company during the twelve months preceding the
anticipated initial public offering have been included in the calculation of
common share equivalents outstanding as if they were outstanding for all periods
presented using the treasury stock method at the initial public offering price
of $14.00 per share.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 is designed to simplify the existing
computational guidelines for computing earnings per share (EPS). It provides for
the elimination of primary EPS, replacing it with basic EPS, with the principal
difference being that common stock equivalents are not considered in computing
basic EPS. SFAS No. 128 is effective for the Company for the year ending
December 31, 1997. The adoption of this statement would have increased the
Company's earnings per share for 1996, 1995 and 1994 by 16%, 12% and 10%,
respectively.

F-10
<PAGE> 63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Interim Financial Data

Interim financial information as of June 30, 1997 and for the six month
periods ended June 30, 1997 and 1996 is unaudited. In the opinion of management,
this financial information includes all adjustments, consisting solely of normal
recurring adjustments, necessary to fairly present the financial information set
forth. The results for the six months ended June 30, 1997 may not be indicative
of operating results for the full year.

2. ACCOUNTS RECEIVABLE:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Billed......................................... $1,133,146 $1,958,436 $5,132,290
Unbilled....................................... 507,927 1,603,154 4,522,435
Travel and other advances...................... 14,216 21,620 74,682
---------- ---------- ----------
$1,655,289 $3,583,210 $9,729,407
========== ========== ==========
</TABLE>

Accounts receivable are billed when certain milestones defined in customer
contracts are achieved. All unbilled accounts receivable are expected to be
collected within one year.

3. DEBT:

The Company had a $2,000,000 demand line of credit with a bank, which was
terminated in June 1997. Interest was charged at prime or LIBOR plus 2.5% at the
discretion of management for each borrowing. Advances under the line were
evidenced by a note which was collateralized by all of the Company's assets
other than assets under the Company's capital lease line of credit (see below),
and was subject to various covenants and restrictions, including, among others,
maintaining a minimum tangible capital base. There were no outstanding
borrowings under the line at December 31, 1996.

U-Gene has a $1,275,000 (NLG 2,500,000) bank overdraft facility which is
collateralized by U-Gene's accounts receivable. There were no outstanding
borrowings at June 30, 1997.

In 1996, the Company entered into two lease lines of credit with a bank.
Amounts drawn on the $1,500,000 computer and $500,000 furniture lines of credit
are payable in equal monthly installments over a five year term, from the date
of the funding. The monthly installment payments are equal to 1.80% and 1.71% of
the total computer and furniture draws, respectively. No amounts can be drawn on
the lines after December 31, 1997. Assets acquired with amounts drawn on these
lines of credit have been accounted for as capital leases, and have been
included in capital lease commitments as detailed in Note 5. Amounts drawn on
these lines of credit totaled approximately $1,109,000 (unaudited) as of June
30, 1997.

In April 1997, the Company obtained an additional $370,000 computer and
$130,000 furniture lease line of credit with the same bank. These lines expire
March 31, 1998, with monthly installment payments equal to 2.23% and 1.76% of
the total computer and furniture borrowings, respectively. Amounts drawn on the
computer and furniture lines of credit are payable over four and five year
terms, respectively, from the date of funding.

F-11
<PAGE> 64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT, CONTINUED:
The Company acquired additional assets which have not been added to the
lease line of credit for a total of $739,684 as of June 30, 1997. These assets
are included in furnishings, equipment and other and have been acquired with a
note payable to the same bank due December 31, 1997. Upon adding these assets to
the lease lines of credit, these assets are expected to be capital leases and
will be included in capital lease commitments.

In addition, in June 1997 the Company entered into a new borrowing
arrangement with a bank. Refer to Note 10.

4. EMPLOYEE BENEFIT PLANS:

Profit Sharing and 401(k) Plan

The Company has a profit sharing plan covering substantially all full-time
U.S. employees who meet certain eligibility requirements. The Company's
contribution is determined annually by the Board of Directors. The Company made
no profit sharing contribution in 1994, 1995 or 1996 or for the six months ended
June 30, 1997.

The profit sharing plan also has a 401(k) salary reduction provision, which
allows U.S. employees to make voluntary contributions after completing one year
of service.

Incentive Stock Option and Stock Incentive Plan

On January 15, 1995, the Company established a plan that provides for the
grant of up to 3,650,000 qualified and non-qualified stock options (the Plan).
Participation in the Plan is at the discretion of the Board of Directors. The
exercise price of qualified options granted under the Plan must be no less than
the fair market value of the Common Stock, as determined under the Plan
provisions, at the date the option is granted (110 percent of fair market value
for stockholders owning more than 10 percent of the Company's common stock). The
exercise price of non-qualified options must be no less than 85% of the fair
market value of the common stock at the date the option is granted. The Options
granted under the Plan vest in equal increments over a five year period
commencing, for some, on the date of grant, and others, two years after the
employees first anniversary after the date of grant, and expire either 90 days
after termination of employment or ten years after date of grant. No options can
be granted after January 15, 2005.

Incentive Stock Option and Stock Incentive Plan, continued

Aggregate stock option activity during 1995, 1996 and the six months ended
June 30, 1997 (unaudited) was as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
-------- -------------- ---------
<S> <C> <C> <C>
Options outstanding, January 1, 1995..............
Granted......................................... 219,219 $ 0.91 $0.91
-------- ---------- -----
Options outstanding, at December 31, 1995......... 219,219 0.91 0.91
Granted......................................... 451,652 1.21 1.21
Canceled........................................ (3,103) 0.91 0.91
-------- ---------- -----
Options outstanding, at December 31, 1996......... 667,768 0.91-1.21 1.12
-------- ---------- -----
Granted (unaudited)............................. 250,609 2.01 2.01
Canceled (unaudited)............................ (160,965) 0.91-1.21 1.21
-------- ---------- -----
Options outstanding, at June 30, 1997
(unaudited)..................................... 757,412 $0.91-2.01 $1.39
======== ========== =====
</TABLE>

F-12
<PAGE> 65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. EMPLOYEE BENEFIT PLANS, CONTINUED:
Options exercisable at December 31, 1996 and June 30, 1997 were zero and
40,588 (unaudited), respectively. The weighted average exercise price of the
options exercisable at June 30, 1997 was $1.11 (unaudited).

