<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
KENDLE INTERNATIONAL INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
OHIO 8731 31-1274091
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
700 CAREW TOWER
441 VINE STREET
CINCINNATI, OHIO 45202
(513) 381-5550
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
EDWARD E. STEINER, ESQ.
KEATING, MUETHING & KLEKAMP, P.L.L.
1800 PROVIDENT TOWER
ONE EAST FOURTH STREET
CINCINNATI, OHIO 45202
TELEPHONE (513) 579-6468
FACSIMILE (513) 579-6957
(Name, address, including zip code, telephone and facsimile numbers,
including area code, of agent for service)
Copy to:
MARK B. SEGALL, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-3903
TELEPHONE (212) 715-9100
FACSIMILE (212) 715-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
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<S> <C> <C> <C> <C>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO BE AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED(1) PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without par
value....................... 2,415,000 $25.375 $61,280,625 $18,078
=======================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely
for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
2,100,000 SHARES
[KENDLE LOGO]
KENDLE INTERNATIONAL INC.
COMMON STOCK
---------------------------
Of the 2,100,000 shares of Common Stock (the "Common Stock") offered hereby
(the "Offering"), 2,000,000 shares are being offered by Kendle International
Inc. ("Kendle" or the "Company") and 100,000 are being offered by certain
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Shareholders.
The Common Stock is listed on the Nasdaq National Market under the symbol
"KNDL." On May 19, 1998, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $25.375 per share. See "Price Range
of Common Stock."
---------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON 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>
================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total (3)........................... $ $ $ $
================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting" and "Principal and
Selling Shareholders."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 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 Selling Shareholders will
be $ , $ , $ and $ , respectively. See "Underwriting."
---------------------------
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 , 1998.
---------------------------
LEHMAN BROTHERS
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
<PAGE> 3
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933 (the "Securities Act") with respect to the 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 of
which are omitted in accordance with the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto, the consolidated financial statements appearing elsewhere
in this Prospectus (the "Consolidated Financial Statements"), and the notes and
schedules filed as a part thereof. The Company is also subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Commission. The Registration Statement and reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; at its Chicago Regional Office, 500 W. Madison Street,
14th Floor, Chicago, Illinois 60661; and at its New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company's Common Stock is listed on the Nasdaq National Market. Consequently,
reports, proxy statements and other information concerning the Company may also
be inspected at the offices of the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006. Electronic filings made
through the Electronic Data Gathering Analysis and Retrieval System (EDGAR) are
publicly available through the Commission's Website (http://www.sec.gov).
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT THAT
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. IN ADDITION, WHEN WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "COULD," "ESTIMATE," "INTENDS," "EXPECT," "PLAN,"
"WOULD" AND SIMILAR EXPRESSIONS ARE USED, THEY ARE INTENDED TO IDENTIFY THE
STATEMENTS AS FORWARD-LOOKING. CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS
THAT ARE NOT HISTORICAL FACTS, OR THAT CONCERN EXPECTED FINANCIAL PERFORMANCE,
ON-GOING BUSINESS STRATEGIES AND POSSIBLE FUTURE ACTION WHICH THE COMPANY
INTENDS TO PURSUE, CONSTITUTE SUCH FORWARD-LOOKING STATEMENTS AND ARE INTENDED
TO BE COVERED BY THE SAFE HARBORS CREATED BY SUCH ACTS. RELIANCE SHOULD NOT BE
PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED. ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE MADE. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE ON WHICH THEY ARE MADE.
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS CAN DIFFER MATERIALLY FROM RESULTS
SUGGESTED BY THESE FORWARD-LOOKING STATEMENTS BECAUSE OF A VARIETY OF FACTORS
INCLUDING, WITHOUT LIMITATION, THOSE DESCRIBED IN THIS PROSPECTUS.
------------------------
Kendle(SM), the Kendle logo, TrialWare(SM) and the names of certain other
services offered by Kendle are service marks or registered service marks 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.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS 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 PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK AND THE PURCHASE OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO
COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
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 Consolidated Financial
Statements and notes thereto. Unless otherwise indicated, the information set
forth in this Prospectus does not give effect to the exercise of the
Underwriters' over-allotment option.
THE COMPANY
Kendle is an international contract research organization ("CRO") that
provides integrated clinical research and drug development services on a
contract basis 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 I through IV
clinical trial management, clinical data management, biostatistical analysis,
medical writing and regulatory consultation and representation. Kendle believes
that it is one of a small number of international CROs capable of providing a
full range of services within multiple therapeutic areas, including
cardiovascular, central nervous system, gastrointestinal, immunology, oncology,
respiratory, skeletal disease and inflammation, and infectious disease. Since
its inception, Kendle has served more than 60 customers, including 19 of the
world's 20 largest pharmaceutical companies.
The CRO industry derives substantially all of its revenue from the
pharmaceutical and biotechnology industries. Worldwide annual expenditures on
research and development by pharmaceutical and biotechnology companies are
estimated to be $35 billion, of which the Company estimates $22 billion is spent
on drug development activities of the type offered by the CRO industry. The
Company believes that approximately $2.7 billion of such spending is outsourced
to CROs.
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 maximize 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 customers performing 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
customers who desire to use a smaller number of CROs to manage their drug
development processes; and (iv) global capabilities that encompass diverse
populations and allow simultaneous filings of registration packages in several
major jurisdictions.
Kendle's strategy is to continue to enhance its reputation as a
high-quality, international 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 customers
"one-stop shopping" with a full range of services that encompass the clinical
research process and complement the research and development departments of its
customers; (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 1997, the Company acquired two European-based CROs, U-Gene Research B.V.
("U-Gene"), based in Utrecht, The Netherlands (the "U-Gene Acquisition"), and
GMI Gesellschaft fur Angewandte Mathematik und Informatik mbH ("gmi"), based in
Munich, Germany (the "gmi Acquisition"). U-Gene provides a full range of
clinical drug development services, including Phase II through IV clinical trial
design and management, data
3
<PAGE> 5
management, statistical analysis, as well as Phase I and II(a) research studies
at its 42-bed, clinical pharmacology unit. gmi provides a wide range of clinical
drug development services, including Phase II through IV clinical trial design
and management, as well as capabilities in seminars and training programs and
health/pharmacoeconomics studies.
On February 12, 1998, the Company acquired ACER/EXCEL Inc. ("ACER/EXCEL"),
based in Cranford, New Jersey (the "ACER/EXCEL Acquisition," and together with
the U-Gene Acquisition and the gmi Acquisition, the "Acquisitions"). ACER/EXCEL
acquisition costs consisted of $14.4 million in cash and 987,574 shares of
Common Stock. ACER/EXCEL provides customers with Phase II through IV clinical
trial management, data collection, biostatistical analysis and regulatory
document preparation. ACER/EXCEL's operations complement Kendle's operations by
expanding its customer base and therapeutic expertise. ACER/EXCEL has
approximately 160 employees in its offices located at Cranford, New Jersey; New
London, Connecticut; and San Diego, California. ACER/EXCEL also provides drug
development services to the Pacific Rim through a joint venture which operates a
CRO headquartered in Beijing, China and through a limited partnership in Taiwan.
In 1997, ACER/EXCEL participated in 65 studies at approximately 550 sites,
involving approximately 10,000 patients.
The Company's principal executive offices are located at 700 Carew Tower,
441 Vine St., Cincinnati, Ohio 45202.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 2,000,000 shares
Common Stock Offered by the Selling 100,000 shares
Shareholders...............................
Common Stock to be Outstanding after the 10,615,320 shares(1)
Offering...................................
Use of Proceeds.............................. For possible acquisitions, working capital
and other general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol................ KNDL
</TABLE>
- ---------------
(1) Excludes 923,620 shares of Common Stock reserved for issuance upon exercise
of outstanding options under the Company's stock option plans as of March
31, 1998, of which 272,175 are currently exercisable at a weighted average
exercise price of $1.08 per share.
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
------ ------ ------ ------- ------- ------- ------ ------- -------
(UNAUDITED)
--------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $2,555 $4,431 $6,118 $12,959 $44,233 $67,484 $5,962 $19,765 $21,029
------ ------ ------ ------- ------- ------- ------ ------- -------
Costs and expenses:
Direct costs.................. 1,548 2,760 3,564 8,176 25,818 39,562 3,375 10,837 11,668
Selling, general and
administrative.............. 603 1,067 1,776 3,278 11,603 16,456 1,893 5,721 6,212
Depreciation and
amortization................ 111 127 168 316 1,583 3,404 151 901 1,034
------ ------ ------ ------- ------- ------- ------ ------- -------
Total costs and expenses...... 2,262 3,954 5,508 11,770 39,004 59,422 5,419 17,459 18,914
------ ------ ------ ------- ------- ------- ------ ------- -------
Income from operations.......... 293 477 610 1,189 5,229 8,062 543 2,306 2,115
Other income (expense), net..... (41) (19) (63) (55) (115) 73 (14) 172 199
------ ------ ------ ------- ------- ------- ------ ------- -------
Income before income taxes and
extraordinary item............ 252 458 547 1,134 5,114 8,135 529 2,478 2,314
Income taxes.................... 1,451 3,494 1,034 968
------ ------ ------ ------- ------- ------- ------ ------- -------
Income before extraordinary
item.......................... 252 458 547 1,134 3,663 $ 4,641 529 1,444 $ 1,346
======= =======
Extraordinary item, net of tax
benefit....................... (1,140)
------ ------ ------ ------- ------- ------ -------
Net income...................... $ 252 $ 458 $ 547 $ 1,134 $ 2,523 $ 529 $ 1,444
====== ====== ====== ======= ======= ====== =======
HISTORICAL PRO FORMA DATA(2):
Pro forma income data:
Income before extraordinary
item........................ $ 252 $ 458 $ 547 $ 1,134 $ 3,663 $ 529
Pro forma adjustment for
income taxes................ 101 183 219 453 609 212
------ ------ ------ ------- ------- ------
Pro forma income before
extraordinary item.......... 151 275 328 681 3,054 317
Extraordinary item, net of tax
benefit..................... (1,140)
------ ------ ------ ------- ------- ------
Pro forma net income.......... $ 151 $ 275 $ 328 $ 681 $ 1,914 $ 317
====== ====== ====== ======= ======= ======
Income per share data (pro forma
except for March 31, 1998,
which is historical)(3):
Basic:
Income per share before
extraordinary item.......... $ 0.04 $ 0.08 $ 0.09 $ 0.19 $ 0.60 $ 0.09 $ 0.18
Extraordinary item per
share....................... (0.22)
------ ------ ------ ------- ------- ------ -------
Net income per share.......... $ 0.04 $ 0.08 $ 0.09 $ 0.19 $ 0.38 $ 0.09 $ 0.18
====== ====== ====== ======= ======= ====== =======
Diluted:
Income per share before
extraordinary item.......... $ 0.04 $ 0.07 $ 0.09 $ 0.17 $ 0.53 $ 0.08 $ 0.17
Extraordinary item per
share....................... (0.20)
------ ------ ------ ------- ------- ------ -------
Net income per share.......... $ 0.04 $ 0.07 $ 0.09 $ 0.17 $ 0.33 $ 0.08 $ 0.17
====== ====== ====== ======= ======= ====== =======
PRO FORMA INCOME PER SHARE(4):
Basic......................... $ 0.74 $ 0.16
======= =======
Diluted....................... $ 0.67 $ 0.15
======= =======
Historical and pro forma
weighted average shares and
potential shares
outstanding(3)(4):
Basic......................... 3,650 3,650 3,650 3,650 5,055 6,270 3,650 7,960 8,592
Diluted....................... 3,804 3,804 3,852 4,017 5,763 6,880 4,030 8,611 9,244
Dividends declared per
share(5)...................... $ 0.02 $ 0.08 $ 0.10 $ 0.13 $ 0.40 $ 0.05
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------
AS
ACTUAL ADJUSTED(6)
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BALANCE SHEET DATA:
Working capital............................................. $10,650.. $58,563
Total assets................................................ 92,655.. 140,568
Total debt, excluding current portion of long-term debt..... 3,532 3,532
Total shareholders' equity.................................. 59,916 107,829
</TABLE>
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(1) The pro forma data give effect to: (i) the Acquisitions as if they had
occurred on January 1, 1997; and (ii) the application of corporate income
taxes to the Company's and ACER/EXCEL's net income at an assumed income tax
rate of 40%, which would have been recorded if the companies had been C
corporations for the entire period. See "Unaudited Pro Forma Condensed
Consolidated Statements of Operations."
(2) The historical pro forma data reflect the application of corporate income
taxes to the Company's net income at an assumed income tax rate of 40%,
which would have been recorded if the Company had been a C corporation for
all periods presented.
(3) Earnings per share calculations have been made in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128").
(4) Pro forma weighted average shares outstanding assumes that on January 1,
1997 shares were issued in the gmi and ACER/EXCEL Acquisitions and warrants
were issued in the U-Gene Acquisition.
(5) Dividends were paid prior to August 22, 1997 to enable the Company's
shareholders to pay taxes while the Company was an S corporation and to
distribute undistributed S corporation earnings previously taxed to
shareholders. The Company currently anticipates that 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.
(6) As adjusted reflects the sale by the Company of 2,000 shares of Common Stock
at the offering price of $25.375 per share, after deducting underwriting
commissions and discounts and estimated offering expenses.
6
<PAGE> 8
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 CUSTOMERS AND INDUSTRIES
During 1997 and for the first three months of 1998, revenues from G.D.
Searle & Co. accounted for approximately 54% and 43%, respectively, of the
Company's net revenues. On a pro forma basis, assuming the consummation of the
Acquisitions as of January 1, 1997, revenues from G.D. Searle & Co. represented
35% and 41% of the Company's net revenues in 1997 and the three months ended
March 31, 1998, respectively. No other customer would have accounted for more
than 10% of the Company's net revenues during these periods. However, other
Company customers have from time to time accounted for more than 10% of the
Company's net revenues. The CRO industry in general continues to be dependent on
the research and development efforts of the principal pharmaceutical and
biotechnology companies, and the Company believes that this dependence will
continue. The loss of business from any of the Company's major customers would
have a material adverse effect on the Company for each respective period. See
"Business -- Customers and Marketing."
As a provider of integrated product development services to the
pharmaceutical and biotechnology industries, the Company is highly dependent for
its revenues 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 customer upon
30 days' notice. Customers may terminate or delay contracts for a variety of
reasons, including the failure of products to satisfy safety requirements,
unexpected or undesired clinical results, developments in the Food and Drug
Administration ("FDA") review process, the customer'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."
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.
7
<PAGE> 9
MANAGEMENT OF GROWTH; ASSIMILATION OF INTERNATIONAL OPERATIONS
The Company has experienced rapid growth over the past several 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 by the Company to meet the demands of and to manage growth of
its business and operations could have a material adverse effect on the
Company's business. Expansion of the Company's international operations also
involve the additional risks of assimilating differences in business practices,
hiring, retaining and integrating qualified personnel and overcoming language
barriers.
