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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission file number 000-23019
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KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 700, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 7,574,467 shares of common
stock, no par value, as of November 10, 1997.
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KENDLE INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations - Three
Months Ended September 30, 1997 and 1996; Nine Months
Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
</TABLE>
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,365,414 $2,047,476
Available for sale securities 9,804,750
Accounts receivable 16,211,477 3,583,210
Unreimbursed investigator and project costs 3,392,646 980,597
Other current assets 1,147,494 12,806
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Total current assets 39,921,781 6,624,089
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Property and equipment, net 5,276,055 1,835,001
Excess of purchase price over net assets acquired, net 26,084,632
Other assets 862,507 164,020
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Total assets $ 72,144,975 $8,623,110
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 549,874 $ 360,203
Trade payables 4,496,537 913,371
Advances against investigator and project costs 1,598,823 776,565
Advance billings 7,768,223 4,303,809
Other accrued liabilities 4,542,205 563,672
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Total current liabilities 18,955,662 6,917,620
------------ ----------
Obligations under capital leases, less current portion 1,856,401 761,029
Other noncurrent liabilities 519,416
Note payable -- escrow agreement 1,500,000
------------ ----------
Total liabilities 22,831,479 7,678,649
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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 at December 31, 1996,
7,552,567 shares issued and outstanding at September 30, 1997 75,000 75,000
Additional paid in capital 50,168,745 270,396
Retained earnings (939,810) 599,065
Cumulative foreign currency translation adjustment 5,608
Unrealized holding gains on available for sale securities, net of tax 3,953
------------ ----------
Total shareholders' equity 49,313,496 944,461
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Total liabilities and shareholders' equity $ 72,144,975 $8,623,110
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 12,517,782 $ 3,607,427 $ 25,689,492 $ 8,300,819
------------ ------------ ------------ -----------
Costs and expenses:
Direct costs 7,115,974 2,441,882 14,463,060 5,617,387
Selling, general and administrative
expenses 3,360,414 818,099 7,408,884 1,835,594
Depreciation and amortization 513,741 50,803 804,946 142,910
------------ ------------ ------------ -----------
10,990,129 3,310,784 22,676,890 7,595,891
------------ ------------ ------------ -----------
Income from operations 1,527,653 296,643 3,012,602 704,928
Other income (expense):
Interest income 94,837 3,011 108,092 7,706
Interest expense (284,470) (5,723) (355,694) (36,014)
Other expense (12,648) (243) (21,426) (566)
------------ ------------ ------------ -----------
Income before income taxes
and extraordinary item 1,325,372 293,688 2,743,574 676,054
Income tax expense 372,808 372,808
------------ ------------ ------------ -----------
Income before extraordinary item 952,564 293,688 2,370,766 676,054
Extraordinary loss, net of tax benefit (1,139,823) (1,139,823)
------------ ------------ ------------ -----------
Net income (loss) $ (187,259) $ 293,688 $ 1,230,943 $ 676,054
============ ============ ============ ===========
Pro forma income (loss) data:
Income before extraordinary item $ 952,564 $ 293,688 $ 2,370,766 $ 676,054
Pro forma adjustment for income
taxes (196,435) (117,595) (756,626) (270,422)
------------ ------------ ------------ -----------
Pro forma income before
extraordinary item 756,129 176,093 1,614,140 405,632
Extraordinary loss, net of tax benefit (1,139,823) (1,139,823)
------------ ------------ ------------ -----------
Pro forma net income (loss) $ (383,694) $ 176,093 $ 474,317 $ 405,632
============ ============ ============ ===========
Primary pro forma income (loss)
per share data:
Pro forma income per share before
extraordinary item $ 0.13 $ 0.04 $ 0.34 $ 0.10
Extraordinary loss per share (0.19) (0.24)
------------ ------------ ------------ -----------
Pro forma net income (loss) per share $ (0.06) $ 0.04 $ 0.10 $ 0.10
============ ============ ============ ===========
Weighted average shares outstanding 6,023,402 3,960,462 4,804,827 3,942,533
Fully diluted pro forma income (loss)
per share data:
Pro forma income per share before
extraordinary item $ 0.13 $ 0.04 $ 0.32 $ 0.10
Extraordinary loss per share (0.19) (0.23)
------------ ------------ ------------ -----------
Pro forma net income (loss) per share $ (0.06) $ 0.04 $ 0.09 $ 0.10
============ ============ ============ ===========
Weighted average shares outstanding 6,023,402 3,960,462 5,018,730 3,942,533