Options exercisable:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Year first exercisable:
1997...................................................... 97,236 66,503
1998...................................................... 130,634 99,901
1999...................................................... 133,554 102,781
2000...................................................... 133,554 152,895
2001...................................................... 133,554 152,895
Thereafter................................................ 39,236 189,537
</TABLE>

Of the options outstanding, 329,449 will vest immediately upon consummation
of an initial public offering.

The weighted-average life of the stock options was approximately 9, 9 and
8 1/2 (unaudited) years as of December 31, 1995, 1996 and June 30, 1997,
respectively. The weighted-average exercise price and weighted-average fair
value of options granted are as follows:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE FAIR VALUE
---------------- ----------------
<S> <C> <C>
1995............................................... $ 0.91(1) $ 0.37
1996............................................... $ 1.21(2) $ 0.89
1997 (unaudited)................................... $ 2.01(3) $ 0.69
</TABLE>

- ---------------

(1) Equals estimated fair value of the stock at date of grant for all options
granted during the period.

(2) Less than estimated fair value of the stock at date of grant for all options
granted during the period.

(3) Greater than estimated fair value of the stock at date of grant for all
options granted during the period.

The fair value of stock options is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield -- zero; risk-free interest rate -- ranges
from 5.60% to 7.685%; and an expected holding period of seven years.

Compensation expense recorded by the Company in connection with options
granted totaled $10,869 and $11,556 (unaudited) for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.

Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
effect on the Company's net income would not have been material for years ended
December 31, 1996 or 1995.

Subsequent Event-Protective Compensation and Benefit Arrangements

The Company has entered into Protective Compensation and Benefit Agreements
with certain employees, including all Executive Officers of the Company. These
Agreements are subject to annual review by the Company's Board of Directors,
expire on December 31, 1999, and will be automatically extended in one year
increments unless canceled by the Company. These Agreements provide for
specified benefits in the event of a change in control, as defined in the
Agreements. At December 31, 1996, the maximum amount which could be required to
be paid under these Agreements, if such events occur, is $3,531,000.

F-13
<PAGE> 66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. LEASES:

The Company leases facilities, office equipment and computers under
agreements which are classified as capital and operating leases. The leases have
initial terms which range from 3 to 6 1/2 years, with two facility leases that
have provisions to extend the leases for an additional 3 to 5 years. Certain of
the leased equipment is subject to the lease lines of credit as described in
Note 3.

Future minimum payments, by year and in the aggregate, under noncancelable
capital leases and operating leases with initial or remaining terms of one year
or more are as follows at December 31, 1996:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
1997.......................................................... $ 450,728 $1,163,410
1998.......................................................... 349,708 1,163,160
1999.......................................................... 258,642 967,828
2000.......................................................... 165,241 912,732
2001.......................................................... 103,269 879,534
---------- ----------
Total minimum lease payments.................................. 1,327,588 $5,086,664
==========
Amounts representing interest................................. 206,356
----------
Present value of net minimum lease payments................... 1,121,232
Current portion............................................... 360,203
----------
Obligations under capital leases, less current portion........ $ 761,029
==========
</TABLE>

Rental expense for 1994, 1995, 1996 and for the six months ended June 30,
1996 and 1997 was $238,578, $235,852 and $502,628, $198,345 (unaudited) and
$701,080 (unaudited), respectively.

6. MAJOR CLIENTS:

The following sets forth the net revenues from clients who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
CLIENTS 1994 1995 1996 1996 1997
----------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A................ $2,238,608 $2,542,424 $6,274,368 $1,868,203 $8,427,777
B................ * * 2,468,759 875,581 1,717,598
C................ * * 1,681,787 510,912 *
D................ * 725,083 * * *
E................ * 670,005 * * *
</TABLE>

- ---------------
* Net revenues did not exceed 10%

7. SHAREHOLDERS' EQUITY:

At December 31, 1995, there were 200,000 shares authorized and 100 shares
of no par common stock issued and outstanding. During 1996, there was a stock
dividend of 999 shares per share accounted for as a stock split. As a result, at
December 31, 1996 and June 30, 1997, there were 100,000 shares issued and
outstanding. Refer to Note 11 regarding a subsequent stock split.

8. PRO FORMA FINANCIAL INFORMATION:

In connection with termination of the Company's S corporation election, the
consolidated statements of operations include pro forma net income for all
periods assuming the Company was taxable as a C corporation and earnings per
share of common stock based on the pro forma net income divided by the pro forma
weighted average number of common shares outstanding.

F-14
<PAGE> 67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. PRO FORMA FINANCIAL INFORMATION, CONTINUED:
The consolidated pro forma balance sheet as of June 30, 1997 reflects: (i)
the reclassification of S corporation retained earnings to additional paid-in
capital of $1,008,920; (ii) a distribution of $700,000 to the shareholders,
which is planned to occur prior to the initial public offering; and (iii) the
establishment of deferred income taxes of $81,000 in connection with the
termination of the Company's S Corporation election.

9. RELATED PARTY TRANSACTION:

The Company made payments in 1996 and in the first six months of 1997
totaling approximately $97,500 and 185,900 (unaudited), respectively, to a
construction company owned by a relative of the Company's primary shareholder,
for construction and renovations at the corporate headquarters.

10. SUBSEQUENT EVENT -- ACQUISITIONS AND FINANCING:

Effective June 30, 1997, the Company acquired U-Gene Research B.V.
("U-Gene") and in July 1997, signed a definitive agreement to acquire GMI
Gesellschaft fur Angewandte Mathematik und Informatik mbH ("gmi"). The purchase
price for the U-Gene acquisition ("U-Gene Acquisition") was 30,000,000 Dutch
guilders ($15,525,439). The purchase price for the gmi acquisition ("gmi
Acquisition") is 19.5 million Deutsch marks (total acquisition costs are
expected to approximate $9.3 million in cash and $2.8 million in the Company's
Common Stock, with the number of shares determined by the initial public
offering price; which amounts were calculated using an exchange rate of 0.57
DM/U.S.$ as of June 30, 1997). The U-Gene Acquisition has been accounted for
using the purchase method of accounting.

In connection with the acquisitions, NationsBank, N.A. (the "Bank") has
agreed to lend the Company up to $20,000,000 under a senior secured revolving
credit facility (the "Senior Credit Facility") and up to $10,000,000 in
subordinated promissory notes (the "Subordinated Credit Facility").