RISKS ASSOCIATED WITH ACQUISITIONS
Kendle has made three acquisitions in the last twelve months and 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; interruptions of the sales efforts 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 non-U.S. companies
involve the additional risks of, among others, assimilating differences in
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."
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 customers; changes in customer
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."
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, some 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.
8
<PAGE> 10
This consolidation trend has been caused, in part, by the decision of
pharmaceutical and biotechnology company customers 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 customers 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, the Company
conducts Phase I trials and is subject to the general risks associated with such
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. The Company also carries liability insurance to mitigate 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 or insurance coverage that may exist with
customers, or if any such indemnification agreement or insurance coverage,
although in place, is not performed or given effect in accordance with its terms
or if the Company's liability exceeds the amount of applicable insurance, this
could have a material adverse effect on the Company. There can be no assurance
that the Company's insurance coverage will continue to be available on terms
acceptable to the Company. See "Business -- Potential Liability and Insurance."
SUBSTANTIAL INTANGIBLE ASSETS
At March 31, 1998, approximately 44% of the Company's assets consisted of
intangible assets, which reflects the excess of the consideration paid for the
Acquisitions over the value of the net tangible assets acquired. Downturns in
the businesses acquired by the Company during 1997 and 1998 could erode the
value of those intangible assets and cause write-downs of assets and charges to
earnings thereby adversely affecting the Company's financial condition and
operating results.
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, 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
9
<PAGE> 11
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 K. 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.
SUBSTANTIAL COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS;
UNDESIGNATED PREFERRED STOCK
After the Offering, Dr. Bryan and Mr. Bergen will control approximately
22.9% of Kendle's outstanding Common Stock (approximately 22.2% 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 24.1% 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."
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 certain 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 90 days after the date of this Prospectus without the prior
written consent of the Underwriters. See "Underwriting."
ADVERSE EFFECT OF EXCHANGE RATE FLUCTUATIONS
The Company's international operations have increased as a result of the
U-Gene and gmi Acquisitions. Since the revenues and expenses of the Company's
international operations are generally denominated in foreign currencies,
exchange rate fluctuations between foreign currencies and the United States
dollar will subject the Company to currency translation risk with respect to the
results of its international operations. To the extent the Company is unable to
shift to its customers the risk of currency fluctuations, these fluctuations
could have a material adverse effect on the Company's results of operations.
IMPACT OF THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or data corruption causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
business activities.
10
<PAGE> 12
The Company has made an initial assessment of the Year 2000 Issue and its
potential impact. The Company currently believes that it can mitigate the impact
of the Year 2000 Issue internally through modifications to existing software and
conversions to new software. The Company has also initiated formal
communications with its suppliers and customers to evaluate the possible effects
of such parties' failure to remediate their Year 2000 Issue. A failure by the
Company, its suppliers or its customers to adequately address the Year 2000
Issue could have a material adverse effect on the operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of the Year 2000 Issue."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby by the Company are estimated to be approximately
$47.9 million (approximately $55.5 million if the Underwriters' over-allotment
option is exercised in full) assuming a public offering price of $25.375 per
share, and after deducting the underwriting discount and commissions and
estimated offering expenses. The Company will receive no proceeds from the sale
of Common Stock by the Selling Shareholders.
The Company expects to use the net proceeds for possible acquisitions,
working capital and other general corporate purposes. However, the Company has
no commitments or agreements with respect to any acquisition transaction as of
the date of this Prospectus. Pending such uses, the Company intends to invest
the net proceeds from the offering in short-term, investment-grade,
interest-bearing securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "KNDL." Public trading of the Common Stock commenced on August 22,
1997. Prior to that time, there was no public market for the Company's Common
Stock. The following table sets forth the high and low sales prices for the
Common Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1998:
First quarter............................................. $ 26 3/16 $ 15
Second quarter (through May 19)........................... $ 27 1/8 $ 22 3/4
1997:
Third quarter (from August 22)............................ $ 18 3/4 $ 15 1/4
Fourth quarter............................................ $ 18 1/8 $ 10 1/2
</TABLE>
On May 19, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $25.375 per share.
DIVIDEND POLICY
Since its initial public offering (the "IPO"), the Company has not paid or
declared any dividends on its Common Stock and does not anticipate paying any
cash dividends in the foreseeable future. The Company intends to retain future
earnings to fund the development and growth of its business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company's revolving credit
facility prohibits the declaration and payment of cash dividends, but does
permit the declaration and payment of dividends in shares of the Company's
Common Stock.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998: (i) on an actual basis and (ii) on an as adjusted basis to
reflect the sale of 2,000,000 shares of Common Stock offered by the Company at
an assumed offering price of $25.375 per share, after deducting underwriting
discounts and commissions and estimated offering expenses. This table should be
read in conjunction with the Company's consolidated financial statements and
notes thereto and the Unaudited Pro Forma Condensed Consolidated Financial
Statements included elsewhere in this Prospectus. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AT
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and available for sale securities.... $ 9,840 $ 57,753
======= ========
Short-term debt:
Current portion of capital lease obligations.............. $ 924 $ 924
Obligations under capital leases, less current portion...... 2,092 2,092
Note payable................................................ 1,440 1,440
Shareholders' equity:
Preferred stock; 100,000 shares authorized; no shares
issued or outstanding..................................
Common stock, 15,000,000 shares authorized; 8,282,685
shares issued and outstanding; 10,282,685 shares issued
and outstanding, as adjusted(1)(2)..................... 75 75
Additional paid-in capital(2)............................. 58,680 106,593
Net unrealized holdings gains (losses) on available for
sale securities, net of tax............................ 64 64
Cumulative foreign currency translation adjustment........ (699) (699)
Retained earnings......................................... 1,796 1,796
------- --------
Total shareholders' equity............................. 59,916 107,829
------- --------
Total capitalization................................. $64,372 $112,285
======= ========
</TABLE>
- ---------------
(1) Excludes 923,620 shares of Common Stock reserved for issuance upon exercise
of outstanding options under the Company's stock option plans as of March
31, 1998, of which 272,175 are currently exercisable at a weighted average
exercise price of $1.08 per share.
(2) Excludes 321,740 shares of Common Stock issued in conjunction with the
ACER/EXCEL Acquisition currently held in escrow pursuant to the terms of the
Stock Purchase Agreement for such acquisition.
13
<PAGE> 15
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma condensed consolidated statements of operations for
the three month period ended March 31, 1998 and the year ended December 31, 1997
give effect to the Acquisitions as if they had occurred on January 1, 1997.
These statements have been prepared from the historical financial statements of
the Company, U-Gene, gmi and ACER/EXCEL and should be read in conjunction with
such statements and the notes thereto, which are included elsewhere herein.
The unaudited pro forma condensed consolidated statements of operations
give effect only to the 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 periods.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL TOTAL
ACER/ COMBINED
ACTUAL EXCEL PRO FORMA PRO
KENDLE 1/1/98-2/11/98 ADJUSTMENTS FORMA
------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues.................................. $19,765 $1,264 $21,029
Costs and expenses:
Direct costs................................ 10,837 831 11,668
Selling, general and administrative......... 5,721 491 6,212
Depreciation and amortization............... 901 59 $ 74(2) 1,034
------- ------ ----- -------
Total costs and expenses................. 17,459 1,381 74 18,914
------- ------ ----- -------
Income (loss) from operations................. 2,306 (117) (74) 2,115
Other income, net............................. 172 27 199
------- ------ ----- -------
Income (loss) before income taxes............. 2,478 (90) (74) 2,314
Income taxes.................................. 1,034 (66)(5) 968
------- ------ ----- -------
Net income (loss)............................. $ 1,444 $ (90) $ (8) $ 1,346
======= ====== ===== =======
Income per share data:
Basic:
Weighted average shares outstanding......... 8,592(4)
Net income per share........................ $ 0.16
Diluted:
Weighted average shares and potential shares
outstanding.............................. 9,244(4)
Net income per share........................ $ 0.15
</TABLE>
See notes on the following page
14
<PAGE> 16
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL PRO KENDLE ACTUAL PRO
ACTUAL U-GENE FORMA PRO ACER/ FORMA TOTAL COMBINED
KENDLE & GMI(1) ADJUSTMENTS FORMA EXCEL ADJUSTMENTS PRO FORMA
------- -------- ----------- ------- ------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................. $44,233 $10,551 $54,784 $12,700 $67,484
Costs and expenses:
Direct costs................ 25,818 7,304 33,122 6,440 39,562
Selling, general and
administrative............ 11,603 1,851 13,454 3,002 16,456
Depreciation and
amortization.............. 1,583 259 $ 500(2) 2,342 306 $ 756(2) 3,404
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses................ 39,004 9,414 500 48,918 9,748 756 59,422
------- ------- ------- ------- ------- ------- -------
Income from operations........ 5,229 1,137 (500) 5,866 2,952 (756) 8,062
Other income, net............. (115) 40 (75) 148 73
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
extraordinary item.......... 5,114 1,177 (500) 5,791 3,100 (756) 8,135
Income taxes.................. 1,451 571 538(3) 2,560 173 761(5) 3,494
------- ------- ------- ------- ------- ------- -------
Income before extraordinary
item........................ $ 3,663 $ 606 $(1,038) $ 3,231 $2,927 $(1,517) $ 4,641
======= ======= ======= ======= ======= ======= =======
Income per share data:
Basic:
Weighted average shares
outstanding............... 6,270(4)
Income per share before
extraordinary item........ $ 0.74
Diluted:
Weighted average shares and
potential shares
outstanding............... 6,880(4)
Income per share before
extraordinary item........ $ 0.67
</TABLE>
- ---------------
(1) Represents the historical results of operations of U-Gene and gmi prior to
the Company's acquisitions on June 30, 1997 and September 3, 1997,
respectively. See also Note 8 to the historical U-Gene consolidated
financial statements included elsewhere herein.
(2) Adjusted to reflect amortization expense. The excess of the cost of the
Acquisitions over net assets acquired is being amortized over 30 years using
the straight line method. The total pro forma purchase price of the
ACER/EXCEL Acquisition includes $8,000 ($2,820 in cash and 322 shares of the
Company's Common Stock) placed in escrow, $6,000 of which relates to a
pending issue relating to ACER/EXCEL's S corporation status and $2,000 of
which relates to indemnification for breach of the sellers' representations
and warranties. The escrowed amounts have been included in the computation
of the cost of the ACER/EXCEL Acquisition over the net assets acquired for
purposes of this pro forma presentation. See also Note 13 to the Company's
consolidated financial statements included elsewhere herein.
(3) Adjusted to reflect: (a) the application of corporate income taxes to the
Company's net income at an assumed income tax rate of 40% which would have
been recorded if the Company had been a C corporation for the entire period;
(b) the application of corporate income taxes for U-Gene and gmi at
effective tax rates of 35% and 43%, respectively; and (c) 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 $249 and the gmi Acquisition of $63.
(4) Pro forma weighted average shares outstanding for the year ended December
31, 1997 assumes: (a) the issuance of 988 and 191 shares of the Company's
Common Stock for the ACER/EXCEL and gmi Acquisitions, respectively; and (b)
the issuance of 154 shares of the Company's Common Stock upon exercise of
warrants issued in connection with the U-Gene Acquisition. Pro forma
weighted average shares for the three months ended March 31, 1998 assumes
the issuance of 988 shares of the Company's Common Stock for the ACER/EXCEL
Acquisition.
(5) Adjusted to reflect the tax effect of the pro forma adjustment using an
estimated income tax rate of 40%.
15
<PAGE> 17
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For each of the years in the five-year period ended December 31, 1997, the
selected financial data are derived from financial statements that have been
audited by Coopers & Lybrand L.L.P., independent accountants. The consolidated
financial statements as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997 appear elsewhere in this Prospectus.
The balance sheet data as of March 31, 1998 and the statement of operations data
for the three months ended March 31, 1997 and 1998 are derived from unaudited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, which are necessary for a fair presentation of
such financial statements. The selected pro forma financial data are derived
from the unaudited pro forma condensed consolidated statements of operations
included elsewhere in this Prospectus. The data set forth below should be read
in conjunction with the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997(1) 1997(2) 1997 1998(1) 1998(2)
------ ------ ------ ------- ------- ------- ------ ------- -------
(UNAUDITED)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $2,555 $4,431 $6,118 $12,959 $44,233 $67,484 $5,962 $19,765 $21,029
------ ------ ------ ------- ------- ------- ------ ------- -------
Costs and expenses:
Direct costs............................ 1,548 2,760 3,564 8,176 25,818 39,562 3,375 10,837 11,668
Selling, general and administrative..... 603 1,067 1,776 3,278 11,603 16,456 1,893 5,721 6,212
Depreciation and amortization........... 111 127 168 316 1,583 3,404 151 901 1,034
------ ------ ------ ------- ------- ------- ------ ------- -------
Total costs and expenses.............. 2,262 3,954 5,508 11,770 39,004 59,422 5,419 17,459 18,914
------ ------ ------ ------- ------- ------- ------ ------- -------
Income from operations.................... 293 477 610 1,189 5,229 8,062 543 2,306 2,115
Other income (expense), net............... (41) (19) (63) (55) (115) 73 (14) 172 199
------ ------ ------ ------- ------- ------- ------ ------- -------
Income before income taxes and
extraordinary item...................... 252 458 547 1,134 5,114 8,135 529 2,478 2,314
Income taxes.............................. 1,451 3,494 1,034 968
------ ------ ------ ------- ------- ------- ------ ------- -------
Income before extraordinary item.......... 252 458 547 1,134 3,663 $ 4,641 529 1,444 $ 1,346
======= =======
Extraordinary item, net of tax benefit.... (1,140)
------ ------ ------ ------- ------- ------ -------
Net income................................ $ 252 $ 458 $ 547 $ 1,134 $ 2,523 $ 529 $ 1,444
====== ====== ====== ======= ======= ====== =======
HISTORICAL PRO FORMA DATA(3):
Pro forma income data:
Income before extraordinary item........ $ 252 $ 458 $ 547 $ 1,134 $ 3,663 $ 529
Pro forma adjustment for income taxes... 101 183 219 453 609 212
------ ------ ------ ------- ------- ------
Pro forma income before extraordinary
item.................................. 151 275 328 681 3,054 317
Extraordinary item, net of tax
benefit............................... (1,140)
------ ------ ------ ------- ------- ------
Pro forma net income...................... $ 151 $ 275 $ 328 $ 681 $ 1,914 $ 317
====== ====== ====== ======= ======= ======
Income per share data (pro forma except
for March 31, 1998, which is
historical)(4):
Basic:
Income per share before extraordinary
item.................................. $ 0.04 $ 0.08 $ 0.09 $ 0.19 $ 0.60 $ 0.09 $ 0.18
Extraordinary item per share............ (0.22)
------ ------ ------ ------- ------- ------ -------
Net income per share...................... $ 0.04 $ 0.08 $ 0.09 $ 0.19 $ 0.38 $ 0.09 $ 0.18
====== ====== ====== ======= ======= ====== =======
Diluted:
Income per share before extraordinary
item.................................. $ 0.04 $ 0.07 $ 0.09 $ 0.17 $ 0.53 $ 0.08 $ 0.17
Extraordinary item per share............ (0.20)
------ ------ ------ ------- ------- ------ -------
Net income per share...................... $ 0.04 $ 0.07 $ 0.09 $ 0.17 $ 0.33 $ 0.08 $ 0.17
====== ====== ====== ======= ======= ====== =======
PRO FORMA INCOME PER SHARE:
Basic................................... $ 0.74 $ 0.16
======= =======
Diluted................................. $ 0.67 $ 0.15
======= =======
Historical and pro forma weighted average
shares and potential shares
outstanding(4)(5):
Basic................................... 3,650 3,650 3,650 3,650 5,055 6,270 3,650 7,960 8,592
Diluted................................. 3,804 3,804 3,852 4,017 5,763 6,880 4,030 8,611 9,244
Dividends declared per share(6)........... $ 0.02 $ 0.08 $ 0.10 $ 0.13 $ 0.40 $ 0.05
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AT MARCH 31, 1998
AT DECEMBER 31, -----------------------
--------------------------------------------- AS
1993 1994 1995 1996 1997(1) ACTUAL(1) ADJUSTED(7)
------ ------ ------- ------- ------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ (492) $ (208) $ (139) $ (294) $20,710 $10,650 $58,563
Total assets........................... 2,181 1,874 2,432 8,623 79,625 92,655 140,568
Total debt, excluding current portion
of long-term debt.................... 173 139 151 761 3,087 3,532 3,532
Total shareholders' equity............. (343) 51 345 944 50,349 59,916 107,829
</TABLE>
- ---------------
(1) Since June 1, 1997, the Company has completed three acquisitions. See Notes
12 and 13 to the consolidated financial statements contained elsewhere in
this Prospectus.