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Nine Months Ended
September 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ (486,590) $ 1,712,340
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Cash flows from investing activities:
Purchase of available for sale securities (9,804,750)
Acquisitions of property and equipment (1,111,613) (277,389)
Additions to software costs (284,894)
Acquisitions of businesses, less cash acquired (22,842,235)
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Net cash used in investing activities (34,043,492) (277,389)
------------ -----------
Cash flows from financing activities:
Borrowings under line of credit 3,100,000 3,067,000
Repayments under line of credit (3,100,000) (3,387,000)
Borrowings under senior credit facility 10,745,439
Repayment of senior credit facility (10,745,439)
Proceeds from subordinated debt borrowings 3,500,000
Proceeds from issuance of stock purchase warrants 1,500,000
Repayment of subordinated debt borrowings (5,000,000)
Proceeds from initial public offering, net 45,251,554
Proceeds from conversion of stock purchase warrants 1,537
Proceeds from exercises of stock options 15,948
Debt issue costs (538,698)
Distributions to shareholders (2,557,819) (285,290)
Payments on capital lease obligations (330,110) (99,271)
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Net cash provided by (used in) financing activities 41,842,412 (704,561)
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Effects of exchange rates on cash and cash equivalents 5,608
Net increase in cash and cash equivalents 7,317,938 730,390
Cash and cash equivalents:
Beginning of period 2,047,476 15,266
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End of period $ 9,365,414 $ 745,656
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
<TABLE>
<CAPTION>
For Nine Months Ended
September 30,
-----------------------------------------
1997 1996
---- ----
Supplemental schedule of noncash investing and financing activities:
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<S> <C>
Acquisition of equipment under capital lease obligations $ 1,637,056
============
Note payable under escrow agreement for acquisition of U-Gene $ 1,530,000
============
Issuance of common stock in conjunction with gmi acquisition $ 2,678,256
============
Exercise of stock purchase warrants recorded as additional
paid in capital $ 1,500,000
============
Acquisitions of Businesses (Note 3):
Fair value of assets acquired $ 34,072,671
Fair value of liabilities assumed or incurred (8,552,180)
Stock issued (2,678,256)
------------
Net cash payments $ 22,842,235
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments, except for the item discussed in Note 6) considered necessary
for a fair presentation have been included. Operating results for the three
months and the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. For further information, refer to the consolidated financial
statements and notes thereto included in Kendle International Inc.'s (the
"Company") Form S-1 filed on August 21, 1997 with the Securities and
Exchange Commission.
The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements.
2. SHAREHOLDER'S EQUITY
On August 22, 1997, the Company completed its initial public
offering ("IPO") of 4,140,000 shares of common stock at a price to the
public of $14.00 per share. Of the 4,140,000 shares sold, 3,540,000 were
sold by the Company and 600,000 shares were sold by selling shareholders.
Net proceeds to the Company approximated $45.3 million.
The net proceeds remaining after the repayment of indebtedness
incurred with the U-Gene Research B.V. ("U-Gene") acquisition and the cash
payments relating to the acquisition of GMI Gesellschaft fur Angewandte
Mathematik und Informatik mbH ("gmi") (See Note 4) have been invested in
securities with original maturities that do not exceed one year.
Investments with maturities ranging from three months to one year have been
classified as available for sale securities and consist of highly
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liquid debt securities. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," available for sale securities have been
recorded at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity.
3. EARNINGS PER SHARE
Primary and fully diluted pro forma income (loss) per share data
has been computed for the three months ended September 30, 1997 and the
three and nine months ended September 30, 1996 using primary weighted
average shares outstanding, as the difference between primary and fully
diluted weighted average shares outstanding for these periods is not
material.
In accordance with Accounting Principles Bulletin No. 15, "Earnings
Per Share," supplemental net income (loss) per share, after giving effect
to: (a) the elimination of interest expense on the indebtedness retired
with the IPO proceeds; and (b) the issuance of common stock whose proceeds
were used to retire the indebtedness; was $(0.04) and $0.12 for the three
and nine months ended September 30, 1997, respectively. These per share
amounts also assume that the Company was taxed as a C corporation for each
period.