Outstanding borrowings under the Senior Credit Facility bear interest at a
rate equal to either LIBOR plus the Applicable Margin (as defined), or the
higher of the Banks prime rate or the Federal Funds rate plus 0.50%. All amounts
outstanding thereunder become due and payable in June, 2000. The Subordinated
Credit Facility consists of 12% Subordinated Series A and B Promissory Notes
payable over a five year term (the "Series A Note" and "Series B Note") and
Common Stock Purchase Warrants (the "Warrants"). At June 30, 1997, amounts
outstanding under the Senior Credit Facility and Subordinated Credit Facility
were $10,745,439 and $5,000,000, respectively.

Covenants

The credit facilities contain various restrictive financial covenants,
including limitations on senior and total debt levels, capital expenditures and
future acquisitions, as well as the maintenance of certain fixed coverage ratios
and minimum net worth levels, and is collateralized by all the assets and shares
of the common stock of the Company (existing shares at the time the Senior and
Subordinated Credit Facilities were executed, (which shares will be released as
collateral upon consummation of the initial public offering) and existing and
hereafter acquired material subsidiaries.

Bank Credit Facility Utilization--U-Gene Acquisition

The U-Gene Acquisition was funded with approximately $9,300,000 from the
Senior Credit Facility, a note payable to an escrow account provided under the
U-Gene purchase agreement of approximately $1,530,000 and $5,000,000 from the
Series A Note.

The escrow agreement was established to provide protection for the Company
by the Sellers with regard to warranties and representations contained in the
purchase agreement, including a claim by Collaborative Clinical Research Inc.
("Collaborative") (See Litigation). The escrow agreement is in the form of an 8%

F-15
<PAGE> 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SUBSEQUENT EVENT -- ACQUISITIONS AND FINANCING, CONTINUED:
interest bearing note and will be paid on January 1, 1999, provided the Company
has not delivered a claim with respect to breaches by the Seller at that time.

In connection with the Series A Note, the Company issued Warrants to the
Bank to purchase 4% of the Common Stock of the Company (153,738 shares). If the
initial public offering described in Note 11 does not occur on or before
December 1, 1997, the number of shares which may be purchased upon exercise of
the Warrants will be increased to 5%, and 6% if not completed by March 1, 1998.
Amounts borrowed under the Series A Note have been recorded in the consolidated
financial statements as a liability, less a debt discount of $1,500,000. The
amount of the debt discount was determined based on the estimated fair value of
the warrants given in connection with the Note and will be amortized into
operations over the life of the Note.

Bank Credit Facility Utilization--gmi Acquisition

Although the Company expects the gmi Acquisition to occur simultaneously
with the closing of the initial public offering, described in Note 11, the
Company is required, per the gmi definitive agreement, to consummate the gmi
Acquisition not later than September 19, 1997. If the initial public offering is
not consummated by September 19, 1997, the Company expects to borrow
approximately $4,500,000 from the Senior Credit Facility and $5,000,000 from the
Series B Note to fund the cash portion of the gmi Acquisition. The Series B Note
includes a requirement to issue Warrants to the Bank for the purchase of 3% of
the Common Stock of the Company, and an additional 1% if the initial public
offering is not completed by March 1, 1998. In addition, the Bank has issued a
standby letter of credit to the gmi shareholders to secure the cash portion of
the gmi Acquisition price due to such shareholders.

Warrants

The Warrants which have been issued in connection with the Series A Note,
provide for purchase of the Company's common stock at $.01 per share and expire
in June 2007. The Warrants contain put rights which may be exercised at any time
after the earliest of June 2002 or the occurrence of other events as defined in
the agreement. The rights provide for a cash payment to the Bank equal to the
ratio of the Warrants to fully diluted shares of common stock multiplied by the
highest of the fair market value, the book value or an amount determined by a
formula specified in the agreement. The put rights expire upon consummation of
the initial public offering.

The Warrants have been recorded in the consolidated financial statements at
their estimated fair value as a liability and increases or decreases in the
estimated fair value of the warrants will be amortized to operations until the
warrants are exercised or the put rights expire. Estimated fair value was
determined based on a third-party appraisal of the warrants.

Repayment

The Company intends to repay all outstanding Subordinated Promissory Notes
and amounts outstanding under the Senior Credit Facility related to the U-Gene
Acquisition with proceeds from the initial public offering. The Warrants will be
exercised and converted to Common Stock concurrent with the initial public
offering.

Allocation of Purchase Price

The Company follows the practice of allocating purchase price to
specifically identifiable intangible assets based on their estimated values as
determined by appropriate valuation methods. In the U-Gene Acquisition, no
allocation of purchase price was made to specifically identifiable intangible
assets other than excess of purchase price over net assets acquired as the
Company believes it did not acquire any other significant specifically
identifiable intangible assets.

F-16
<PAGE> 69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SUBSEQUENT EVENT -- ACQUISITIONS AND FINANCING, CONTINUED:
Supplemental Information

The following unaudited pro forma results of operations assume the
acquisition of U-Gene occurred as of January 1, 1996:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net revenues.............. $25,466,819 $ 11,451,553 $ 19,614,343
Net income................ $ 1,497,630 $ 679,267 $ 1,584,602
Earnings per Share........ $ 0.35 $ 0.16 $ 0.36
</TABLE>

The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the U-Gene Acquisition been
consummated as of January 1, 1996, nor are they necessarily indicative of future
operating results.

Litigation

Preferred Stock

In 1997, the Company authorized 100,000 shares of preferred stock which may
be issued from time to time in series having such designated preferences and
rights, qualifications and limitations as the Board of Directors may determine
without any approval of shareholders.

11. SUBSEQUENT EVENT -- INITIAL PUBLIC OFFERING:

The Company is in the process of filing a registration statement for an
initial public offering which they expect to have completed in August 1997.
Issuance of 3,000,000 shares is planned to raise approximately $38,560,000 in
net proceeds. In conjunction with this transaction, the Company has also
effected a stock split of 36.5 shares for 1 share. All numbers of common shares
and per share amounts in the accompanying financial statements have been
retroactively adjusted to reflect this stock split.