(2) The pro forma data give effect to (i) the Acquisitions as if they had
occurred on January 1, 1997; and (ii) the application of corporate income
taxes to the Company's and ACER/EXCEL's net income at an assumed income tax
rate of 40%, which would have been recorded if the companies had been C
corporations for the entire period. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
(3) The historical pro forma data reflect the application of corporate income
taxes to the Company's net income at an assumed income tax rate of 40%,
which would have been recorded if the Company had been a C corporation for
all periods presented.
(4) Earnings per share calculations have been made in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128").
(5) Pro forma weighted average shares outstanding assumes that on January 1,
1997 shares were issued in the gmi and ACER/EXCEL Acquisitions and warrants
were issued in the U-Gene Acquisition.
(6) Dividends were paid prior to August 22, 1997 to enable the Company's
shareholders to pay taxes while the Company was an S corporation and to
distribute undistributed S corporation earnings previously taxed to
shareholders. The Company currently anticipates that 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.
(7) As adjusted reflects the sale by the Company of 2,000 shares of Common Stock
offered by the Company at the offering price of $25.375 per share, after
deducting underwriting commissions and discounts and estimated offering
expenses.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Kendle provides integrated clinical research services on a contract basis
to the pharmaceutical and biotechnology industries. These services include Phase
I through IV clinical trial management, clinical data management, statistical
analysis, medical writing and regulatory consultation and representation.
The Company'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. Most of the Company's
contracts are terminable upon 30 days' notice by the customer. Customers
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 customer'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.
The Company generally recognizes revenues from contracts on the percentage
of completion method, measured principally by the total costs incurred as a
percentage of estimated total costs for each contract. The Company 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 adjustments to revenues resulting from such revisions being
recorded on a cumulative basis for 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 customers, 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 1997, the Company acquired two European-based contract research
organizations ("CROs"), U-Gene Research B.V. ("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 through IV
clinical trial design and management, data management, statistical analysis, as
well as Phase I and II(a) research studies at its 42-bed, clinical pharmacology
unit. gmi provides a wide range of clinical drug development services, including
Phase II through IV clinical trial design and management, as well as
capabilities in seminars and training programs and health/pharmacoeconomics
studies. The U-Gene acquisition was completed as of June 30, 1997, and the gmi
acquisition was completed on September 3, 1997.
The Company completed its acquisition of ACER/EXCEL Inc. ("ACER/EXCEL"), a
full-service CRO headquartered in Cranford, New Jersey, on February 12, 1998.
ACER/EXCEL provides customers with Phase II through IV clinical trial
management, data collection, statistical analysis and regulatory document
preparation. ACER/EXCEL employs approximately 160 employees in its Cranford, New
Jersey; New London, Connecticut; and San Diego, California offices. It also
provides drug development services to the Pacific Rim through a joint venture
which operates a CRO headquartered in Beijing, China and through a limited
partnership in Taiwan.
18
<PAGE> 20
The U-Gene, gmi and ACER/EXCEL acquisitions were accounted for using the
purchase method of accounting with goodwill, as a result of the transactions,
being amortized over 30 years. The results of operations are included in the
Company's consolidated statements of operations from the respective dates of
acquisition.
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
PERCENTAGE OF NET REVENUES INCREASE (DECREASE)
------------------------------------- ----------------------------------
THREE THREE
MONTHS MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MARCH 31, YEAR YEAR MARCH 31,
--------------------- ------------- --------- --------- ----------
1995 TO 1996 TO 1997 TO
1995 1996 1997 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% 112% 241% 232%
Costs and expenses
Direct costs............................. 58.3 63.1 58.4 56.6 54.8 129 216 221
Selling, general and administrative...... 29.0 25.3 26.2 31.8 29.0 85 254 202
Depreciation and amortization............ 2.7 2.4 3.6 2.5 4.5 88 402 500
Income from operations..................... 10.0 9.2 11.8 9.1 11.7 95 340 325
Other income (expense), net................ (1.0) (0.4) (0.2) (0.2) 0.8 -- -- --
Income before income taxes and
extraordinary item....................... 9.0 8.8 11.6 8.9 12.5 107 351 369
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenues increased by $13.8 million, or 232%, from $6.0 million for the
three months ended March 31, 1997 to $19.8 million for the three months ended
March 31, 1998. The increase in net revenues was due to: (i) 35 new projects
commenced in the three months ended March 31, 1998, which resulted in net
revenues of $4.6 million for the three months ended March 31, 1998; (ii) a net
increase in revenues recognized on existing projects of $1.6 million; and (iii)
an increase of approximately $7.6 million in net revenues relating to the
Company's recent acquisitions. Revenues from G.D. Searle & Co. accounted for
approximately 43% of net revenues for the three months ended March 31, 1998 and
no other customer accounted for more than 10% of the Company's net revenues for
the three months ended March 31, 1998.
Direct costs increased by $7.4 million, or 221%, from $3.4 million for the
three months ended March 31, 1997 to $10.8 million for the three months ended
March 31, 1998. This increase is primarily comprised of: (i) approximately $6.6
million in direct salaries and fringe benefits to support the increases in net
revenues for the period; and (ii) an increase of approximately $800,000 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 56.6% for the three months ended March 31, 1997 to 54.8%
for the three months ended March 31, 1998. 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.
Selling, general and administrative expenses increased by $3.8 million, or
202%, from $1.9 million for the three months ended March 31, 1997 to $5.7
million for the three months ended March 31, 1998. The increase is primarily
comprised of: (i) an increase of approximately $2.3 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; (ii) an
increase of approximately $541,000 in rent and other facilities expenses; and
(iii) an increase of approximately $1.0 million consisting of increases in
training, contractual services, recruiting, and marketing and advertising
expenses for the three months ended March 31, 1998 as compared to the same
period in 1997. Selling, general and administrative expenses expressed as a
percentage of net revenues decreased from 31.8% for the three months ended March
31, 1997 to 29.0% for the three months ended March 31, 1998.
19
<PAGE> 21
Depreciation and amortization expense increased $751,000, or 500%, from
$150,000 for the three months ended March 31, 1997 to $901,000 for the three
months ended March 31, 1998. The increase was due to capital expenditures and
amortization of goodwill as a result of the Company's recent acquisitions.
Income taxes of $1.0 million, or 41.7% of income before income taxes, were
recorded for the three months ended March 31, 1998. No income taxes were
recorded with respect to periods prior to the Company's IPO as the Company was
taxed as an S corporation.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues increased by $31.2 million, or 241%, from $13.0 million for
the year ended December 31, 1996 to $44.2 million for the year ended December
31, 1997. The increase in net revenues was due to (i) 57 new projects commenced
in 1997, which resulted in net revenues of $10.0 million for the year ended
December 31, 1997; (ii) a net increase in revenues recognized on existing
projects of $10.8 million; and (iii) an increase of approximately $10.6 million
in net revenues relating to the U-Gene and gmi acquisitions. Revenues from G.D.
Searle & Co. accounted for approximately 54% of net revenues for the year ended
December 31, 1997. Net revenues from customers other than G.D. Searle & Co.
increased $13.8 million, or 206%, from $6.7 million for the year ended December
31, 1996 to $20.5 million for the year ended December 31, 1997, and no other
customer accounted for more than 10% of the Company's net revenues for the year
ended December 31, 1997.
Direct costs, including costs of acquired companies, increased by $17.6
million, or 216% from $8.2 million for the year ended December 31, 1996 to $25.8
million for the year ended December 31, 1997. This increase was primarily
comprised of: (i) approximately $12.0 million in direct salaries and fringe
benefits to support the increase in net revenues for the period; and (ii) an
increase of approximately $5.6 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 63.1% for the
year ended December 31, 1996 to 58.4% for the year ended December 31, 1997. The
decrease in those costs as a percentage of net revenues was due primarily to the
absorption of direct project-related costs over a larger revenue base.
Selling, general and administrative expenses, including costs of acquired
companies, increased by $8.3 million or 254% from $3.3 million for the year
ended December 31, 1996 to $11.6 million for the year ended December 31, 1997.
Selling, general and administrative expenses expressed as a percentage of net
revenues increased from 25.3% for the year ended December 31, 1996 to 26.2% for
the year ended December 31, 1997. The increase was primarily comprised of: (i)
an increase of approximately $4.1 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; and (ii) increases in training
($535,000), contractual services ($553,000), recruiting ($491,000), conferences
and seminars ($491,000), and professional services ($331,000) expenses for the
year ended December 31, 1997 as compared to the year ended December 31, 1996.
Depreciation and amortization expense increased $1.3 million, or 402%, from
$316,000 for the year ended December 31, 1996 to $1.6 million for the year ended
December 31, 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.
Income taxes of $1.5 million, or 28.4% of income before income taxes and
extraordinary item, were recorded for the year ended December 31, 1997. No
income taxes were recorded with respect to periods prior to the IPO, as the
Company was taxed as an S corporation.
Net income of $2.5 million for the year ended December 31, 1997 includes a
$1.1 million extraordinary loss, net of a $400,000 tax benefit, associated with
the early extinguishment of indebtedness which resulted from the repayment with
proceeds from the IPO of borrowings made by the Company in connection with the
U-Gene acquisition.
20
<PAGE> 22
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 projects commenced in 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 customers 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 was 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 was 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 was 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.
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.
QUARTERLY 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 customers; changes in customer
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. Accordingly, the relationship between net
revenues and direct costs may vary.
The following table presents unaudited quarterly operating results for the
Company for each of the nine most recent quarters in the period ended March 31,
1998. In the opinion of the Company, this information is prepared on the same
basis as the Consolidated Financial Statements appearing elsewhere in this
Prospectus and reflects all 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 Consolidated
21
<PAGE> 23
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
The operating results for any quarter are not indicative of the results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31 MAR 31,
1996 1996 1996 1996 1997 1997 1997(1) 1997 1998(2)
---- ---- ---- ---- ---- ---- ------- ---- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $2,063 $2,630 $3,607 $4,659 $5,962 $7,210 $12,518 $18,543 $19,765
------ ------ ------ ------ ------ ------ ------- ------- -------
Costs and expenses:
Direct costs....... 1,395 1,781 2,441 2,560 3,375 3,971 7,116 11,355 10,837
Selling, general
and
administrative... 372 646 818 1,442 1,893 2,108 3,360 4,242 5,721
Depreciation and
amortization..... 45 46 51 173 151 141 514 778 901
------ ------ ------ ------ ------ ------ ------- ------- -------
Total costs and
expenses....... 1,812 2,473 3,310 4,175 5,419 6,220 10,990 16,375 17,459
------ ------ ------ ------ ------ ------ ------- ------- -------
Income from
operations......... 251 157 297 484 543 990 1,528 2,168 2,306
Other income
(expense), net..... (16) (10) (3) (26) (14) (53) (203) 154 172
------ ------ ------ ------ ------ ------ ------- ------- -------
Income before
extraordinary
item............... $ 235 $ 147 $ 294 $ 458 $ 529 $ 937 $ 1,325 $ 2,322 $ 2,478
====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) On June 30, 1997 and September 3, 1997 the Company acquired U-Gene and gmi,
respectively. Results of operations of these acquisitions have been included
since these dates.
(2) On February 12, 1998 the Company acquired ACER/EXCEL. Results of operations
of this acquisition have been included since this date.
LIQUIDITY AND CAPITAL RESOURCES
On August 22, 1997, the Company and its shareholders completed the IPO in
which 3,540,000 shares of Common Stock were sold by the Company at a price to
the public of $14.00 per share. Net proceeds to the Company approximated $45.2
million.
Cash and cash equivalents decreased by $7.8 million for the three months
ended March 31, 1998 as a result of cash used in operating, investing, and
financing activities of $2.3 million, $5.3 million and $0.2 million,
respectively. Net cash used in operating activities resulted primarily from net
income offset by additional working capital used to support the Company's
growth. Investing activities for the three months ended March 31, 1998 consisted
primarily of the costs related to the ACER/EXCEL acquisition of $9.8 million,
net of cash acquired.
Cash and cash equivalents increased by $13.7 million for the year ended
December 31, 1997 as a result of cash provided by operating and financing
activities of $6.5 million and $41.6 million, respectively, and cash used in
investing activities of $34.4 million. Net cash provided by operating activities
resulted primarily from net income offset by the net change in working capital
items.
Investing activities for the year ended December 31, 1997 primarily
consisted of the costs related to the U-Gene Acquisition and the gmi Acquisition
of $22.9 million and the purchase of available for sale securities of $10.9
million. Financing activities for the year ended December 31, 1997 primarily
consisted of $45.2 million of net proceeds from the Company's IPO.
Cash and cash equivalents increased by $2.1 million during the year ended
December 31, 1996 as a result of $3.3 million in cash provided by operating
activities and $400,000 and $800,000 in cash used by investing and financing
activities, respectively. Net cash provided by operating activities resulted
primarily from net income and the net change in working capital items.
Investing activities for the year ended December 31, 1996 primarily
consisted of property and equipment purchases of $407,000. Financing activities
for the year ended December 31, 1996 consisted of a net repayment
22
<PAGE> 24
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.
In March, 1998, the Company amended its senior secured revolving credit
facility (the "Senior Credit Facility"). The $30 million Senior Credit Facility
bears interest at 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%, plus the
Applicable Margin. All amounts outstanding thereunder are payable in June, 2000.
The Senior Credit Facility includes various restrictive covenants including the
maintenance of certain fixed coverage and leverage ratios as well as minimum net
worth levels. There are currently no outstanding borrowings under the Senior
Credit Facility.