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 pro forma
net income per share for the three and nine months ended September 30,
1997 by 12% and 11%, respectively.
4. ACQUISITIONS
Effective September 3, 1997, the Company acquired gmi. Acquisition
costs of $12.7 million consisted of $10.0 million in cash and the issuance
of 191,304 shares of the Company's Common Stock at $14 per share or $2.7
million. The gmi acquisition has been accounted for using the purchase
method of accounting, with goodwill as a result of the transaction being
amortized over 30 years. The results of operations are included in the
Company's results from the date of acquisition.
The Company acquired U-Gene as of June 30, 1997 for approximately
$15.9 million. The acquisition was accounted for using the purchase method
of accounting, with goodwill as a result of the transaction being amortized
over 30 years. The results of operations are included in the Company's
results from the date of acquisition.
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The following unaudited pro forma results of operations assume the
acquisitions of U-Gene and gmi occurred as of January 1, 1996:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net revenues $36,734,386 $22,006,003
Income before extraordinary item $2,906,249 $1,285,632
Net income $1,766,426 $1,285,632
Income before extraordinary item,
assuming the Company was taxed
as a C corporation $2,149,623 $1,015,210
Income per share before
extraordinary item $0.58 $0.31
Net income per share $0.35 $0.31
Income per share before
extraordinary item, assuming the
Company was taxed as a
C corporation $0.43 $0.25
</TABLE>
The pro forma financial information is not necessarily indicative
of the operating results that would have occurred had the U-Gene and gmi
acquisitions been consummated as of January 1, 1996, nor are they
necessarily indicative of future operating results.
5. INCOME TAXES
The condensed consolidated financial statements of the Company for
periods prior to the IPO as discussed in Note 2 do not include a provision
for income taxes because the taxable income or loss of the Company is
included in the income tax returns of the individual shareholders under the
S corporation election. Pro forma income (loss) data is presented to give
effect to a 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.
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6. EXTRAORDINARY ITEM
During the third quarter of 1997, the Company recorded an
extraordinary loss on early extinguishment of indebtedness which amounted
to $1.1 million, net of tax benefits of approximately $426,000. The
extraordinary loss resulted from the write-off of the debt discount
recorded in connection with long-term borrowings. Such borrowings were made
by the Company in connection with the acquisition of U-Gene prior to the
Company's IPO and were repaid with the proceeds of the IPO.
7. SUBSEQUENT EVENT
On October 28, 1997, the Company announced the signing of a
non-binding letter of intent to acquire 100% of the stock of ACER/EXCEL
Inc. ("ACER"), headquartered in Cranford, New Jersey. The transaction would
be effected through an exchange of both cash and stock and would be
accounted for under the purchase method of accounting. Under the proposed
agreement, the Company would acquire ACER for approximately $36 million,
consisting of approximately 1.2 million shares of stock and $17 million in
cash. The share portion of the consideration is subject to a pricing
formula based on the stock's fair market value.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The information set forth and discussed below for the three months and
nine months ended September 30, 1997, is derived from the Condensed Consolidated
Financial Statements included herein and should be read in conjunction
therewith. The Company's results of operations for a particular quarter may not
be indicative of results expected during subsequent quarters or for the entire
year.
COMPANY OVERVIEW
The Company provides integrated clinical research services on a
contract basis to the pharmaceutical and biopharmaceutical industries. These
services include Phase I to IV clinical trial management, clinical drug
management, biostatistical analysis, medical writing and regulatory consultation
and representation.
Kendle's 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. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured by the total costs incurred as a percentage of estimated total costs
for each contract. The estimated total costs of contracts are reviewed and
revised periodically throughout the lives of the contracts with adjustments 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.