F-17
<PAGE> 70

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of GMI Gesellschaft
fur Angewandte Mathematik und Informatik mbH

We have audited the accompanying balance sheets of GMI Gesellschaft fur
Angewandte Mathematik und Informatik mbH (gmi) as of December 31, 1995 and 1996,
and the related statements of operations, changes in shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of gmi as of December 31, 1995 and
1996 and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.

Coopers & Lybrand
Wirtschaftsprufungsgesellschaft GmbH

Munich, Germany
May 7, 1997

F-18
<PAGE> 71

GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- ------------
USD
USD USD (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,187,977 $1,667,097 $1,785,336
Accounts receivable................................... 1,553,491 1,770,528 1,550,793
Other current assets.................................. 130,221 58,992 87,175
---------- ---------- ----------
Total current assets............................... 2,871,689 3,496,617 3,423,304
---------- ---------- ----------
Equipment:
Equipment............................................. 615,793 691,919 652,636
Less: accumulated depreciation........................ (455,393) (521,430) (504,230)
---------- ---------- ----------
Net equipment...................................... 160,400 170,489 148,406
---------- ---------- ----------
Total assets $3,032,089 $3,667,106 $3,571,710
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 486,075 $ 413,044 $ 588,557
Advance billings...................................... 701,988 403,267 88,871
Taxes on income....................................... 203,526 860,613 1,088,954
Other accrued liabilities............................. 44,181 165,745 170,932
Other liabilities..................................... 631,132 779,952 575,954
---------- ---------- ----------
Total current liabilities.......................... 2,066,902 2,622,621 2,513,268
---------- ---------- ----------
Deferred tax liability.................................. 238,611
Total liabilities.................................. 2,305,513 2,622,621 2,513,268
---------- ---------- ----------
Shareholders' equity:
Common stock.......................................... 32,283 32,283 32,283
Retained earnings..................................... 664,358 1,051,682 1,292,124
Currency translation adjustments...................... 29,935 (39,480) (265,965)
---------- ---------- ----------
Total shareholders' equity......................... 726,576 1,044,485 1,058,442
---------- ---------- ----------
Total liabilities and shareholders' equity.... $3,032,089 $3,667,106 $3,571,710
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-19
<PAGE> 72

GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE
DECEMBER 31, SIX MONTHS ENDED
------------------------ JUNE 30,
1995 1996 ------------------------
---------- ---------- 1996 1997
USD USD ---------- ----------
USD USD
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................... $5,294,434 $6,996,307 $2,832,941 $3,872,674
Cost and expenses:
Direct costs............................. 3,396,801 4,894,183 2,062,113 2,161,134
Selling, general and administrative...... 551,410 597,132 244,376 259,325
Depreciation............................. 143,898 105,016 52,844 40,738
---------- ---------- ---------- ----------
4,092,109 5,596,331 2,359,333 2,461,197
---------- ---------- ---------- ----------
Income from operations................ 1,202,325 1,399,976 473,608 1,411,477
---------- ---------- ---------- ----------
Other income (expense):
Interest income.......................... 28,645 48,899 12,195 25,292
Other.................................... (3,285) (4,292) (4,458) (3,814)
---------- ---------- ---------- ----------
25,360 44,607 7,737 21,478
---------- ---------- ---------- ----------
Income before taxes................... 1,227,685 1,444,583 481,345 1,432,955
---------- ---------- ---------- ----------
Income taxes
Current.................................. 424,610 885,715 389,713 680,513
Deferred................................. 198,767 (227,472) (232,924)
---------- ---------- ---------- ----------
623,377 658,243 156,789 680,513
---------- ---------- ---------- ----------
Net income............................ $ 604,308 $ 786,340 $ 324,556 $ 752,442
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-20
<PAGE> 73

GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
CURRENCY TOTAL
COMMON RETAINED TRANSLATION SHAREHOLDERS'
STOCK EARNINGS ADJUSTMENTS EQUITY
------- ---------- ----------- --------------
USD USD USD USD
<S> <C> <C> <C> <C>
Balance, January 1, 1995................... $32,283 $ 339,029 $ 371,312
Net income............................... 604,308 604,308
Distributions to shareholders............ (278,979) (278,979)
Translation adjustments.................. $ 29,935 29,935
------- ---------- --------- ----------
Balance, December 31, 1995................. 32,283 664,358 29,935 726,576
Net income............................... 786,340 786,340
Distributions to shareholders............ (399,016) (399,016)
Translation adjustments.................. (69,415) (69,415)
------- ---------- --------- ----------
Balance, December 31, 1996................. 32,283 1,051,682 (39,480) 1,044,485
Net income (unaudited)................... 752,442 752,442
Distribution to shareholders
(unaudited)........................... (512,000) (512,000)
Translation adjustments (unaudited)...... (226,485) (226,485)
------- ---------- --------- ----------
Balance, March 31, 1997 (unaudited)........ $32,283 $1,292,124 $(265,965) $1,058,442
======= ========== ========= ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-21
<PAGE> 74

GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- ------------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income.................................. $ 604,308 $ 786,340 $ 324,556 $ 752,442
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation............................. 143,898 105,016 52,844 40,738
Changes in:
Accounts receivable.................... (411,951) (524,546) 173,382 32,091
Other current assets................... (214,786) 223,927 52,596 (38,837)
Accounts payable....................... (3,747) 42,040 122,753 266,131
Advance billings....................... (23,384) (264,597) (567,447) (296,504)
Accrued taxes.......................... 159,909 729,912 302,760 173,291
Other accrued liabilities.............. 11,807 135,589 105,772 20,815
Deferred taxes......................... 184,008 (238,611) (238,611) 45,701
Other liabilities...................... 80,631 134,698 180,407 (172,837)
---------- ---------- ---------- ----------
Net cash provided by operating activities..... 530,693 1,129,768 509,012 823,031
---------- ---------- ---------- ----------
Cash flows from investing activities:
Net acquisitions of property and
equipment................................ (174,996) (134,675) (62,750) (37,551)
Proceeds from disposals of fixed assets..... 728
---------- ---------- ---------- ----------
Net cash used in investing activities......... (174,268) (134,675) (62,750) (37,551)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Distributions to shareholders............... (278,979) (399,016) (248,749) (512,000)
---------- ---------- ----------
Net cash used in financing activities......... (278,979) (399,016) (248,749) (512,000)
---------- ---------- ----------
Net effect of exchange rate changes on cash
and cash equivalents........................ 53,598 (116,957) (85,595) (155,241)
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents..... 131,044 479,120 111,918 118,239
Cash and cash equivalents:
Beginning of period......................... 1,056,933 1,187,977 1,187,977 1,667,097
---------- ---------- ---------- ----------
End of period............................... $1,187,977 $1,667,097 $1,299,895 $1,785,336
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-22
<PAGE> 75

GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business

GMI gesellschaft fur Angewandte Mathematik und Informatik mbH ("gmi" or the
"Company"), is an independent contract research organization providing a broad
range of medical, pharmaceutical and biotechnological research activities for
the industry. Its purpose is the planning, carrying out and execution of
clinical trials. The Company's services include design of clinical trials,
monitoring and data management, statistical analyses, quality assurance,
seminars and training, post marketing surveillance as well as pharmaceutical
cost-benefit analyses. The Company's major market is Germany, but it also
operates with customers from other European markets.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and money market funds held
with a financial institution, with an initial maturity of three months or less.

The Company maintains its bank accounts with a single German financial
institution, the Dresdner Bank AG. There is no state insurance coverage on bank
balances in Germany.

Revenue Recognition

Revenues are earned by performing services primarily under fixed-price
contracts. Revenues are recognized on the percentage of completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. This method is used because management considers total costs
incurred to be the best available measure of progress on these contracts. The
estimated total costs of contracts are reviewed and revised periodically
throughout the lives of the contracts with adjustments to costs resulting from
such revisions being recorded on a cumulative basis in the period in which the
revisions are made. Hence, the effect of the changes on future periods of
contract performance is recognized as if the revised estimates had been the
original estimates. Because of the inherent uncertainties in estimating costs,
it is at least reasonably possible that the estimates used will change in the
near term and result in a material change.

Contract costs include direct labor costs and indirect costs related to contract
performance, such as indirect labor, supplies, depreciation, rent and utilities.
Selling, general, and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are recognized in the
period in which such losses become known. Amendments to contracts resulting in
revisions to revenues and costs are recognized in the period in which the
revisions are determined. Included in trade receivables are unbilled accounts
receivable, which represent revenue recognized in excess of amounts billed.
Advance billings represent amounts billed in excess of revenue recognized.

Equipment

Equipment is stated at cost, less accumulated depreciation. Depreciation is
computed over the estimated useful lives of the assets, ranging from two to ten
years using the straight-line method and the declining-balance method. Repairs
and maintenance are charged to expenses as incurred. Upon disposition, the asset
and the related accumulated depreciation are relieved and any gains or losses
are reflected in operations.

Investigator and Project Costs

F-23
<PAGE> 76

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
reflected as a current asset in the accompanying balance sheet. Advances from
clients for such costs not yet incurred are reflected as a current liability.
Reimbursement for such costs is excluded from contract revenues and totaled $2.7
million, $2.1 million and $1,358,000 (unaudited) for the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997, respectively.

Income taxes

The Company is subject to corporate and trade income tax and recognizes deferred
taxes in accordance with Statement of Financial Accounting Standard No. 109
("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires companies subject
to income taxes to adjust their deferred tax assets and liabilities based on
temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.

German Corporation Tax Law provides for a regular tax rate of 45% (1996 and
1995: 45%) plus a surtax thereon of 7.5% (1996 and 1995: 7.5%). For dividends
distributed the regular rate is lowered to 30% (1996 and 1995: 30%).

The second component of the provision for taxes on income is the trade tax on
income which is levied at varying rates according to individual municipalities.
In the case of the Company, the applicable rate amounts to 19.35% of the taxable
trade income. This trade tax on income is deductible for corporate income tax
purposes which results in an effective total tax rate of 58.4% (1996 and 1995:
58.4%).

Reconciliations of the statutory German income tax rate to the financial
statement effective tax rates are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- -----------
(UNAUDITED)
% % %
<S> <C> <C> <C>
German statutory tax rate............. 58.4 58.4 58.4
Reduced Tax rate due to
distribution........................ (7.9) (12.9) (11.4)
Non-deductible Expenses............... 0.3 0.1
--------------------------
Effective tax rate.................... 50.8 45.6 47.0
==========================
</TABLE>

The deferred tax liability related to temporary differences between financial
statements and tax accounting for deferred revenue recognition on contracts
during the years 1994 and 1995. The effect has been reversed in the first
quarter of 1996, as deferred recognition is no longer part of the tax planning
strategy of the company.

The reduced tax rate due to distribution is based on distributions made in 1996
of $328,865 relative to the year ended December 31, 1995 and intended
distributions of $606,417 at December 31, 1996 and $752,442 (unaudited) at June
30, 1997.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

F-24
<PAGE> 77

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ ----------
1995 1996 1997
---------- ---------- ----------
USD USD USD
(UNAUDITED)
<S> <C> <C> <C>
Billed............................ $1,293,921 $1,070,731 $ 644,881
Unbilled.......................... 259,570 699,797 905,912
--------- --------- ----------
$1,553,491 $1,770,528 $1,550,793
========= ========= ==========
</TABLE>

Accounts receivable are billed when certain milestones defined in customer
contracts are achieved. All unbilled accounts receivable are expected to be
collected within one year.

3. CURRENT LIABILITIES

The following sets forth the portions of the current liabilities which accounted
for more than 5% of the total current liabilities.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ----------
1995 1996 1997
--------- --------- ----------
USD USD USD
(UNAUDITED)
<S> <C> <C> <C>
Sales tax liabilities............... $ 121,707 $ 174,109 *
Wages and Salaries.................. 352,459 468,290 $ 232,955
Social Security..................... * 88,431 *
</TABLE>

* liability does not exceed 5%

4. MAJOR CLIENTS:

The following sets forth the net revenues from clients who accounted for more
than 10% of the Company's net revenues during each of the periods presented:

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ --------------------
CLIENTS 1995 1996 1996 1997
------------------------ ---------- ---------- -------- --------
USD USD USD
(UNAUDITED)
<S> <C> <C> <C> <C>
A....................... * $1,398,969 $519,192 $874,268
B....................... * 1,024,344 434,241 838,325
C....................... $ 564,893 * * *
D....................... * * 453,334 *
E....................... * * 435,731 397,719
F....................... * * 393,759 *
</TABLE>

* Net revenues did not exceed 10%

5. SHAREHOLDERS' EQUITY:

Common stock amounted to $32,283 as of December 31, 1995 and 1996. As the
company takes the legal form of a "GmbH," this common stock is not divided into
individual shares and therefore no earnings per share calculation is possible.