On February 12, 1998, the Company completed its acquisition of ACER/EXCEL.
Total acquisition costs consisted of $14.4 million in cash and 987,574 shares of
the Company's Common Stock. The cash portion of the acquisition was funded from
the Company's existing cash. The total purchase price includes $2.8 million in
cash and 197,516 shares of the Company's Common Stock placed in escrow pending
resolution of an issue relating to ACER/EXCEL's S corporation tax status ("Tax
Escrow"). An additional 124,224 shares of the Company's Common Stock were placed
in escrow for indemnification of sellers' representations and warranties
("General Escrow") to be released, 50% in February 1999 and 50% in February,
2000. If the S corporation tax issue is resolved in favor of the sellers, 62,112
shares of the Company's Common Stock will be transferred from the Tax Escrow to
the General Escrow for additional indemnification of sellers' representations
and warranties.
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 Senior Credit Facility and the net proceeds from the offering, will be
sufficient to meet its foreseeable cash needs, including possible acquisitions.
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 additional public or private issuances of
equity or debt securities. There can be no assurances that such financings will
be available on terms acceptable to the Company.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on an initial assessment, the Company determined that it may be
required to modify or replace significant portions of its software at an
estimated total cost of $800,000, a small portion of which has been spent to
date, so that systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. The Company
plans to be substantially complete with the Year 2000 project by December 31,
1998.
The Company has initiated formal communications with its suppliers and
customers to evaluate the extent to which the Company is vulnerable to those
third parties' failure to remediate their Year 2000 Issue. The Company's total
Year 2000 estimated costs could increase substantially as a result of a third
party's failure to adequately address the Year 2000 Issue. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely matter, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors.
23
<PAGE> 25
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. See "Risk
Factors -- Impact of the Year 2000."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information." This statement requires selected
information to be reported on the Company's operating segments. Operating
segments are determined by the way management structures the segments in making
operating decisions and assessing performance. The Company is currently
reviewing what changes, if any, this will require on the presentation of the
financial statements for fiscal periods beginning after December 15, 1997.
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
defines the accounting for computer software developed or obtained (purchased)
for internal use, including (1) a requirement to capitalize specified costs as a
long-lived asset, (2) amortization of such amounts, and (3) recognition and
measurement of impairment of those amounts. The Company plans to adopt the SOP
on January 1, 1999. The Company does not believe the adoption of this SOP will
have a material impact on its financial statements.
24
<PAGE> 26
BUSINESS
OVERVIEW
The Company is an international CRO that provides integrated 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 I
through IV clinical trial management, clinical data management, biostatistical
analysis, medical writing and regulatory consultation and representation. The
Company believes that it is one of a small number of CROs capable of providing a
broad range of services on an international basis within multiple therapeutic
areas, including cardiovascular, central nervous system, gastrointestinal,
immunology, oncology, respiratory, skeletal disease and inflammation and
infectious disease.
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
customers who desire to use a smaller number of 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.
The Company'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 customers "one-stop shopping" with a
full range of services that encompass the clinical research process and
complement the research and development departments of its customers; (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.
During 1997, the Company acquired two European-based CROs, U-Gene based in
Utrecht, The Netherlands, and gmi based in Munich, Germany. U-Gene provides a
full range of clinical drug development services including Phase II through IV
clinical trial design and management, data management, statistical analysis, as
well as Phase I and II(a) research studies at its 42-bed clinical pharmacology
unit. gmi provides a wide range of clinical drug development services, including
Phase II through IV clinical trial design and management, as well as
capabilities in seminars and training programs and health/pharmacoeconomics
studies.
The Company completed the acquisition of ACER/EXCEL, a full-service CRO
headquartered in Cranford, New Jersey, on February 12, 1998. ACER/EXCEL provides
customers with Phase II through IV clinical trial management, data collection,
statistical analysis and regulatory document preparation. ACER/EXCEL's
operations complement Kendle's operations by expanding its customer base and
therapeutic expertise. ACER/EXCEL has approximately 160 employees in its
Cranford, New Jersey; New London, Connecticut; and San Diego, California
offices. It also provides drug development services to the Pacific Rim, through
a joint venture which operates a CRO headquartered in Beijing, China and through
a limited partnership in Taiwan.
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, biostatistical analysis and product registration support. These
services are provided in accordance with government regulations covering
clinical trials and the drug approval process.
25
<PAGE> 27
Worldwide annual expenditures on research and development by pharmaceutical
and biotechnology companies are estimated to be $35 billion, of which the
Company estimates $22 billion is spent on drug development activities offered by
the CRO industry. The Company believes that approximately $2.7 billion of such
spending is outsourced to CROs.
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 and
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 trial 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 customer 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 customer'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 Customers. Customers and potential customers frequently
consider the proximity of a company as a factor in selecting a CRO for a
project. The Company currently has seven domestic offices and five
international offices and plans to establish additional domestic or
international offices where customer relationships would be enhanced.
Management believes that the availability of offices that are convenient to
customers will be an increasingly important factor in gaining and retaining
customer 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
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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.
COMPANY STRATEGY
The Company's objective is to grow as a high-quality provider of a full
range of CRO services. The Company 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 customers.
Excellent Customer Relationships. The Company invests significant
time and effort in building excellent relationships with its customers. It
accomplishes this through a combination of high quality, timely and cost
effective services that are designed to be highly responsive to its
customers' needs. The Company believes that the relationships developed by
its regional offices have been a key factor in gaining and retaining
certain customer business. The Company has seven domestic offices and five
international offices and plans to establish additional domestic or
international offices where customer relationships would be enhanced.
Therapeutic Area Expertise. The Company believes that it is better
able to serve its customers' 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, and infectious disease.
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 the Company to grow its revenues from
existing customers and win new customer 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 customers. These services
include clinical trial 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 customers' 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
continue to supplement its internal growth through strategic acquisitions
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 continue 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 customer relationships and obtaining customers.
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<PAGE> 29
International Support. The Company believes that its ability to
conduct clinical trials worldwide enhances its ability to serve the
increasingly global model of drug development. The Company has expanded
internationally by strategic acquisitions with a goal of serving all major
customer markets worldwide and positioning the Company to serve developing
markets. The Company is conducting a number of multinational clinical
studies designed to pursue concurrent regulatory approvals in multiple
countries. The Company believes that the expertise developed by conducting
multi-jurisdictional clinical trials is a competitive advantage as
pharmaceutical companies increasingly pursue regulatory approvals in
multiple jurisdictions in parallel. The Company believes that the efficient
delivery of high-quality clinical services requires adherence to
standardized procedures on a worldwide basis. The Company has devoted
considerable resources to developing internal standard operating
procedures. These procedures, together with the Company's information
technology, enable the Company to reduce the time involved in preparing
regulatory submissions by concurrently compiling and analyzing large
volumes of data from multinational trials and preparing regulatory
submissions for filings on a global basis.
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 customers. 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
"Customers and Marketing."
INFORMATION TECHNOLOGY
The Company believes that superior information technology is essential to
providing its customers with innovative services which expedite the clinical
trials process. The Company offers its customers 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) family of technology
tools includes:
TrialBase(SM), 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(SM), 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(SM), 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(SM), 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 customer requirements.
TriAlert(SM), 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
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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
customer specific dictionary. The system provides greater flexibility in
meeting the customer's coding requirements.
The Company believes that its TrialWare(SM) family of technology tools
provides a competitive advantage by more fully integrating the Company's
operations with the investigative site clinical trial activities. The Company
also has the ability to meet its customers' 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 customers in optimizing their research
and development spending through the clinical stages of the drug development
process. The Company provides Phase I through IV clinical trial management,
clinical data management and biostatistical analysis and medical writing and
regulatory consultation and representation.
Phase II through IV Clinical Trial Management. The core of the Company's
business offerings is a comprehensive package of services to conduct Phase II
through IV clinical trials, which, in concert with its other analytical and
Phase I testing services, allows the Company to offer its customers an
integrated package of clinical management services. The Company has significant
experience in the therapeutic areas of cardiovascular, central nervous system,
gastrointestinal disease, immunology, oncology, respiratory, skeletal disease
and inflammation and infectious disease.
Through its clinical experience, the Company has developed the expertise to
manage every aspect of clinical trials in Phase I through 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 customers' 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
customers with one or more of the following core Phase II through 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 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.
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- 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 customer 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 5,000 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
customer 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.
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 customers 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 customer needs by utilizing SAS, Oracle, DLB Recorder and other software in
addition to the Company's proprietary TrialWare(SM) software.
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 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 customers 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 customers in all
phases of drug development.
Phase I Testing Services. The Company offers a full range of Phase I
testing services at its state-of-the-art 42-bed clinical pharmacology unit
located on the campus of the University Hospital Utrecht in Utrecht, The
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Netherlands. This unit provides a favorable regulatory environment for Phase I
research, featuring a large physician and nursing staff, a dedicated recruitment
and screening department, a centralized computerized monitoring system,
specialized lab testing capabilities, and an on-site specialized pharmacy. The
Company's Phase I therapeutic specialities include cardiovascular, central
nervous system diseases, endocrine, gastrointestinal, imaging, infectious
diseases, oncology, respiratory disease, rheumatology and women's health.
Medical Writing and Regulatory Consultation and Representation. The
Company provides report writing and regulatory consultation and representation
to its customers in a manner designed to complement parallel development
processes to reduce overall development time. The Company provides its customers
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 customers 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 customers to assess their own trials.
CUSTOMERS AND MARKETING
The Company has provided services to 19 of the world's largest 20
pharmaceutical companies, as ranked by 1996 research and development spending.
During 1997 and for the first three months of 1998, revenues from G.D.
Searle & Co. accounted for approximately 54% and 43%, respectively, of the
Company's net revenues. However, on a pro forma basis assuming the consummation
of the Acquisitions as of January 1, 1997, revenues from G.D. Searle & Co.
represented 35% and 41% of the Company's net revenues in 1997 and the three
months ended March 31, 1998, respectively, and no other customer would have
accounted for more than 10% of the Company's net revenues during these periods.
However, other Company customers have from time to time accounted for more than
10% of the Company's net revenues. The CRO industry in general continues to be
dependent on the research and development efforts of the principal
pharmaceutical and biotechnology companies as major customers, and the Company
believes that this dependence will continue. The loss of business from any of
the Company's major customers would have a material adverse effect on the
Company for each respective period.
The Company has a new business development group made up of 3 components:
sales, proposals and customer services and corporate communications. The Company
employs 32 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 customers.
CONTRACTUAL ARRANGEMENTS
The Company'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. 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 customer upon 30 days' notice.
Customers 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."
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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, some 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., PAREXEL International Corporation,
Pharmaceutical Product Development, Inc. and Quintiles Transnational
Corporation. See "Risk Factors -- Competition."
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 customers
and through insurance maintained by customers. 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
customers and the terms and scope of such indemnification vary from customer to
customer and from trial to trial. Although most of the Company's customers 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 carries liability insurance to mitigate
these risks. 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 customer or the Company or where the
indemnifying party does not fulfill its indemnification obligations. There can
be no assurance that the Company's insurance coverage will be adequate, or that
insurance coverage will continue to be available on terms acceptable to the
Company. 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
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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.
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 March 31, 1998, the Company had 870 full-time employees. 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.
FACILITIES
The Company leases all of its facilities. The Company's principal executive
offices are located in Cincinnati, Ohio, where it leases approximately 56,000
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
2006. The Company also maintains offices in Chicago, Illinois; Los Angeles,
California; San Diego, California; New London, Connecticut; Cranford, New
Jersey; Princeton, New Jersey; London, England; Milan, Italy; Utrecht, The
Netherlands; Munich, Germany and through a joint venture in Beijing, China.
Management believes that such offices are sufficient to meet its present
needs and does not anticipate any difficulty in securing additional space, as
needed, on terms acceptable to the Company.
LITIGATION
The Company is not involved in any litigation, nor, to the Company's
knowledge, is any litigation currently threatened against the Company, which
could have a material adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and other key employees of the Company as
of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Candace K. Bryan, Pharm.D.(1)........ 51 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.................... 50 Vice President--Finance, Chief Financial Officer,
Treasurer and Member, Board of Directors
Philip E. Beekman(1)(2).............. 66 Member, Board of Directors
Charles A. Sanders, M.D.(1)(2)....... 65 Member, Board of Directors
James G. O'Donnell, M.B., B.A.O.,.... Vice President, European Operations
B.C.h.............................. 43
Frank L. Santoro, M.D................ 38 Vice President, North American Operations
T. Y. Lee, Sc.D...................... 56 Vice President, Clinical Development and Asian
Affairs
Peter F. Djuric, Pharm.D............. 49 Director, Clinical Research
Jere M. Hardy........................ 53 Director, Clinical Data Management
Lois B. Rosenberger, Ph.D............ 47 Director, Regulatory Affairs
Stephen G. Scheurer.................. 49 Director, Human Resources
William K. Sietsema, Ph.D............ 42 Director, Clinical Research
Mandyam K. Srirama, Ph.D............. 64 Director, Biostatistics
Gary M. Wedig........................ 48 Director, Information Technology
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
CANDACE K. 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.
Additionally, Dr. Bryan recently was elected to serve on the Board of Directors
of H.J. Heinz Company, a food products manufacturer. 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
K. 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
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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.
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 Consolidated Cigar Holdings, 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
StaffMark, Inc., a provider of diversified staffing services to businesses,
healthcare providers and government agencies, Magainin Pharmaceuticals, Inc.,
Vertex Pharmaceuticals, Incorporated, Pharmacopeia, Inc., SCIOS, Inc. and
Trimeris, Inc., all biopharmaceutical companies engaged in the development of
medicines for serious diseases.
JAMES G. O'DONNELL, M.B., B.A.O., B.C.H., joined Kendle in December 1997 as
Vice President European Operations, based in West London, England. Prior to
joining the Company, Dr. O'Donnell was Head of Business Development, Europe for
Innovex, Inc. In 1995 and 1996 Dr. O'Donnell was the Chief Executive Officer for
Unilabs Clinical Trials Ltd., and from 1988 to 1995 he held positions as Medical
Director, Director Business Development and Head of Clinical Research at
Chiltern International Ltd. Prior to entering the clinical development field,
Dr. O'Donnell practiced medicine for ten years in the U.K. and the Middle East.
FRANK L. SANTORO, M.D., joined Kendle in October 1997 as Vice President
North American Operations, responsible for all clinical operations throughout
the United States. Prior to joining Kendle, Dr. Santoro was the Vice President
Clinical Research Services with Innovex, Inc. From 1990 through 1995, Dr.
Santoro was with ClinTrials Research first as a Medical Director and later as a
General Manager. From 1989 to 1990, he served as the Director of Clinical
Research for G.H. Besselaar. Prior to entering the CRO industry, Dr. Santoro
served as a Public Health Services Volunteer in Alaska and a Research Fellow at
The Ohio State University.