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
During the quarter, the Company acquired two European based contract
research organizations, U-Gene Research BV ("U-Gene"), headquartered in Utrecht,
The Netherlands, and GMI Gesellschaft fur Angewandte Mathematik und Informatik
mbH ("gmi"), headquartered in Munich, Germany. U-Gene provides a full range of
clinical drug development services including Phase II-IV clinical trial design
and management, and Phase I and II(a) research studies at its 38-bed, clinical
pharmacology unit. gmi provides a wide range of clinical drug development
services including Phase II to IV
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clinical trials, seminars and in-house training programs and presentations and
specializes in health/pharmocoeconomic studies. Both acquisitions were accounted
for using the purchase method of accounting, with goodwill as a result of the
transaction being amortized over 30 years. The U-Gene acquisition was completed
as of June 30, 1997 and the gmi acquisition was completed on September 3, 1997.
The results of operations are included in the Company's results of operations
from the respective dates of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net revenues increased by $8.9 million, or 247%, from $3.6 million for
the three months ended September 30, 1996 to $12.5 million for the three months
ended September 30, 1997. The increase in net revenues was due to: (a) 62 new
projects in the three months ended September 30, 1997 as compared to the three
months ended September 30, 1996, which resulted in net revenues of $4.0 million
for the three months ended September 30, 1997; (b) a net increase in revenues
recognized on existing projects of $1.0 million; and (c) an increase of
approximately $3.9 million in net revenues relating to the acquisitions.
Revenues from G.D. Searle & Co. accounted for approximately 49% of net revenues
for the three months ended September 30, 1997. Net revenues from clients other
than G.D. Searle & Co. increased $4.4 million, or 220%, from $2.0 million for
the three months ended September 30, 1996 to $6.4 million for the three months
ended September 30, 1997.
Direct costs increased by $4.7 million, or 191%, from $2.4 million for
the three months ended September 30, 1996 to $7.1 million for the three months
ended September 30, 1997. This increase is primarily comprised of: (a)
approximately $3.8 million in direct salaries and fringe benefits to support the
increases in net revenues for the period; and (b) an increase of approximately
$539,000 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 three months ended September 30,
1996 to 56.8% for the three months ended September 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 247% for the three months ended September 30, 1997 as compared to
the three months ended September 30, 1996, while direct costs increased by 191%
over the same periods.
Selling, general and administrative expenses increased by $2.5 million,
or 311%, from $818,000 for the three months ended September 30, 1996 to $3.4
million for the three months ended September 30, 1997. Selling, general and
administrative expenses as a percentage of net revenues increased from 22.7% for
the three months ended September 30, 1996 to 26.8% for the three months ended
September 30, 1997. The increase is primarily comprised of: (a) an increase of
approximately $1.5 million in salaries and benefits, which is the result of the
Company's continued efforts to increase its infrastructure in
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order to support the growth in business activity; and (b) increases in training
($168,000), contractual services ($118,000), recruiting ($109,000), and
marketing and advertising ($101,000) expenses for the three months ended
September 30, 1997 as compared to the same period in 1996.
Depreciation and amortization expense increased $463,000, or 911%, from
$51,000 for the three months ended September 30, 1996 to $514,000 for the three
months ended September 30, 1997. The increase was due to capital expenditures
associated with the three offices opened by the Company in 1996 and amortization
of goodwill as a result of the U-Gene and gmi acquisitions.
Interest expense, net of interest income, increased by $187,000, from
$3,000 for the three months ended September 30, 1996 to $190,000 for the three
months ended September 30, 1997 due to the Company's borrowings during the three
months ended September 30, 1997 relating to the U-Gene acquisition. This
indebtedness was repaid with the proceeds of the Company's IPO.
Income taxes of $373,000, or 28.1% of income before income taxes and
extraordinary item, were recorded for the three months ended September 30, 1997
as compared to no income taxes being recorded for the three months ended
September 30, 1996. Income taxes were not provided prior to the Company's IPO as
the Company was taxed as an S corporation.
Net loss of $(188,000) for the three months ended September 30, 1997
includes a $1.1 million extraordinary loss associated with the early
extinguishment of indebtedness which resulted from long-term borrowings made by
the Company in connection the U-Gene acquisition prior to the Company's IPO,
that were repaid with the proceeds from the IPO.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net revenues increased by $17.4 million, or 210%, from $8.3 million for
the nine months ended September 30, 1996 to $25.7 million for the nine months
ended September 30, 1997. The increase in net revenues was due to: (a) 70 new
projects in the nine months ended September 30, 1997, as compared to the nine
months ended September 30, 1996, which resulted in net revenues of $7.9 million
for the nine months ended September 30, 1997; (b) a net increase in revenues
recognized on existing projects of $5.6 million; and (c) an increase of
approximately $3.9 million in net revenues relating to the acquisitions.