6. RELATED PARTY TRANSACTION:

The Company made payments in 1996 totalling approximately $ 107,069 to a
shareholder under a consulting contract.

7. FOREIGN CURRENCY TRANSLATION

The Company's functional currency is the Deutsche mark.

For US dollars reporting purposes, assets and liabilities have been translated
from Deutsche mark to US dollars at year-end rates and revenues, costs and
dividends have been translated at average rates for the year. Gains and losses
resulting from this translation are accumulated in shareholders' equity.

F-25
<PAGE> 78

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
U-Gene Research B.V.

We have audited the accompanying consolidated balance sheets of U-Gene Research
B.V. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U-Gene Research B.V. as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

Coopers & Lybrand N.V.
Utrecht, The Netherlands
June 17, 1997

F-26
<PAGE> 79

U-GENE RESEARCH B.V.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
USD USD
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 777,005 $2,022,645
Accounts receivable................................................. 2,994,446 2,899,576
Other current assets................................................ 287,034 405,033
---------- ----------
Total current assets...................................... 4,058,485 5,327,254
---------- ----------
Deferred tax asset.................................................. 24,000 92,946
Property and equipment
Furnishings, equipment and other.................................... 1,135,760 1,803,492
Less: accumulated depreciation...................................... (407,780) (685,426)
---------- ----------
Net property and equipment.......................................... 727,980 1,118,066
---------- ----------
Total assets.............................................. $4,810,465 $6,538,266
========== ==========
</TABLE>

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
USD USD
<S> <C> <C>
Current liabilities:
Trade payables...................................................... $1,519,745 $1,265,114
Dividends payable................................................... 147,526 266,335
Advance billings.................................................... 841,709 2,076,320
Accrued compensation and related payroll withholdings and taxes..... 783,529 651,577
Other accrued liabilities........................................... 538,833 753,576
---------- ----------
Total current liabilities................................. 3,831,342 5,012,922
---------- ----------
Pension liabilities................................................. 95,857 170,777
---------- ----------
Total liabilities......................................... 3,927,199 5,183,699
---------- ----------
Shareholders' equity:
Common stock........................................................ 172,235 172,235
Additional paid-in capital.......................................... 14,448 14,448
Retained earnings................................................... 648,406 1,211,029
Accumulated translation adjustment.................................. 48,177 (43,145)
---------- ----------
Total shareholders' equity................................ 883,266 1,354,567
---------- ----------
Total liabilities and shareholders' equity................ $4,810,465 $6,538,266
========== ==========
</TABLE>

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

F-27
<PAGE> 80

U-GENE RESEARCH B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ---------------------------
1995 1996 1996 1997
---------- ----------- ----------- -----------
USD USD USD USD
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................. $9,115,192 $12,507,765 $ 6,758,161 $ 6,442,632
---------- ----------- ---------- ----------
Cost and expenses:
Direct costs........................... 5,917,585 8,107,770 4,613,216 4,146,666
Selling, general and administrative.... 2,038,345 2,783,333 1,174,022 1,499,754
Depreciation........................... 278,257 319,764 144,324 186,468
---------- ----------- ---------- ----------
8,234,187 11,210,867 5,931,562 5,832,888
---------- ----------- ---------- ----------
Income from operations................... 881,005 1,296,898 826,599 609,744
---------- ----------- ---------- ----------
Other income:
Interest income........................ 6,222 6,623 150 12,454
---------- ----------- ---------- ----------
Income before tax........................ 887,227 1,303,521 826,749 622,198
Tax on income............................ 302,735 465,243 292,349 218,297
---------- ----------- ---------- ----------
Net income............................... $ 584,492 $ 838,278 $ 534,400 $ 403,901
========== =========== ========== ==========
</TABLE>

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

F-28
<PAGE> 81

U-GENE RESEARCH B.V.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL CURRENCY TOTAL
NUMBER OF COMMON PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
--------- -------- ---------- ----------- ----------- -------------
USD USD USD USD USD
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994...... 299 $172,235 $ 14,448 $ 348,431 $ 535,114
Net income..................... 584,492 584,492
Distributions to
shareholders................. (284,517) (284,517)
Translation adjustments........ $ 48,177 48,177
--- -------- ------- ---------- ---------- ----------
Balance December 31, 1995...... 299 172,235 14,448 648,406 48,177 883,266
Net income..................... 838,278 838,278
Distributions to
shareholders................. (275,655) (275,655)
Translation adjustments........ (91,322) (91,322)
--- -------- ------- ---------- ---------- ----------
Balance December 31, 1996...... 299 172,235 14,448 1,211,029 (43,145) 1,354,567
Net income (unaudited)......... 403,901 403,901
Translation adjustments
(unaudited).................. (175,540) (175,540)
--- -------- ------- ---------- ---------- ----------
Balance June 30, 1997
(unaudited).................. 299 $172,235 $ 14,448 $ 1,614,930 $ (218,685) $ 1,582,928
=== ======== ======= ========== ========== ==========
</TABLE>