T. Y. LEE, SC.D. joined Kendle in February 1998 through the ACER/EXCEL
Acquisition. Dr. Lee is the founder of ACER/EXCEL and served as its Chairman and
Chief Executive Officer. Prior to ACER/EXCEL, Dr. Lee was a Vice President of
Ayerst Labs in charge of Biostatistics and Clinical Programming, and has also
worked for Hoechst-Roussel and Merck Sharp & Dohme Research Laboratories. Dr.
Lee has been published in a variety of professional journals.
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.
JERE M. HARDY, joined Kendle in 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.
35
<PAGE> 37
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.
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 Department Stores, Inc., 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 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
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 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
The Company's Compensation Committee, composed of Mr. Beekman (Chairman),
Dr. Bryan and Dr. Sanders, determines the compensation of the Company's
executive officers. A subcommittee composed solely of Mr. Beekman and Dr.
Sanders administers the 1997 Stock Option and Stock Incentive Plan. See "Certain
Transactions."
36
<PAGE> 38
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered in each of the
last three fiscal years for the Company's Chief Executive Officer and each of
the Company's executive officers whose total salary and bonus exceeded $100,000
during 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------- -------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------- ----------- -------- ------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Candace K. Bryan........ 1997 $153,444 $70,000 2,250 $ 0
Chairman of the Board 1996 122,400 0 0 6,064
of Directors and 1995 123,754 0 0 2,099
Chief Executive Officer
Christopher C. Bergen... 1997 145,944 56,000 2,000 0
President and Chief 1996 122,400 0 0 2,291
Operating Officer 1995 123,129 0 0 2,099
Timothy M. Mooney(1).... 1997 134,671 42,000 1,650 0
Vice President-Finance, 1996 72,035 0 135,050 0
Chief Financial Officer
and Treasurer
</TABLE>
- ---------------
(1) Mr. Mooney joined Kendle in May 1996.
The following table provides certain information with respect to grants of
stock options to the executives officers named in the Summary Compensation Table
above pursuant to the Company's 1997 Stock Option and Stock Incentive Plan
during the year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
PERCENT OF RATE
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Candace K. Bryan................. 2,250 0.44% $14.00 08/22/07 $19,810 $50,203
Christopher C. Bergen............ 2,000 0.39% 14.00 08/22/07 17,609 44,625
Timothy M. Mooney................ 1,650 0.32% 14.00 08/22/07 14,527 36,815
</TABLE>
- ---------------
(1) Options are exercisable in five equal annual installments beginning one year
after the date of grant.
(2) Potential realizable value is calculated from the exercise price of the
options granted.
(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, of the Company's Common Stock price.
37
<PAGE> 39
The following table sets forth information concerning the value of
unexercised options as of December 31, 1997 held by the executives named in the
Summary Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF UNDERLYING VALUE OF UNEXERCISED
SECURITIES UNEXERCISED SECURITIES IN-THE-MONEY
UNDERLYING OPTIONS AT OPTIONS AT
OPTIONS FISCAL YEAR-END FISCAL YEAR-END(1)
NAME EXERCISED VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---------- -------------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Candace K. Bryan........ 0 0 0 2,250 $ 0 $6,188
Christopher C. Bergen... 0 0 0 2,000 0 5,500
Timothy M. Mooney....... 0 0 135,050 1,650 2,098,677 4,538
</TABLE>
- ---------------
(1) Represents the number of shares optioned multiplied by the difference
between $16.75, the fair market value of the Common Stock at December 31,
1997, and the exercise price for that option.
PROTECTIVE COMPENSATION ARRANGEMENTS
The Company maintains Protective Compensation and Benefit Agreements with
certain employees, including all executive officers of the Company. 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 in
Control (as defined in the agreements) occurs while the agreements are in
effect, such agreements shall not expire before the second anniversary of the
Change in Control. The agreements are intended, in the event of a Change in
Control, to induce key personnel to remain in the employment of the Company.
In the event of a Change in Control, the agreements provide that if the
covered individual is terminated from employment by the Company within 24 months
following the Change in 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 in 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 in Control Compensation (as
defined in the agreements).
The Change in 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 in 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 in Control Compensation and any other payments
received by the individual. At March 31, 1998, the total cost to the Company,
for Dr. Bryan, Mr. Bergen and Mr. Mooney, assuming each became entitled to
Change in Control Compensation as of that date, would be approximately
$1,118,000 excluding payment for excise taxes, if any. The total cost to the
Company for all employees covered by these agreements, assuming each such
individual is entitled to Change in Control Compensation as of that date, would
be approximately $6,838,000, excluding benefits and payment for excise taxes, if
any.
The Company also has adopted a bonus plan under which each Company employee
may be eligible for merit-based bonuses up to 100% of her or his base salary.
401(k) PLAN
The Company maintains a 401(k) retirement plan covering substantially all
U.S. employees. Under the plan, an employee must complete six months of service
and meet minimum age requirements to be eligible to participate in the plan.
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
38
<PAGE> 40
the Board of Directors. The Company matches contributions up to 25% of the first
6% contributed by the employee.
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 the Company.
Options, SARs and restricted stock awards may be granted to any employee of
the Company, or any advisor or consultant to Kendle. Incentive stock options can
only be granted to Kendle employees. The Plan is administered by a subcommittee
of the Compensation Committee. The Plan provides that all exercise prices for
non-qualified 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 subcommittee of the
Compensation Committee has broad discretion in delineating the terms of the
grant of awards under the Plan, subject to the restrictions outlined above.
The Company has outstanding options granted as of March 31, 1998 for ten
year periods under the 1997 Stock Option and Stock Incentive Plan for the
purchase of an aggregate of 301,350 shares of the Company's Common Stock at
prices ranging from $9.50 to $20.00. Outstanding options granted under a
previous plan total 622,270 as of March 31, 1998, at prices ranging from $0.91
to $1.21. Of the total options outstanding under the plans, 272,175 are
immediately exercisable at prices ranging from $0.91 to $1.21.
In May 1998, the Company's shareholders approved the 1998 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides for
the issuance of a maximum of 500,000 shares of Common Stock through payroll
deductions. Each full-time employee of the Company with at least one month of
service is eligible to participate under the Stock Purchase Plan unless the
employee would own more than 5% of the outstanding Common Stock or would have
the ability to purchase stock with a fair market value of greater than $25,000
(as determined at the time of grant) during any calendar year. To participate in
the Stock Purchase Plan, an employee must authorize payroll deductions of any
whole percentage from 1% to 10% of such participant's annual salary. The Stock
Purchase Plan will be implemented through one 12-month purchase period each
calendar year. On the first day of each purchase period, each participant will
be deemed to have been granted the right to purchase a number of shares of
Common Stock equal to the accumulated payroll deductions that will be made
during the purchase period divided by the applicable share price. The applicable
share price will be 85% of the lower of the fair market value on the first day
or last day of each purchase period.
COMPENSATION OF DIRECTORS
Non-employee members of the Board of Directors will receive $1,000 for each
meeting of the Board of Directors attended and $500 for each Committee meeting
attended. 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 also received a ten year option to purchase
10,000 shares of Common Stock concurrently with the closing of the Company's
IPO, and will receive ten year options to purchase Common Stock at fair market
value on the date of grant for 5,000 shares on the next annual election to the
Board and 1,000 shares on each subsequent election.
39
<PAGE> 41
CERTAIN TRANSACTIONS
The Company made payments in 1996 and 1997 and the first three months of
1998 of approximately $97,500, $397,000 and $193,000, 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 than those that could have been negotiated with unaffiliated
third parties.
In connection with the U-Gene Acquisition, the Company borrowed funds from
NationsBank, N.A. an affiliate of NationsBanc Montgomery Securities, LLC, one of
the Representatives. These funds were repaid in full with proceeds from the
Company's IPO. The Company also issued warrants to purchase 153,738 shares of
Common Stock at $0.01 per share in connection with the loan. The warrants were
exercised in full contemporaneously with the consummation of the IPO.
NationsBank is also a lender on the Senior Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock and as
adjusted to give effect to the sale of Common Stock in the Offering by (i) each
Selling Shareholder, (ii) each shareholder known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (iii) each
director, (iv) each executive officer and (v) all executive officers and
directors as a group. 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>
SHARES BENEFICIALLY OWNED
BEFORE OFFERING(1) ------------------------- AFTER OFFERING(1)
----------------------- SHARES TO BE SOLD IN -----------------------
NO. OF SHARES PERCENT THE OFFERING(1) NO. OF SHARES PERCENT
------------- ------- ------------------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Candace K. Bryan(2)............... 1,368,716 15.9 0 1,368,716 12.9
Christopher C. Bergen............. 1,060,784 12.3 0 1,060,784 10.0
Kendle Stock Trust................ 620,500 7.2 0 620,500 5.9
T.Y. Lee(3)....................... 236,129 2.7 17,511 218,618 2.1
Jean C. Lee(3).................... 211,258 2.5 15,666 195,592 1.8
Albrecht M. Neiss(4).............. 143,861 1.7 50,624 93,237 *
Timothy M. Mooney(5).............. 136,550 1.6 0 136,550 1.3
Michael G. Minor(3)............... 66,523 * 4,933 61,590 *
Conway K. Lee(3).................. 43,150 * 3,200 39,950 *
Trust fbo Jennifer K. Lee(3)...... 43,150 * 3,200 39,950 *
Steven K. Lee(3).................. 43,150 * 3,200 39,950 *
Citicorp Trust(3)................. 22,474 * 1,666 20,808 *
Philip E. Beekman(6).............. 13,261 * 0 13,261 *
Charles A. Sanders(6)............. 15,161 * 0 15,161 *
All executive officers and
Directors as a group (5
persons)(7)..................... 2,594,472 29.6 0 2,594,472 24.1
</TABLE>
- ---------------
(1) Applicable percentage of ownership prior to this Offering is based upon
shares of Common Stock outstanding as of March 31, 1998. Applicable
percentage ownership after the Offering includes an additional shares of
Common Stock which are being included for sale by the Company in the
Offering (based on the offering price of $25.375 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 March 31, 1998,
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) Includes 18,980 shares held directly by Hazel Kendle, mother of Dr. Bryan.
40
<PAGE> 42
(3) Individual (or trust, as the case may be) is a Selling Shareholder who
acquired the shares offered for sale pursuant to this Prospectus in
connection with the ACER/EXCEL Acquisition. The number of shares listed as
beneficially owned by these selling shareholders excludes certain shares
that are currently subject to escrow. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(4) Individual is a Selling Shareholder who acquired the shares offered for sale
pursuant to this Prospectus in connection with the gmi Acquisition.
(5) Includes 135,050 shares issuable upon the exercise of vested options.
(6) Includes 10,000 shares issuable upon the exercise of vested options.
(7) Includes 155,050 shares issuable upon the exercise of vested options.
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 Restated and Amended Articles of
Incorporation and Amended 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 Restated and Amended 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,
41
<PAGE> 43
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.
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 Amended and Restated 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.
42
<PAGE> 44
UNDERWRITING
The underwriters of the offering named below (the "Underwriters"), for whom
Lehman Brothers Inc., J.C. Bradford & Co. and NationsBanc Montgomery Securities
LLC 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.........................................
J.C. Bradford & Co..........................................
NationsBanc Montgomery Securities LLC.......................
---------
Total.................................................. 2,100,000
=========
</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
$ per share. The Underwriters may allow, and such dealers may reallow a
concession not in excess of $ per share to certain brokers and dealers.
The Company has granted to the Underwriters an option to purchase up to an
additional 315,000 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 90 days
after the date of the Prospectus. All of 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 90 days after the date of the Prospectus.
In connection with the offering the rules of the Securities and Exchange
Commission permit the Representatives to engage in certain transactions that
stabilizes the price of the Common Stock. Such transactions may consist of bids
or purchases for the purposes of pegging, fixing or maintaining the price of the
Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth in the cover page of the Prospectus),
and thereby create a short position by purchasing Common Stock in connection
with the offering, the Representatives may reduce that short position by
purchasing Common Stock in the open market. The Representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option described herein.
The Representatives also may improve a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the
43
<PAGE> 45
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling commission from the Underwriters and
selling group members who sold those shares as part of the offering.
In general, purchases of a security for the purposes of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher that it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
In connection with the U-Gene Acquisition, the Company borrowed funds from
NationsBank, N.A. an affiliate of NationsBanc Montgomery Securities LLC, one of
the Representatives. These funds were repaid in full with proceeds from the
Company's IPO. The Company also issued warrants to NationsBank to purchase
153,738 shares of Common Stock at $0.01 per share in connection with the loan.
The warrants were exercised in full contemporaneously with the consummation of
the IPO. NationsBank is also a lender on the Senior Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio and for
the Underwriters by Kramer, Levin, Naftalis & Frankel, New York, New York.
Attorneys of Keating, Muething & Klekamp, P.L.L. own approximately 6,000 shares
of the Company's Common Stock.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997; the balance sheets of ACER/EXCEL Inc. as of December 31, 1996 and 1997
and the related statements of operations, shareholders' equity and cash flows of
each of the two years in the period ended December 31, 1997; the consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended December 31, 1996 for U-Gene; and the statements
of operations, shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1996 for gmi each included in this Prospectus have
been included herein in reliance upon the reports of Coopers & Lybrand L.L.P. as
relates to the Company and ACER/EXCEL INC., 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.
44
<PAGE> 46
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, 1996 and
1997; and March 31, 1998 (Unaudited)................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997; and for the three
months ended March 31, 1997 and 1998 (Unaudited)....... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1996 and 1997;
and for the three months ended March 31, 1998
(Unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997; and for the three
months ended March 31, 1997 and 1998 (Unaudited)....... F-6
Notes to Consolidated Financial Statements.................. F-8
ACER/EXCEL INC. FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-20
Financial Statements:
Balance Sheets as of December 31, 1996 and 1997........... F-21
Statements of Operations for the years ended December 31,
1996 and 1997.......................................... F-22
Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996 and 1997................. F-23
Statements of Cash Flows for the years ended December 31,
1996 and 1997.......................................... F-24
Notes to Financial Statements............................... F-25
GMI GESELLSCHAFT FUR ANGEWANDTE MATHEMATIK UND INFORMATIK
mbH FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-30
Financial Statements:
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-31
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-32
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-33
Notes to Financial Statements............................... F-34
U-GENE RESEARCH B.V. FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-37
Financial Statements:
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-38
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-39
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-40
Notes to Consolidated Financial Statements.................. F-41
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kendle International Inc.