Revenues from G.D. Searle & Co. accounted for approximately 56% of net revenues
for the nine months ended September 30, 1997. Net revenues from clients other
than G.D. Searle & Co. increased $6.3 million, or 129%, from $4.9 million for
the nine months ended September 30, 1996 to $11.2 million for the nine months
ended September 30, 1997.
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Direct costs increased by $8.9 million, or 157%, from $5.6 million for
the nine months ended September 30, 1996 to $14.5 million for the nine months
ended September 30, 1997. This increase is primarily comprised of: (a)
approximately $6.2 million in direct salaries and fringe benefits to support the
increases in net revenues for the period; and (b) an increase of approximately
$2.2 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 nine months ended September 30,
1996 to 56.3% for the nine months ended September 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 210% for the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996, while direct costs increased by 157%
over the same periods.
Selling, general and administrative expenses increased $5.6 million, or
304%, from $1.8 million for the nine months ended September 30, 1996 to $7.4
million for the nine months ended September 30, 1997. Selling, general and
administrative expenses as a percentage of net revenues increased from 22.1% for
the nine months ended September 30, 1996 to 28.8% for the nine months ended
September 30, 1997. The increase is primarily comprised of: (a) an increase of
approximately $3.4 million in salaries and 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 nine months ended September 30, 1997 as
compared to the same period in 1996; and (b) increases in training ($438,000),
contractual services ($470,000), recruiting ($366,000), conferences and seminars
($218,000) and marketing and advertising ($247,000) expenses for the nine months
ended September 30, 1997 as compared to the same period in 1996.
Depreciation and amortization expense increased $662,000, or 463%, from
$143,000 for the nine months ended September 30, 1996 to $805,000 for the nine
months ended September 30, 1997. The increase was due to capital expenditures
associated with the three offices opened by the Company in 1996 and amortization
of goodwill as a result of the U-Gene and gmi acquisitions.
Interest expense, net of interest income, increased by $220,000, from
$28,000 for the nine months ended September 30, 1996 to $248,000 for the nine
months ended September 30, 1997 due to the Company's borrowings during the three
months ended September 30, 1997 relating to the U-Gene acquisition. This
indebtedness was repaid with the proceeds of the Company's IPO.
Income taxes of $373,000, or 13.6% of income before income taxes and
extraordinary item, were recorded for the nine months ended September 30, 1997
as compared to no income taxes being recorded for the nine months ended
September 30, 1996. Income taxes were not provided prior to the Company's IPO as
the Company was taxed as an S corporation.
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Net income of $1.2 million for the nine months ended September 30, 1997
includes a $1.1 million extraordinary loss associated with the early
extinguishment of indebtedness which resulted from long-term borrowings made by
the Company in connection the U-Gene acquisition prior to the Company's IPO,
that were repaid with the proceeds from the IPO.
LIQUIDITY AND CAPITAL RESOURCES
On August 22, 1997, the Company completed its IPO of 4,140,000 shares
of common stock at a price to the public of $14.00 per share. Of the 4,140,000
shares sold, 3,540,000 were sold by the Company and 600,000 shares were sold by
selling shareholders. Net proceeds to the Company approximated $45.3 million.
Cash and cash equivalents increased by $7.3 million for the nine months
ended September 30, 1997 as a result of cash used in operating and investing
activities of $487,000 and $34.0 million, respectively, and cash provided by
financing activities of $41.8 million. Net cash used in operating activities
resulted primarily from net income offset by the net change in working capital
items.
Investing activities for the nine months ended September 30, 1997
consisted primarily of the costs related to the U-Gene and gmi acquisitions of
$22.8 million and the purchase of available for sale securities of $9.8 million.
Financing activities for the nine months ended September 30, 1997 primarily
consisted of $45.3 million of net proceeds from the Company's IPO.
Cash and cash equivalents increased by $730,000 for the nine months
ended September 30, 1996 as a result of cash provided by operating activities of
$1.7 million, and cash used by investing and financing activities of $277,000
and $705,000, respectively. Net cash used by operating activities resulted
primarily from net income offset by the net change in working capital items.