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

F-29
<PAGE> 82

U-GENE RESEARCH B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, SIX MONTHS SIX MONTHS
------------------------- ENDED ENDED
1995 1996 JUNE 30, 1996 JUNE 30, 1997
---------- ---------- -------------- --------------
USD USD USD USD
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 584,492 $ 838,278 $ 534,400 $ 403,901
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation.......................... 278,257 319,764 114,324 186,468
Changes in:
Accounts receivable................... (688,280) 94,870 (115,360) (1,206,730)
Other current assets.................. 146,613 (117,999) (105,247) (108,272)
Advance billings...................... (579,848) 1,234,611 (262,781) 93,778
Trade payables........................ 1,007,664 (254,631) (644,529) (39,275)
Accrued liabilities and dividends
payable............................. 828,344 201,600 (23,316) (1,132,704)
Pension liability..................... 74,920 (12,149) 49,886
Deferred taxes........................ (312,672) (68,946) 24,000 36,712
---------- ---------- --------- -----------
Net cash provided by (used in)
operating activities................ 1,264,570 2,322,467 (490,658) (1,716,236)
---------- ---------- --------- -----------
Cash flows from investing activities
in tangible fixed assets:
Additions............................. (474,786) (709,850) (464,241) (198,677)
Disposals............................. 132,476
---------- ---------- --------- -----------
Net cash used in investing
activities.......................... (342,310) (709,850) (464,241) (198,677)
---------- ---------- --------- -----------
Cash flows from financing activities:
Distributions to shareholders......... (284,517) (275,655)
---------- ----------
Net cash used in financing
activities.......................... (284,517) (275,655)
---------- ----------
Net effect of exchange rate changes on
cash and cash equivalents........... 48,177 (91,322) 28,487 (175,540)
---------- ---------- --------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 685,920 1,245,640 (926,412) (2,090,453)
Cash and cash equivalents:
Beginning of period................... 91,085 777,005 777,005 2,022,645
---------- ---------- --------- -----------
End of period......................... $ 777,005 $2,022,645 $ (149,407) $ (67,808)
========== ========== ========= ===========
</TABLE>

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

F-30
<PAGE> 83

U-GENE RESEARCH B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business

U-Gene Research B.V., (the "Company") is a clinical research organization
providing a broad range of integrated product development services to complement
the research and development activities of the pharmaceutical and biotechnology
industries. The Company's services include Phase-II-IV clinical trial
management, clinical data management and biostatistical analysis, medical
writing and regulatory consultation and representation. The Company is based in
Utrecht, The Netherlands, and has local offices in London, United Kingdom, and
since April 1, 1997, Milan, Italy.

Principles of consolidation

The consolidated financial statements include the financial information of
U-Gene Research B.V. and its wholly-owned subsidiaries U-Gene Clinical Research
B.V. and U-Gene Research Biotechnology B.D., both based in Utrecht, The
Netherlands.

Foreign currency translation

The Company's functional currency is the Dutch guilder. Assets and
liabilities denominated in other currencies have been converted into Dutch
guilders at year-end rates. Exchange differences are charged or credited to the
statements of operations.

For US dollars reporting purposes, assets and liabilities have been
translated from Dutch guilders to US dollars at year-end rates and revenues,
costs and dividends have been translated at average rates for the year. Gains
and losses resulting from this translation are accumulated in shareholders'
equity.

Cash and cash equivalents

Cash and cash equivalents consist of demand deposits and money market funds
held with a financial institution with an initial maturity of three months or
less.

The Company maintains its bank accounts with a single Dutch financial
institution, the Crediet-en Effectenbank N.V., a subsidiary of the ING-Bank.
There is no state insurance coverage on bank balances in The Netherlands. The
Company changed from Crediet-en Effectenbank N.V. to ABN AMRO Bank N.V. on July
1, 1997.

Revenue recognition

Revenues are earned by performing services primarily under fixed-price
contracts. Revenues are recognized on the percentage of completion method,
primarily measured by the percentage of costs incurred to date to estimated
total costs for each contract. This method is used because management considers
total costs incurred to be the best available measure of progress on these
contracts. The estimated total costs of contracts are reviewed and revised
periodically throughout the lives of the contracts with adjustment to revenues
resulting from such revisions being recorded on a cumulative basis in the period
in which the revisions are made. Hence, the effect of the changes on future
periods of contract performance is recognized as if the revised estimates had
been the original estimates. Because of the inherent uncertainties in estimating
costs, it is at least reasonably possible that the estimates used will change in
the near term and could result in a material change.

Contract costs include direct labor costs, investigator costs, other direct
costs and indirect costs related to contract performance, such as indirect
labor, supplies and utilities. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are recognized in the period in which such losses become known.

F-31
<PAGE> 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Revenue Recognition, continued

Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are nibbled accounts receivable, which represent revenue
recognized in excess of amounts billed. Advance billings represent amounts
billed in excess of revenue recognized.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of three to eight years using the straight-line method.
Repairs and maintenance are charged to expense as incurred. Upon disposition,
the asset and the related accumulated depreciation are relieved and any gains or
losses are reflected in operations.

Income taxes

The company is subject to corporate income tax and recognizes deferred
taxes in accordance with Statement of Financial Accounting Standard No. 109,
("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires companies subject
to income taxes to adjust their deferred tax assets and liabilities based on
temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Dutch Corporation Tax Law provides for a
tax rate of 35%.

Use of estimates

2. ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
USD USD
<S> <C> <C>
Billed.................................................... $1,522,952 $1,346,515
Unbilled.................................................. 1,471,494 1,553,061
---------- ----------
$2,994,446 $2,899,576
========== ==========
</TABLE>

Accounts receivable are billed when certain milestones defined in customer
contracts are achieved. All unbilled accounts receivable are expected to be
collected within one year.

3. DEBT

The Company had a USD 573,000 (NLG 1 million) overdraft facility with a
bank on which there were no outstanding borrowings at December 31, 1995 and
1996. The Company's receivables serve as collateral.

On July 1, 1997 the Company agreed on an overdraft facility of NLG 2.5
million with ABN AMRO Bank N.V. The Company's receivables serve as collateral.

4. EMPLOYEE BENEFIT PLANS

The Company has defined benefit pension plans covering nearly all of its
employees and two directors in The Netherlands. The plan benefits are based on
years of service and compensation levels at the time of retirement.

F-32
<PAGE> 85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

4. EMPLOYEE BENEFIT PLANS, CONTINUED
The pension arrangements are single employer plans as defined in SFAS No.
87, "Employers' Accounting for Pensions."

The company's funding policy is to fund amounts as are necessary on an
actuarial basis to provide for vested benefits.

Plan assets of the single employer plans are participating annuity
contracts as defined in SFAS No. 87.

Two other directors have defined contribution pension plans. The annual
contribution to each of these plans is USD 8,876.