We have audited the accompanying consolidated balance sheets of Kendle
International Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
February 18, 1998, except as to
the information presented in Note 5
for which the date is March 9, 1998
F-2
<PAGE> 48
KENDLE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $2,047,476 $15,766,963 $ 7,942,400
Available for sale securities..................... 8,438,650 1,897,693
Accounts receivable............................... 3,561,590 15,027,791 19,946,782
Unreimbursed investigator and project costs....... 980,597 5,174,967 6,354,429
Other current assets.............................. 34,426 1,845,297 2,734,288
---------- ----------- -----------
Total current assets...................... 6,624,089 46,253,668 38,875,592
---------- ----------- -----------
Property and equipment:
Furnishings, equipment and other.................. 1,177,416 5,126,862 7,007,942
Equipment under capital leases.................... 1,588,135 3,225,190 4,291,077
Less: accumulated depreciation and amortization... (930,550) (2,157,360) (2,772,589)
---------- ----------- -----------
Net property and equipment..................... 1,835,001 6,194,692 8,526,430
---------- ----------- -----------
Excess of purchase price over net assets acquired... 25,929,433 41,109,306
Other assets........................................ 164,020 1,246,815 4,143,952
---------- ----------- -----------
Total assets.............................. $8,623,110 $79,624,608 $92,655,280
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital
leases......................................... $ 360,203 $ 627,836 $ 923,707
Trade payables.................................... 913,371 9,837,358 8,281,432
Advances against investigator and project costs... 776,565 1,303,310 1,546,667
Advance billings.................................. 4,303,809 8,066,286 11,440,341
Accrued compensation and related payroll
withholdings and taxes......................... 250,758 2,261,752 2,021,362
Income taxes payable.............................. 62,914 1,413,993 1,729,282
Other accrued liabilities......................... 250,000 2,032,760 2,283,159
---------- ----------- -----------
Total current liabilities...................... 6,917,620 25,543,295 28,225,950
---------- ----------- -----------
Obligations under capital leases, less current
portion........................................... 761,029 1,617,256 2,092,389
Note payable........................................ 1,470,000 1,440,000
Other liabilities................................... 645,248 980,652
---------- ----------- -----------
Total liabilities.............................. 7,678,649 29,275,799 32,738,991
---------- ----------- -----------
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares
authorized Common stock -- no par value;
15,000,000 shares authorized; 3,650,000 shares
issued and outstanding at December 31, 1996;
7,582,367 shares issued and outstanding at
December 31, 1997; 8,282,685 issued and
outstanding at March 31, 1998.................. 75,000 75,000 75,000
Additional paid-in capital........................ 270,396 50,186,639 58,679,723
Retained earnings................................. 599,065 351,970 1,796,356
Net unrealized holdings gains (losses) on
available for sale securities, net of tax...... (759) 64,473
Cumulative foreign currency translation
adjustment..................................... (264,041) (699,263)
---------- ----------- -----------
Total shareholders' equity..................... 944,461 50,348,809 59,916,289
---------- ----------- -----------
Total liabilities and shareholders'
equity.................................. $8,623,110 $79,624,608 $92,655,280
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 49
KENDLE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $6,117,679 $12,959,054 $44,232,899 $5,961,576 $19,765,139
Cost and expenses:
Direct costs............................. 3,563,849 8,176,375 25,817,887 3,375,497 10,836,878
Selling, general and administrative...... 1,775,613 3,277,931 11,602,708 1,892,872 5,721,360
Depreciation and amortization............ 167,769 315,541 1,583,521 150,066 900,858
---------- ----------- ----------- ---------- -----------
5,507,231 11,769,847 39,004,116 5,418,435 17,459,096
Income from operations................ 610,448 1,189,207 5,228,783 543,141 2,306,043
---------- ----------- ----------- ---------- -----------
Other income (expense):
Interest income.......................... 6,276 14,746 368,768 11,803 200,864
Interest expense......................... (69,361) (65,127) (424,768) (30,932) (51,843)
Other.................................... (4,470) (59,053) 4,860 22,885
---------- ----------- ----------- ---------- -----------
(63,085) (54,851) (115,053) (14,269) 171,906
Income before income taxes and
extraordinary item.................... 547,363 1,134,356 5,113,730 528,872 2,477,949
Income taxes............................. 1,451,184 1,033,563
---------- ----------- ----------- ---------- -----------
Income before extraordinary item......... 547,363 1,134,356 3,662,546 528,872 1,444,386
Extraordinary item, net of tax benefit... (1,139,823)
---------- ----------- ----------- ---------- -----------
Net income............................ $ 547,363 $ 1,134,356 $ 2,522,723 $ 528,872 $ 1,444,386
========== =========== =========== ========== ===========
Pro forma income data:
Income before extraordinary item......... $ 547,363 $ 1,134,356 $ 3,662,546 $ 528,872
Pro forma adjustment for income taxes.... 218,945 453,742 608,777 211,549
---------- ----------- ----------- ----------
Pro forma income before extraordinary
item.................................. 328,418 680,614 3,053,769 317,323
Extraordinary item, net of tax benefit... (1,139,823)
---------- ----------- ----------- ----------
Pro forma net income..................... $ 328,418 $ 680,614 $ 1,913,946 $ 317,323
========== =========== =========== ==========
Income per share data (pro forma for 1995,
1996 and 1997):
Basic:
Income per share before extraordinary
item.................................. $ 0.09 $ 0.19 $ 0.60 $ 0.09 $ 0.18
Extraordinary item per share............. (0.22)
---------- ----------- ----------- ---------- -----------
Net income per share..................... $ 0.09 $ 0.19 $ 0.38 $ 0.09 $ 0.18
========== =========== =========== ========== ===========
Weighted average shares outstanding...... 3,650,000 3,650,000 5,055,452 3,650,000 7,959,716
Diluted:
Income per share before extraordinary
item.................................. $ 0.09 $ 0.17 $ 0.53 $ 0.08 $ 0.17
Extraordinary item per share............. (0.20)
---------- ----------- ----------- ---------- -----------
Net income per share..................... $ 0.09 $ 0.17 $ 0.33 $ 0.08 $ 0.17
========== =========== =========== ========== ===========
Weighted average shares and potential
shares outstanding.................... 3,852,465 4,017,493 5,763,308 4,030,065 8,611,089
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 50
KENDLE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NET UNREALIZED
------------------- ADDITIONAL RETAINED HOLDINGS GAINS CUMULATIVE TOTAL
NUMBER PAID-IN EARNINGS (LOSSES) ON AVAILABLE TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL (DEFICIT) FOR SALE SECURITIES ADJUSTMENT EQUITY
--------- ------- ----------- ----------- ---------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995.................. 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
Distributions to
shareholders.......... (2,308,350) (2,308,350)
Reclassification of S
corporation retained
earnings to additional
paid-in capital....... 461,468 (461,468)
Net proceeds from
initial public
offering.............. 3,540,000 45,198,032 45,198,032
Issuance of Common Stock
in connection with the
acquisition of gmi.... 191,304 2,678,256 2,678,256
Warrants issued and
subsequently
converted............. 153,738 1,501,537 1,501,537
Shares issued under
stock option plan..... 47,325 43,048 43,048
Income tax benefit from
exercise of stock
options............... 33,902 33,902
Net unrealized holdings
loss on available for
sale securities....... $ (759) (759)
Foreign currency
translation
adjustment............ $(264,041) (264,041)
Net income.............. 2,522,723 2,522,723
--------- ------- ----------- ----------- --------- --------- -----------
Balance, December 31,
1997.................. 7,582,367 75,000 50,186,639 351,970 (759) (264,041) 50,348,809
Shares issued under
stock option plan
(unaudited)........... 34,484 36,992 36,992
Issuance of Common Stock
in connection with the
acquisition of
ACER/EXCEL
(unaudited)........... 665,834 8,456,092 8,456,092
Net unrealized holdings
gain on available for
sale securities
(unaudited)........... 65,232 65,232
Foreign currency
translation adjustment
(unaudited)........... (435,222) (435,222)
Net income
(unaudited)........... 1,444,386 1,444,386
--------- ------- ----------- ----------- --------- --------- -----------
Balance, March 31, 1998
(unaudited)........... 8,282,685 $75,000 $58,679,723 $ 1,796,356 $ 64,473 $(699,263) $59,916,289
========= ======= =========== =========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 51
KENDLE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income............................. $ 547,363 $ 1,134,356 $ 2,522,723 $ 528,872 $ 1,444,386
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation and amortization.......... 167,769 315,541 1,583,521 150,066 900,858
Deferred income taxes.................. 245,465 36,473
Extraordinary item, net of tax......... 1,139,823
Other.................................. (31,205) (30,000)
Changes in operating assets and
liabilities, net of effects from
acquisitions of U-Gene, gmi and
ACER/EXCEL:
Accounts receivable................. (691,144) (1,927,921) (6,079,930) (795,906) (2,728,065)
Other current assets................ (37,812) 25,007 (388,014) (123,866) (747,232)
Other assets........................ 2,191 (116,186) (140,903) (53,664) (8,884)
Investigator and project costs...... 267,927 (838,857) (3,667,626) (1,926,007) 244,932
Trade payables...................... 94,471 659,821 7,048,641 1,009,660 (2,170,157)
Advance billings.................... (254,972) 3,906,574 1,292,162 (1,248,670) 1,174,603
Accrued liabilities................. (137,834) 201,303 2,955,261 156,043 (389,490)
Other............................... (33,144) (38,667)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities............................. (75,185) 3,320,971 6,479,918 (2,303,472) (2,272,576)
----------- ----------- ------------ ----------- -----------
Cash Flows From Investing Activities
Purchase of available for sale
securities.......................... (10,938,650)
Proceeds from sale of available for
sale securities..................... 2,500,000 8,489,409
Acquisitions of property and
equipment........................... (165,928) (406,974) (2,545,164) (268,025) (948,170)
Additions to internally developed
software............................ (40,005) (531,243) (52,538) (217,865)
Acquisitions of businesses, less cash
acquired............................ (22,872,203) (9,798,307)
Cash placed in escrow as a result of
business acquisition................ (2,820,000)
----------- ----------- ------------ ----------- -----------
Net cash used in investing activities.... (165,928) (446,979) (34,387,260) (320,563) (5,294,933)
----------- ----------- ------------ ----------- -----------
</TABLE>
Continued
F-6
<PAGE> 52
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Borrowings under line of credit........ $ 1,825,000 $ 4,267,000 $ 3,100,000
Repayments under line of credit........ (1,505,000) (4,587,000) (3,100,000)
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 and conversion
of stock purchase warrants.......... 1,501,537
Repayment of subordinated debt
borrowings.......................... (5,000,000)
Net proceeds from initial public
offering............................ 45,198,032
Proceeds from exercise of stock
options............................. 43,048 $ 31,992
Debt issue costs....................... (538,698)
Distributions to shareholders.......... (253,225) (285,291) (2,558,350) $ (466,000)
Payments on capital lease
obligations......................... (155,238) (236,492) (513,196) (107,254) (177,429)
Amounts payable -- book overdraft...... 1,163,789
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities............................. (88,463) (841,783) 41,632,373 590,535 (145,437)
----------- ----------- ------------ ----------- -----------
Effects of exchange rates on cash and
cash equivalents....................... (5,544) (111,617)
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (329,576) 2,032,209 13,719,487 (2,033,500) (7,824,563)
Cash and Cash Equivalents:
Beginning of year...................... 344,843 15,267 2,047,476 2,047,476 15,766,963
----------- ----------- ------------ ----------- -----------
End of year............................ $ 15,267 $ 2,047,476 $ 15,766,963 $ 13,976 $ 7,942,400
=========== =========== ============ =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for
interest............................ $ 69,361 $ 65,127 $ 424,768 $ 30,932 $ 32,410
=========== =========== ============ =========== ===========
Cash paid during the year for income
taxes............................... $ 479,973 $ 533,557
============ ===========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Acquisition of equipment under capital
leases.............................. $ 240,976 $ 1,116,418 $ 1,637,056 $ 483,839
=========== =========== ============ ===========
Reclassification of shareholder's
advance to additional paid-in
capital............................. $ 126,000
===========
Dividends declared and payable......... $ 250,000
===========
Note payable under escrow agreement for
acquisition of U-Gene............... $ 1,530,000
============
Interest on note payable under escrow
agreement for acquisition of
U-Gene.............................. $ 180,000
============
Acquisitions of Businesses:
Fair value of assets acquired....... $ 34,750,659 $23,230,088
Fair value of liabilities assumed or
incurred.......................... (9,200,200) (4,975,689)
Stock issued........................ (2,678,256) (8,456,092)
------------ -----------
Net cash payments................. $ 22,872,203 $ 9,798,307
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 53
KENDLE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Kendle International Inc. (the "Company") is a contract research
organization ("CRO") providing integrated clinical research services on a
contract basis to the pharmaceutical and biotechnology industries. These
services include Phase I through IV clinical trial management, clinical data
management, statistical analysis, medical writing and regulatory consultation
and representation. The Company has operations in North America and Europe.
Principles of Consolidation and Organization
The consolidated financial statements include the financial information of
Kendle International Inc. and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated. The
results of operations of the Company's wholly-owned subsidiaries have been
included in the consolidated financial statements of the Company from the
respective dates of acquisition (See Notes 12 and 13).
Certain amounts reflected in the prior years' consolidated financial
statements have been reclassified to be comparable with the current year.
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned subsidiaries are
translated into U.S. dollars at year-end exchange rates. Income statement
accounts are translated at average exchange rates for the year. These
translation adjustments are recorded as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included in the
consolidated statements of operations.
As a significant percentage of the Company's cash flow from operations is
derived from operations outside the United States, 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.
Available for Sale Securities
Investments purchased with initial maturities greater than three months are
classified as available for sale securities and consist of highly liquid debt
securities. These securities are stated in the consolidated financial statements
at market value. Realized gains and losses are included in the consolidated
statements of operations, calculated based on the weighted average cost of the
investments. Unrealized gains and losses, net of tax, are reported as a separate
component of shareholders' equity.
Revenue Recognition
Revenues are earned by performing services primarily under fixed-price
contracts. 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. This method is used
because management considers total costs incurred to be the best available
measure of progress on these contracts.
F-8
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 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 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 two 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 estimated useful lives of the
assets, not to exceed the terms of the related leases.
Accumulated amortization on these leases was $352,804 and $898,122 at
December 31, 1996 and 1997, respectively.
Internally Developed Software
The Company capitalizes costs incurred to internally develop 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. Unamortized software costs and
accumulated amortization included in the consolidated balance sheets at December
31, 1996 and 1997 were $40,005 and $571,248 and $2,000 and $53,196,
respectively.
Excess of Purchase Price Over Net Assets Acquired
The excess of cost over the fair value of the net assets acquired in the
acquisitions of U-Gene Research B.V. ("U-Gene"), based in Utrecht, The
Netherlands, GMI Gesellschaft fur Angewandte Mathematik und Informatik mbH
("gmi"), based in Munich, Germany, and ACER/EXCEL Inc. ("ACER/EXCEL") 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, an impairment loss will be
recognized.
F-9
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Accumulated amortization on the excess of purchase price over net assets
acquired was $376,930 at December 31, 1997.
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
customers. Such pass-through costs incurred, but not yet reimbursed, are
reflected as a current asset in the accompanying consolidated balance sheets.
Advances from customers 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 $1,983,948, $3,043,802 and $48,657,085
for the years ended December 31, 1995, 1996 and 1997, respectively.
Income Taxes
On August 22, 1997, upon terminating its S corporation status, the Company
recorded deferred taxes in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." In accordance with
SFAS No. 109, the Company recorded 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 year in which the
differences are expected to reverse.
For periods prior to August 22, 1997, the consolidated financial statements
of the Company do not include a provision for income taxes because taxable
income or loss of the Company was included in the income tax returns of the
individual shareholders under the S corporation election. The consolidated
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 had the Company filed corporate tax returns
during these periods.