Investing activities for the nine months ended September 30, 1996
consisted of property and equipment purchases. Financing activities for the nine
months ended September 30, 1996 consisted primarily of borrowings under the
Company's line of credit and distributions to shareholders.
The Company has a $20 million credit facility with a U.S. bank. The
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. At September 30, 1997, there were no amounts outstanding
under the credit facility.
The Company has a $1.9 million computer and a $630,000 furniture lease
line of credit with a bank. Amounts drawn on these lines are payable over a 4-5
year term from
15
<PAGE> 16
the date of funding. These lines expire on March 31,1998. The monthly
installment payments are equal to 1.80%-2.23% and 1.71%-1.76% of the total
computer and furniture draws, respectively. Amounts drawn on these lines of
credit totaled $2.2 million at September 30, 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, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its credit facility, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and global presence. Any such
acquisitions may require additional external financings and the Company may from
time to time seek to obtain funds from public or private issuances of equity or
debt securities. There can be no assurance that such financings will be
available on terms acceptable to the Company.
RECENT EVENTS
On October 28, 1997 the Company announced the signing of a non-binding
letter of intent to acquire 100% of the stock of ACER/EXCEL Inc. ("ACER") The
transaction would be effected through an exchange of both cash and stock and
would be accounted for under the purchase method of accounting. Under the
proposed agreement, which is expected to be completed by January 1998, Kendle
would acquire ACER for approximately $36 million, consisting of approximately
1.2 million shares of stock and $17 million in cash. The share portion of the
consideration is subject to a pricing formula based on the stock's fair market
value. The proposed transaction is subject to the negotiation and execution of a
definitive agreement and other approvals.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 is designed to simplify
the existing computational guidelines for computing earnings per share ("EPS")
and 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 effect of the adoption of this statement
would have increased the Company's pro forma net income per share for the three
and nine months ended September 30, 1997 by approximately 12% and 11%,
respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This standard establishes a requirement for display of Comprehensive
Income in general-purpose financial statements for fiscal periods beginning
after December 15, 1997. The Company does not expect the adoption of the
standard to be material.
16
<PAGE> 17
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Information set forth in this Form 10-Q, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains various "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which statements reflect management's
current view with respect to certain future events and financial performance
that are subject to risks and uncertainties. Such forward looking statements can
be identified by the use of forward looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "believe," or "continue," or the negative
thereof or other variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are
further qualified by important factors that could cause the Company's actual
operating results to differ materially from those in the forward looking
statements, including without limitation, the actual operating performance, the
ability of the combined businesses to be integrated with Kendle's operations,
the ability to penetrate new markets, the ability of joint venture businesses to
be integrated with Kendle's operations, and the ability to maintain large client
contracts or to enter into new contracts, and the other risk factors set forth
in the Company's recent SEC filings on Form S-1 and S-8, copies of which are
available upon request from Kendle's investor relations department.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
Report of Sales of Securities and Use of Proceeds Therefrom
-----------------------------------------------------------
- Name of Seller--Kendle International Inc.
- Effective Date of Registration Statement--August 21, 1997.
- SEC File Number Assigned to the Registration Statement--
333-30581.
- CUSIP Number--48880L 10 7
- Date the Offering Commenced--August 22, 1997.
- The offer did not terminate before any securities were sold.
- The offer did not terminate prior to the sale of all securities
registered.
- Managing Underwriters---Lehman Brothers and J.C. Bradford & Co.
Title of Security--Common Stock, no par value; ISSUER-- Amount
registered--3,540,000 (includes Underwriters' over-allotment
option); Aggregate price of offering amount
registered--$49,560,000; Amount sold--3,540,000; Aggregate
offering price of amount sold--$49,560,000; SELLING
SHAREHOLDERS--Amount registered--600,000; Aggregate offering price
of amount registered--$8,400,000; Amount sold--600,000; Aggregate
offering price of amount sold--$8,400,000.
17
<PAGE> 18
- Offering expenses for the issuer--Underwriting discounts and
commissions--$3,469,200; Other expenses--$839,246
- Net proceeds to the issuer after total expenses--$45,251,554
- Use of Proceeds--Acquisition of business--$10.0 million (cash
portion of gmi acquisition); Repayment of indebtedness--$13.8
million; S corporation distribution to shareholders--$1.3 million;
Working capital--$1.0 million.