Net periodic pension expense of single employer plans included the
following components in thousands:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -------------
USD USD
(UNAUDITED)
<S> <C> <C>
Service cost-benefits earned during the year............... $ 92 $ 69
Interest cost on the projected benefit obligations......... 19 13
Actual return on plan assets............................... (27) (2)
Net total of other components.............................. 35 5
--- ---
Net periodic pension cost.................................. $119 $ 85
=== ===
</TABLE>

The actuarial present value of benefit obligations and funded status for
the Company's single employer plans were as follows in thousands:

FOR THE FOR THE FOR THE
YEAR YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -------------
USD USD USD
(UNAUDITED)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested........................................ $128 $ 210 $ 253
Accumulated................................... 123 201 229
Projected..................................... 217 375 428
Plan assets at fair value..................... 42 120 132
---- ---- ----
Plan assets less than projected benefit
obligation.................................. (175) (255) (296)
Unrecognized transition obligation............ 79 61 56
Unrecognized net loss......................... 23 19
---- ---- ----
Accrued pension cost.......................... $(96) $ (171) $(221)
==== ==== ====
Weighted average discount rates............... 6.2 % 5.6 % 5.6 %
Expected long-term rate of return on assets... 4.0 4.0 4.0
Assumed rate of increase in future
compensation................................ 4.0 4.0 4.0
</TABLE>

F-33
<PAGE> 86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

5. LEASES

Lease contracts

U-Gene Research B.V. leases a number of cars under operating lease
contracts. The lease contracts have a term of four years or a certain number of
kilometers, usually 150,000. The estimated costs per year amount to USD 250,000.
A lease contract has been concluded for a photocopier under an operational lease
contract for a term of five years.

Lease contract for premises

With effect from December 1, 1992 an operating lease contract for the main
premises at Bolognalaan 40 was entered into with S.F.A.R. for a period of three
years. The lessee has a right to renew the lease for two option periods of three
years, commencing on December 1, 1995 and December 1, 1998. The current rent is
USD 232,000 excluding VAT, to be paid in advance in quarterly installments
amounting to USD 58,000 each. The lessee is also obliged to pay service costs of
USD 10,000 every three months in advance. The rent is adjusted annually on July
1. A bank guarantee has been given to S.F.A.R. of USD 82,000 for an indefinite
period.

With effect from January 1, 1996 an operating lease contract for the
offices located Einsteindreef 129-131 was entered into with Verwaltung IFU
Immobilienfonds GmbH & Co. K.G. for a period of two years. The lessee has a
right to renew the lease for two option periods of three years, commencing on
January 1, 1998 for a period of one year and January 1, 1999 for a period of two
years. The current rent is USD 115,000, excluding VAT, to be paid in advance in
quarterly installments amounting to USD 28,750 each. The lessee is also obliged
to pay service costs of USD 3,500 every three months in advance. A bank
guarantee has been given to Verwaltung IFU Immobilienfonds GmbH & Co. K.G. of
USD 37,800 for an indefinite period.

Commitments under operating lease contracts can be summarized as follows:

6. GEOGRAPHICAL SEGMENT INFORMATION

The following sets forth net revenues from customers in the following
geographical areas:

<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30,
1995 1996 1997
---- ---- -------------
%
(UNAUDITED)
<S> <C> <C> <C>
The Netherlands........................................... 62 40 25
Other European Community countries........................ 26 28 23
Other (mainly USA)........................................ 12 32 52
--- --- ---
100 100 100
=== === ===
</TABLE>

F-34
<PAGE> 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

7. MAJOR CLIENTS

The following sets forth the net revenues from clients who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:

YEAR ENDED JUNE 30,
DECEMBER 31, 1997
------------------------- -----------
CLIENTS 1995 1996
---------------------------------------------- -------- ----------
USD USD USD
(UNAUDITED)
<S> <C> <C> <C>
A............................................. $933,288 $2,114,293 *
B............................................. 980,204 2,041,000 *
C............................................. * 1,925,683 *
D............................................. * 1,516,039 *
E............................................. * * $ 1,720,995
F............................................. * * 643,667
</TABLE>

* Net revenues did not exceed 10%.

8. GRANTS

For 1995 and 1996 costs are stated net of Dutch wage tax credits for R&D
work amounting to USD 156,000 and USD 191,000 respectively.

This wage tax credit facility may not necessarily be available for the
Company in 1997 and following years.

9. TAXES

Reconciliations of the statutory income tax rate to the effective tax rates
shown in the financial statements are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS SIX MONTHS
ENDED ENDED
1995 1996 JUNE 30, 1996 JUNE 30, 1997
---- ---- -------------- --------------
% % % %
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
The Netherlands statutory tax rate....... 35.0 35.0 35.0 35.0
Permanent differences.................... (0.9) 0.6 0.4 0.1
---- ---- ---- ----
34.1 35.6 35.4 35.1
==== ==== ==== ====
</TABLE>

Permanent differences comprise partly deductible entertaining expenses and
permanent deductions in relation to capital expenditures.

Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS SIX MONTHS
ENDED ENDED
1995 1996 JUNE 30, 1996 JUNE 30, 1997
--------- -------- -------------- --------------
USD USD USD USD
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current tax..................... $ 615,407 $534,189 $268,349 $181,585
Deferred tax (benefit).......... (312,672) (68,946) 24,000 36,712
-------- -------- -------- --------
$ 302,735 $465,243 $292,349 $218,297
======== ======== ======== ========
</TABLE>

The deferred tax asset relates to temporary differences mainly relating to
the recognition of pension costs.

10. SHAREHOLDERS' EQUITY:

At December 31, 1995 and 1996 and June 30, 1997 (unaudited) there were
1,000 shares authorized with a par value of NLG 1,000, each of which 299 shares
were issued and outstanding.

F-35
<PAGE> 88

======================================================

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------------

TABLE OF CONTENTS

<TABLE>
<S> <C>
Additional Information................ 2
Prospectus Summary.................... 3
The Company........................... 3
Acquisitions.......................... 4
The Offering.......................... 5
Summary Financial and Operating
Data................................ 6
Risk Factors.......................... 7
The Acquisitions...................... 12
Bank Credit Facility.................. 13
Use of Proceeds....................... 14
Termination of S Corporation Status... 14
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 18
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 31
Management............................ 42
Certain Transactions.................. 47
Principal and Selling Shareholders.... 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Index to Financial Statements......... F-1
</TABLE>

UNTIL SEPTEMBER 16, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS AN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================

3,600,000 SHARES

[KENDLE LOGO]

KENDLE
INTERNATIONAL INC.

COMMON STOCK
---------------------------

PROSPECTUS

AUGUST 22, 1997

---------------------------
LEHMAN BROTHERS

J.C. BRADFORD & CO.

======================================================