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.
Use of Estimates
The preparation of consolidated 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 consolidated
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 March 31, 1998 and for the three months
ended March 31, 1997 and 1998 is unaudited. In the opinion of management, this
financial information includes all adjustments, consisting solely of normal
recurring adjustments, necessary to fairly present the final information set
forth. The results for the three months ended March 31, 1998 may not be
indicative of operating results for the full year.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement requires selected information to be reported on the
F-10
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Company's operating segments. Operating segments are determined by the way
management structures the segments in making operating decisions and assessing
performance. The Company is currently reviewing what changes, if any this will
require on the presentation of the financial statements for fiscal periods
beginning after December 15, 1997.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
defines the accounting for computer software developed or obtained (purchased)
for internal use, including (1) a requirement to capitalize specified costs as a
long-lived asset, (2) amortization of such amounts, and (3) recognition and
measurement of impairment of those amounts. The Company plans to adopt the SOP
on January 1, 1999. The Company does not believe the adoption of this SOP will
have a material impact on its financial statements.
2. AVAILABLE FOR SALE SECURITIES:
The fair value of available for sale securities is estimated based on
quoted market prices. Information related to the Company's available for sale
securities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
UNREALIZED FAIR
COST LOSS VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Debt securities:
U.S. government obligations................... $8,439,409 $(759) $8,438,650
</TABLE>
Proceeds from the maturities of investments in securities were $2,500,000.
Gross gains realized on these maturities were $35,790 during 1997. Shareholders'
equity includes an unrealized holding loss of $759 at December 31, 1997.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
1996
ASSETS
Cash and cash equivalents................................. $ 2,047,476 $ 2,047,476
1997
ASSETS
Cash and cash equivalents................................. $15,766,963 $15,766,963
Available for sale securities............................. 8,438,650 8,438,650
LIABILITIES
Note payable.............................................. 1,470,000 1,470,000
</TABLE>
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Billed..................................................... $1,958,436 $11,095,821
Unbilled................................................... 1,603,154 3,931,970
---------- -----------
$3,561,590 $15,027,791
========== ===========
</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.
F-11
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. DEBT:
During 1997, the Company had a $20,000,000 senior secured revolving credit
facility (the "Senior Credit Facility") with a U.S. bank. Outstanding borrowings
under the Senior Credit Facility bore 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%.
The Senior Credit Facility contained 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 was collateralized by
all of the assets and Common Stock of the Company and its material subsidiaries.
In March, 1998, the Company amended the Senior Credit Facility. The $30
million Amended and Restated Senior Credit Facility bears interest at 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%, plus the Applicable Margin. All
amounts outstanding thereunder are payable in June, 2000. The Amended and
Restated Senior Credit Facility contains various restrictive financial
covenants, including the maintenance of certain fixed coverage and leverage
ratios and minimum net worth levels.
The Company has several lease lines of credit with a bank to purchase
computer equipment and furniture. The lines total $2,500,000, of which
$2,000,000 expired December 31, 1997 and $500,000 expires March 31, 1998.
Amounts drawn under the lines are payable in equal monthly installments ranging
from 1.71% to 2.23% of the total borrowings and are payable over four to five
year terms, from the date of funding. The lease lines of credit are
collateralized by the equipment purchased under the leases.
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 7.
6. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a 401(k) retirement plan covering substantially all
U.S. employees who have completed at least six months of service and meet
minimum age requirements. Beginning in 1997, the Company is required to
contribute 25% of each participant's contribution of up to 6% of salary.
Contributions to this plan totaled $30,809 for the year ended December 31, 1997.
Incentive Stock Option and Stock Incentive Plan
On August 15, 1997, the Company established a plan that provides for the
grant of up to 1,000,000 incentive and non-qualified stock options (the "1997
Plan"). Participation in the 1997 Plan is at the discretion of the Board of
Directors. The exercise price of incentive options granted under the 1997 Plan
must be no less than the fair market value of the Common Stock, as determined
under the 1997 Plan provisions, at the date the option is granted (110% of fair
market value for shareholders owning more than 10% of the Company's Common
Stock). The exercise price of non-qualified options must be no less than 95% of
the fair market value of the Common Stock at the date the option is granted. The
vesting provisions of the options granted under the 1997 Plan are determined at
the discretion of the Compensation Committee of the Board of Directors. The
options generally expire either 90 days after termination of employment or, if
earlier, ten years after date of grant. No options can be granted after August
15, 2007. The Company has reserved 1,000,000 shares of Common Stock for the 1997
Plan, of which 742,450 are available for grant at December 31, 1997.
The 1997 Plan replaced a similar plan under which 656,432 options were
outstanding at December 31, 1997.
F-12
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. EMPLOYEE BENEFIT PLANS, CONTINUED:
Aggregate stock option activity during 1995, 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
-------- ----------- --------
<S> <C> <C> <C>
Options outstanding,
at 1/1/95....................................... -- -- --
Granted......................................... 219,219 $ 0.91 $ 0.91
-------- ----------- ------
Options outstanding,
at 12/31/95..................................... 219,219 0.91 0.91
Granted......................................... 451,652 1.21 1.21
Canceled........................................ (3,103) 0.91 0.91
-------- ----------- ------
Options outstanding,
at 12/31/96..................................... 667,768 0.91-1.21 1.12
Granted......................................... 243,308 2.01 2.01
269,100 9.50-16.63 14.12
Canceled........................................ (218,869) 0.91-14.00 1.93
Exercised....................................... (47,325) 0.91 0.91
-------- ----------- ------
Options outstanding,
at 12/31/97..................................... 913,982 $0.91-16.63 $ 5.00
======== =========== ======
</TABLE>
Options to purchase 279,022 shares were exercisable at December 31, 1997 at
a weighted average exercise price of $1.06 and with a weighted average life of
eight years.
The weighted-average remaining life of the options was approximately nine
years at December 31, 1995, 1996 and 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............................................... 4.46(3) 2.09
13.88(2) 10.00
</TABLE>
(1) Exercise price of the options equals estimated fair value of the stock at
date of grant for all options granted during the period.
(2) Exercise price of the options is less than estimated fair value of the stock
at date of grant for all options granted during the period.
(3) Exercise price of the options is greater than estimated fair value of the
stock at date of grant for all options granted during the period.
The fair value of options is the estimated present value at date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield--zero; risk-free interest rate--ranges from 5.60% to
7.69%; expected volatility--58.3% for grants made on or after August 22, 1997
and zero for grants made prior to that date; and an expected holding period of
seven years.
Had the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," for expense recognition purposes, the amount of compensation
expense that would have been recognized in 1995, 1996 and
F-13
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. EMPLOYEE BENEFIT PLANS, CONTINUED:
1997 would have been $14,588, $41,295 and $271,092, respectively. The Company's
pro forma net income and pro forma net income per share for 1995, 1996 and 1997
would have been reduced to the amounts below:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Pro forma net income
As reported.............................. $328,418 $680,614 $1,913,946
Pro forma................................ 319,665 655,837 1,751,291
Diluted pro forma net income per share
As reported.............................. 0.09 0.17 0.33
Pro forma................................ 0.08 0.16 0.30
</TABLE>
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, 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, 1997, the maximum amount which could be required to be paid under these
Agreements, if such events occur, is approximately $5,693,000.
7. 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 three to seven years, with two facility leases
that have provisions to extend the leases for an additional three to five years.
Future minimum payments, by year and in the aggregate, under noncancelable
capital and operating leases with initial or remaining terms of one year or
more, are as follows at December 31, 1997:
<TABLE>
<CAPTION>
OPERATING
LEASES CAPITAL LEASES
----------- --------------
<S> <C> <C>
1998.............................................. $ 797,088 $ 2,374,466
1999.............................................. 698,324 2,056,068
2000.............................................. 602,539 1,539,717
2001.............................................. 460,100 1,199,401
2002.............................................. 56,348 943,425
----------- ------------
Total minimum lease payments...................... 2,614,399 $ 8,113,077
============
Amounts representing interest..................... (369,307)
-----------
Present value of net minimum lease payments....... 2,245,092
Current portion................................... (627,836)
-----------
Obligations under capital leases, less current
portion......................................... $ 1,617,256
===========
</TABLE>
Rental expense under operating leases for 1995, 1996 and 1997 was $235,852,
$502,628 and $1,763,857, respectively.
F-14
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. MAJOR CUSTOMERS:
The following sets forth the net revenues from customers who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
CUSTOMERS 1995 1996 1997
--------- ---------- ---------- -----------
<S> <C> <C> <C>
A...................................... $2,542,424 $6,274,368 $23,725,880
B...................................... * 2,468,759 *
C...................................... * 1,681,787 *
D...................................... 725,083 * *
E...................................... 670,005 * *
</TABLE>
- ---------------
* Net revenues did not exceed 10%
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 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.
9. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Current:
Federal, state and local............................... $ 861,095
Foreign................................................ 344,624
Deferred:
Federal, state and local............................... 91,328
Effect of termination of S corporation status.......... 144,572
Foreign................................................ 9,565
----------
Total provision........................................ $1,451,184
==========
</TABLE>
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate of 34% in 1997 as set forth below:
<TABLE>
<S> <C>
Income tax expense at the U.S. federal statutory
rate.................................................. 34.0%
S corporation income for which no current income taxes
were provided......................................... (14.4)
Effects of foreign taxes............................... 3.2
State income taxes, net of federal benefit............. 1.6
Effect of termination of S corporation status.......... 2.8
Other.................................................. 1.2
-----
Total.................................................. 28.4%
=====
</TABLE>
A provision has not been made for U.S. or additional foreign taxes on the
undistributed portion of earnings of foreign subsidiaries as those earnings have
been permanently reinvested. It is not practicable to determine the amount of
applicable taxes that would be due were such earnings distributed.
F-15
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES, CONTINUED:
Components of the Company's net deferred tax asset and liability included
in the consolidated balance sheet at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Compensation and employee benefits.......................... $ 113,966
Other....................................................... 70,700
---------
Total deferred tax assets................................... 184,666
---------
Deferred tax liabilities:
Software costs.............................................. 217,054
Depreciation................................................ 135,940
Other....................................................... 22,318
---------
Total deferred tax liability................................ 375,312
---------
Total net deferred tax liability............................ $ 190,646
=========
</TABLE>
10. SHAREHOLDERS' EQUITY:
On August 22, 1997, the Company and its shareholders completed an 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. Proceeds to
the Company approximated $49.6 million, net of underwriting commissions and
discounts and offering expenses of $4.4 million.
Concurrent with the Company's IPO (as noted above), a stock split of 36.5
shares per one share was also effected. All common shares and per share amounts
in the accompanying consolidated financial statements have been retroactively
adjusted to reflect this stock split.
11. PRO FORMA INCOME PER SHARE DATA:
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"). In accordance
with SFAS No. 128, the Company has retroactively restated pro forma income per
share data for all periods presented.
SFAS No. 128 eliminates primary EPS, replacing it with basic EPS, with the
principal difference being that common stock equivalents are not considered in
computing basic EPS. Accordingly basic pro forma income per share is computed
using the weighted average common shares outstanding for all periods presented.
Diluted pro forma income per share is computed using the weighted average common
shares and potentially dilutive common shares outstanding for all periods
presented.
F-16
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. PRO FORMA INCOME PER SHARE DATA, CONTINUED:
The weighted average shares and potential shares outstanding used in
computing diluted pro forma income per share have been calculated as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding..................... 3,650,000 3,650,000 5,055,452 3,650,000 7,959,716
Stock purchase warrants........... 153,738 153,738 97,718 153,738
Stock options..................... 48,727 213,755 610,138 226,327 651,373
--------- --------- --------- --------- ---------
Weighted average shares and
potential shares outstanding.... 3,852,465 4,017,493 5,763,308 4,030,065 8,611,089
========= ========= ========= ========= =========
</TABLE>
12. 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, valued at $14 per share or $2.7 million.
The Company acquired U-Gene as of June 30, 1997 for approximately $15.9
million in cash. The U-Gene acquisition was funded with approximately $9.3
million from the Senior Credit Facility, $5 million from a subordinated note and
an 8% promissory note of approximately $1.5 million payable to the U-Gene
shareholders which was deposited in an escrow account pursuant to the U-Gene
Purchase Agreement. As discussed in Note 14, the Company repaid all outstanding
amounts under the Senior Credit Facility and the subordinated note with the
proceeds from the Company's IPO. The promissory note will be paid on January 1,
1999, provided the Company has not delivered a claim with respect to breaches by
the U-Gene shareholders at that time.
In connection with the financing, the Company also issued common stock
purchase warrants which were exercisable at $0.01 per share for 153,738 shares
of the Company's Common Stock. The Warrants were exercised by the bank and
converted to Common Stock concurrently with the consummation of the Company's
IPO. Upon exercise, the Company reclassified the fair value of the warrants to
additional paid-in capital.
The following unaudited pro forma results of operations assume the
acquisitions of U-Gene and gmi occurred at the beginning of each year:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
<S> <C> <C>
Net revenues........................................ $32,463,000 $54,783,000
Income before extraordinary item.................... 3,039,000 3,840,000
Net income.......................................... 3,039,000 2,700,000
Income before extraordinary item, assuming the
Company was taxed as a C corporation.............. 1,656,000 3,231,000
Income per share before extraordinary item.......... 0.72 0.65
Diluted net income per share........................ 0.72 0.46
Diluted income per share before extraordinary item,
assuming the Company was taxed as a C
corporation....................................... 0.39 0.55
</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 at January 1, 1996 and 1997, nor are they necessarily
indicative of future operating results.
13. SUBSEQUENT ACQUISITION (UNAUDITED):
On February 12, 1998, the Company completed its acquisition of ACER/EXCEL
headquartered in Cranford, New Jersey. Total acquisition costs consisted of
$14.4 million in cash and 987,574 shares of the Company's
F-17
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. SUBSEQUENT ACQUISITION (UNAUDITED), CONTINUED:
Common Stock. The total purchase price includes $6.0 million ($2.8 million in
cash and 197,516 shares of the Company's Common Stock) placed in escrow pending
resolution of an issue relating to ACER/EXCEL's S corporation tax status ("Tax
Escrow"). In early 1998, ACER/EXCEL determined that, with respect to its tax
status as an S corporation, certain inadvertent terminating events occurred in
1991. ACER/EXCEL has filed a request for waiver of its inadvertent termination
status retroactive to the date of the terminating events and expects to be
granted such waiver, at which time the escrowed amounts will be paid to the
seller. This escrowed amount has not been included as consideration in the
computation of the excess of acquisition costs over net assets acquired. Once
the escrow is released, purchase price and the excess of acquisition costs over
net assets acquired will increase. An additional $2.0 million (124,224 shares of
the Company's Common Stock) was placed in escrow for indemnification of sellers'
representations and warranties ("General Escrow"), to be released to the selling
shareholders, 50% in February, 1999 and 50% in February, 2000. If the S
corporation tax issue is resolved in favor of the selling Shareholders, 62,112
shares of the Company's Common Stock will be transferred from the Tax Escrow to
the General Escrow for additional indemnification of sellers' representations
and warranties.