- The use of proceeds described above does not represent a material
change in the use of proceeds described in the prospectus.
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
applicable
Item 5. Other Information - - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
11 Statement Regarding Computation of
Earnings Per Share
27.1 Financial Data Schedule
(b) The Company filed one report during the quarter ended September 30,
1997 on Form 8-K, dated September 18, 1997, in which the Company reported its
acquisition of gmi under Item 2. "Acquisition or Disposition of Assets." No
other reports on Form 8-K were filed during the quarter.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle Bryan
-------------------------------------
Date: November 14, 1997 Candace Kendle Bryan
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
-------------------------------------
Date: November 14, 1997 Timothy M. Mooney
Vice President - Chief Financial Officer
19
<PAGE> 20
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
11 Statement Regarding Computation of
Earnings Per Share
27.1 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PRO FORMA INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma income (loss) data for primary
and fully diluted computation:
Pro forma income before extraordinary item $ 756,129 $ 176,093 $1,614,140 $ 405,632
Extraordinary loss, net of tax benefit (1,139,823) (1,139,823)
----------- ----------- ---------- ----------
Pro forma net income (loss) $ (383,694) $ 176,093 $ 474,317 $ 405,632
=========== =========== ========== ==========
PRIMARY
Weighted average common shares and dilutive
common stock equivalents:
Common stock outstanding 5,386,252 3,650,000 4,337,039 3,650,000
Stock purchase warrants 153,738 153,738
Stock options 637,150 156,724 467,788 138,795
----------- ----------- ---------- ----------
6,023,402 3,960,462 4,804,827 3,942,533
=========== =========== ========== ==========
Primary income (loss) per common share:
Pro forma income per share before
extraordinary item $ 0.13 $ 0.04 $ 0.34 $ 0.10
Extraordinary loss per share (0.19) (0.24)
----------- ----------- ---------- ----------
Pro forma net income (loss) per share $ (0.06) $ 0.04 $ 0.10 $ 0.10
=========== =========== ========== ==========
FULLY DILUTED
Weighted average common shares and dilutive
common stock equivalents:
Common stock outstanding 5,386,252 3,650,000 4,337,039 3,650,000
Stock purchase warrants 153,738 153,738
Stock options 701,075 233,898 681,691 201,540
----------- ----------- ---------- ----------
6,087,327 4,037,636 5,018,730 4,005,278
=========== =========== ========== ==========
Fully diluted income (loss) per common share:
Pro forma income per share before
extraordinary item $ 0.12 $ 0.04 $ 0.32 $ 0.10
Extraordinary loss per share (0.19) (0.23)
----------- ----------- ---------- ----------
Pro forma net income (loss) per share $ (0.07) $ 0.04 $ 0.09 $ 0.10
=========== =========== ========== ==========
</TABLE>
Note: Certain stock options and stock purchase warrants are deemed outstanding
for all periods presented. Effective with the Company's IPO, the stock
purchase warrants were exercised and converted to common stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,365
<SECURITIES> 9,805
<RECEIVABLES> 16,211
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,922
<PP&E> 6,820
<DEPRECIATION> 1,543
<TOTAL-ASSETS> 72,145
<CURRENT-LIABILITIES> 18,956
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 49,238
<TOTAL-LIABILITY-AND-EQUITY> 72,145
<SALES> 25,689
<TOTAL-REVENUES> 25,689
<CGS> 14,463
<TOTAL-COSTS> 22,677
<OTHER-EXPENSES> (87)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356
<INCOME-PRETAX> 0
<INCOME-TAX> 373
<INCOME-CONTINUING> 2,371
<DISCONTINUED> 0
<EXTRAORDINARY> (1,140)
<CHANGES> 0
<NET-INCOME> 1,231
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
<FN>
EARNINGS PER SHARE PRIMARY AND FULLY DILUTED REFLECTS THE ADJUSTMENT FOR INCOME
TAXES AS IF THE COMPANY WERE A C CORPORATION FOR THE ENTIRE PERIOD.
</FN>
</TABLE>