The value of the stock consideration was determined for financial reporting
purposes as of December 23, 1997, the date the purchase price was established.
Valuation of the Common Stock was based on an appraisal obtained by the Company
which discounted the shares due to lock-up restrictions and the lack of
registration of the shares.
The following unaudited pro forma results of operations assume the
acquisition of ACER/EXCEL occurred at the beginning of each year:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net revenues.............................................. $ 9,103,833 $21,028,762
Net income................................................ 1,535,516 1,359,463
Net income (assuming the Company was taxed as a C
Corporation throughout 1997)............................ 921,309 1,359,463
Net income per diluted share (assuming the Company was
taxed as a C corporation throughout 1997)............... 0.20 0.15
Weighted average shares and potential shares
outstanding............................................. 4,695,899 8,921,812
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the ACER/EXCEL acquisition been
consummated as of January 1, 1997 and 1998, nor are they necessarily indicative
of future operating results.
14. RELATED PARTY TRANSACTION:
The Company made payments in 1996 and 1997 totaling approximately $97,500
and $397,000, respectively, to a construction company owned by a relative of the
Company's primary shareholder, for construction and renovations at the corporate
headquarters.
15. EXTRAORDINARY ITEM:
During the third quarter of 1997, the Company recorded an extraordinary
item on the early extinguishment of indebtedness of $1.1 million, net of tax
benefits of approximately $426,000. The extraordinary item 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.
F-18
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16. GEOGRAPHIC INFORMATION:
Principal financial information by geographic areas is as follows:
<TABLE>
<CAPTION>
1997
--------------------------------
<S> <C>
Net revenues
North America............................................. $33,850,189
Europe.................................................... 10,382,710
-----------
$44,232,899
===========
Income from operations
North America............................................. $ 4,470,835
Europe.................................................... 757,948
-----------
$ 5,228,783
===========
Identifiable assets
North America............................................. $40,893,382
Europe.................................................... 38,731,226
-----------
$79,624,608
===========
</TABLE>
Net revenues and income from operations of the Company's European
wholly-owned subsidiaries have been included in the consolidated statements of
operations from the respective dates of acquisition.
17. COMPREHENSIVE INCOME (UNAUDITED):
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement requires display of comprehensive income in a set of
general purpose financial statements. Comprehensive income is defined as changes
in equity of a business enterprise during a period from transactions and other
events from non-owner sources. The reconciliation of comprehensive income for
1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1997 1998
------------------ ------------------
<S> <C> <C>
Net income...................................... $ 528,872 $1,444,386
---------- ----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments...... (435,222)
Unrealized holdings gains on available for
sale securities............................ 65,232
---------- ----------
Comprehensive income............................ $ 528,872 $1,074,396
========== ==========
</TABLE>
F-19
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Kendle International Inc.
We have audited the accompanying balance sheets of ACER/EXCEL Inc. as of
December 31, 1996 and 1997, and the related 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of ACER/EXCEL Inc. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 27, 1998
F-20
<PAGE> 66
ACER/EXCEL INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1997
----------------------- ----------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 285,615 $ 1,864,682
Marketable securities.................................. 1,617,698 1,906,307
Accounts receivable (net of allowance for doubtful
accounts of $28,000 in 1997)........................ 2,675,367 3,200,082
Unreimbursed investigator and project costs............ 1,193,691 1,273,301
Other current assets................................... 20,207 169,289
---------- -----------
Total current assets................................ 5,792,578 8,413,661
Property and equipment:
Furnishings, equipment and other....................... 1,027,260 1,582,540
Equipment under capital leases......................... 161,817 918,106
Less: accumulated depreciation and amortization........ (482,726) (787,869)
---------- -----------
Net property and equipment.......................... 706,351 1,712,777
---------- -----------
Other assets............................................. 12,300 135,962
---------- -----------
Total assets........................................ $6,511,229 $10,262,400
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables......................................... $ 939,925 $ 739,940
Other accrued liabilities.............................. 192,473 298,579
Current portion of obligations under capital leases.... 54,091 227,540
Advance billings....................................... 805,300 1,328,909
Deferred compensation.................................. 200,204
---------- -----------
Total current liabilities........................... 2,191,993 2,594,968
Capital lease obligations, less current portion.......... 37,852 509,244
---------- -----------
Total liabilities................................... 2,229,845 3,104,212
---------- -----------
Shareholders' equity:
Common stock -- no par value; no stated value; 5,000
shares authorized 4,000 shares issued and
outstanding......................................... 23,500 23,500
Unrealized gains (losses) on marketable securities..... 65,204 158,568
Paid in capital........................................ 100,000
Retained earnings...................................... 4,192,680 6,876,120
---------- -----------
Total shareholders' equity.......................... 4,281,384 7,158,188
---------- -----------
Total liabilities and shareholders' equity.......... $6,511,229 $10,262,400
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 67
ACER/EXCEL INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C>
Net revenues................................................ $ 7,848,080 $12,700,366
Cost and expenses:
Direct costs.............................................. 3,940,434 6,440,159
Selling, general, and administrative...................... 2,121,379 3,001,955
Depreciation and amortization............................. 140,693 306,591
----------- -----------
6,202,506 9,748,705
----------- -----------
Income from operations.................................... 1,645,574 2,951,661
Other income (expense):
Interest income........................................... 59,433 29,971
Dividend income........................................... 72,998 154,709
Interest expense.......................................... (13,721) (39,290)
Other..................................................... 30,443 3,305
----------- -----------
149,153 148,695
----------- -----------
Income tax expense.......................................... 92,794 173,000
----------- -----------
Net income................................................ $ 1,701,933 $ 2,927,356
=========== ===========
Pro forma (unaudited) (Note 4):
Net income, as reported................................... $ 1,701,933 $ 2,927,356
Pro forma income tax expense.............................. 596,609 1,067,142
----------- -----------
Pro forma net income...................................... $ 1,105,324 $ 1,860,214
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 68
ACER/EXCEL INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- UNREALIZED TOTAL
NUMBER GAINS ON SHARE-
OF MARKETABLE PAID IN RETAINED HOLDERS'
SHARES AMOUNT SECURITIES CAPITAL EARNINGS EQUITY
--------- ------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995............... 2,000 $20,000 $1,545,107 $1,565,107
Adjustment for
merger.......... 2,000 3,500 $ 24,526 1,265,124 1,293,150
----- ------- -------- -------- ---------- ----------
Balance, December 31,
1995, as
restated........... 4,000 23,500 24,526 2,810,231 2,858,257
Net income......... 1,701,933 1,701,933
Unrealized gains... 40,678 40,678
Distributions to
shareholders.... (319,484) (319,484)
----- ------- -------- -------- ---------- ----------
Balance, December 31,
1996............... 4,000 23,500 65,204 4,192,680 4,281,384
Net income......... 2,927,356 2,927,356
Unrealized gains... 93,364 93,364
Capital
contribution.... $100,000 100,000
Distributions to
shareholders.... (243,916) (243,916)
----- ------- -------- -------- ---------- ----------
Balance, December 31,
1997............... 4,000 $23,500 $158,568 $100,000 $6,876,120 $7,158,188
===== ======= ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 69
ACER/EXCEL INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $1,701,933 $2,927,356
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 140,693 306,591
Realized security gains................................ (24,524) (3,305)
Deferred income taxes.................................. 56,445 66,000
Deferred and non-cash compensation..................... 91,509 100,000
(Increase) decrease in:
Accounts receivable.................................. (1,584,559) (524,715)
Unreimbursed investigator and project costs.......... (148,715) (79,610)
Other current assets................................. (5,342) (149,082)
Other assets......................................... (1,983) (26,299)
Increase (decrease) in:
Trade payables....................................... 543,975 (265,985)
Other accrued liabilities.............................. (53,795) 106,106
Advance billings....................................... 2,635 523,609
Deferred compensation payable.......................... (200,204)
---------- ----------
Net cash provided by operating activities................. 718,272 2,780,462
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment..................... (315,041) (455,030)
Leasehold improvements................................. (36,383) (101,698)
Purchases of marketable securities..................... (1,397,960) (1,053,289)
Proceeds from sales of marketable securities........... 1,368,071 861,349
Investment in joint venture interests.................. (97,363)
---------- ----------
Net cash used by investing activities..................... (381,313) (846,031)
---------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations................. (42,066) (111,448)
Distributions to shareholders.......................... (319,484) (243,916)
---------- ----------
Net cash used by financing activities..................... (361,550) (355,364)
---------- ----------
Net increase (decrease) in cash and cash equivalents........ (24,591) 1,579,067
Cash and cash equivalents at beginning of year.............. 310,206 285,615
---------- ----------
Cash and cash equivalents at end of year.................... $ 285,615 $1,864,682
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 13,721 $ 39,290
========== ==========
Supplemental schedule of noncash investing and financing
activities:
Acquisition of equipment under capital leases............. $ 756,289
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 70
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
ACER/EXCEL 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 through IV clinical trial
management, clinical data management and biostatistical analysis, medical
writing and regulatory consultation and representation. The Company conducts its
operations in the United States.
In 1997, the Company contributed capital to form a joint venture, Beijing
ACERWITS Medical Consulting Co., Lt. ("ACERWITS"), in which the Company has a
50% interest. The joint venture is a clinical research organization located in
Beijing, China. In addition, the Company purchased a 13.67% investment in Taiwan
Medi Pharm Consulting Company ("TMP") in 1997. The Company's investment in these
investees is immaterial.
2. BUSINESS COMBINATION:
On December 31, 1996, ACER/EXCEL Inc. (formerly Advanced Clinical
Epidemiological Research, Inc.) consummated a merger through an exchange of
2,848 shares of common stock for all outstanding common stock of Excel
Scientific Protocols, Inc. ("Excel"), a company related through common
ownership. Each share of Excel was exchanged for 1.582 shares of ACER/EXCEL Inc.
common stock. This business combination qualified as a "tax-free reorganization"
pursuant to the IRC Section 368(a) and has been accounted for as if it were a
pooling of interests under Accounting Principles Board Opinion No. 16, since it
was a merger of companies under common control. Accordingly, all prior period
financial statements presented reflect the combined results of operations,
financial position and cash flows of ACER/EXCEL Inc. and Excel.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying financial statements are
summarized below.
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net revenues:
ACER/EXCEL Inc............................................ $2,762,590
Excel Scientific Protocols, Inc........................... 5,546,143
Elimination of intercompany transaction................... (460,653)
----------
Combined.................................................. $7,848,080
==========
Net income:
ACER/EXCEL Inc............................................ $ 366,842
Excel Scientific Protocols, Inc........................... 1,335,091
----------
Combined.................................................. $1,701,933
==========
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of money market funds held with a
financial institution.
The Company maintains its demand deposits with a single financial
institution, the balance of which from time-to-time exceeds the maximum
federally insured amount.
Marketable Securities
The Company classifies its marketable securities as "available for sale."
These securities are stated in the financial statements at market value.
Realized gains and losses are included in the statements of operations,
F-25
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
calculated based on the weighted average cost of the investments. Unrealized
gains and losses are shown as a separate component of shareholders' equity.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of five 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 in these leases was $46,083 and $151,606 at December
31, 1996 and 1997, respectively.
Investments
The Company accounts for its 50% investment in the ACERWITS joint venture
using the equity method of accounting and its investment in TMP using the cost
method of accounting. The equity in the earnings of ACERWITS were not material.
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 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 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 revenues and costs are recognized in
the period in which the amendments 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.
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 $3,001,000 and $5,810,640 for the years ended December 31, 1996 and
1997, respectively.
F-26
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. SUMMARY OF 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.
4. INCOME TAXES:
The Company has filed its federal income tax returns as an "S Corporation"
under Subchapter S of the Internal Revenue Code and passed its tax attributes
through to its shareholders. However, in January 1998, the Company discovered
that certain inadvertent terminating events had occurred in 1991 which caused
the Company to cease to qualify as an S Corporation. On February 11, 1998, the
Company filed a request for waiver of its inadvertent termination status
retroactive to the date of the terminating events in 1991. The Company expects
to be granted such waiver; accordingly no provision or liability for federal
income taxes has been included in the financial statements. The Company is
subject to state income taxes in certain states in which they conduct business.
The provision for state income taxes consists of current and deferred taxes.
The statements of operations include the unaudited 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 been
responsible for paying taxes during those periods.
5. MARKETABLE SECURITIES:
The fair value of marketable securities is estimated based on quoted market
prices. Information related to the company's marketable securities is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Certificates of deposit......................... $ 110,248 $ (528) $ 109,720
Mutual funds.................................... 1,060,130 $ 67,217 1,127,347
Debt securities:
U.S. government obligations................... 50,807 (472) 50,335
Municipal obligations......................... 331,309 (1,013) 330,296
---------- -------- ------- ----------
Total...................................... $1,552,494 $ 67,217 $(2,013) $1,617,698
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Certificates of deposit......................... $ 374,955 $(1,461) $ 373,494
Mutual funds.................................... 796,661 $139,383 936,044
Common stock.................................... 34,242 14,157 48,399
Debt securities:
U.S. government obligations................... 50,807 1,318 52,125
Municipal obligations......................... 491,074 5,171 496,245
---------- -------- ------- ----------
Total...................................... $1,747,739 $160,029 $(1,461) $1,906,307
========== ======== ======= ==========
</TABLE>
F-27
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. MARKETABLE SECURITIES, CONTINUED:
Contractual maturities of marketable debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Due after one year through five years... $230,195 $229,941 $133,077 $134,461
Due after five years through ten
years................................. 151,921 150,690 408,804 413,909
-------- -------- -------- --------
Total debt securities................. $382,116 $380,631 $541,881 $548,370
======== ======== ======== ========
</TABLE>
Proceeds from sales or maturities of investments in securities were
$1,368,071 and $861,349 during 1996 and 1997, respectively. Gross gains and
losses realized on such sales or maturities were not material for each of the
two periods. Shareholders' equity includes a net unrealized holding gain of
$65,204 and 158,568, at December 31, 1996 and 1997, respectively.
6. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Billed................................................... $1,929,541 $2,033,975
Unbilled................................................. 745,826 1,166,107
---------- ----------
$2,675,367 $3,200,082
========== ==========
</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.
7. DEBT:
In 1997, the Company entered into an agreement with a financial services
company for a $1,000,000 line of credit which expires July 31, 1998. Interest is
charged at the 30 day commercial paper rate plus 2.3%. Advances under the line
are evidenced by a note which is collateralized by all of the Company's
financial assets, and is subject to various covenants and restrictions,
including, among others, maintaining minimum tangible capital as defined. There
were no outstanding borrowings under the line at December 31, 1997.
8. 401(k) EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) retirement plan covering substantially all
employees who have completed at least five months of service and meet minimum
age requirements. The Company is required to contribute 25% of each
participant's contribution of up to 6% of salary. Contributions to this plan
totaled $29,486 and $49,595 for the years ended December 31, 1996 and 1997,
respectively.
9. DEFERRED COMPENSATION:
As of December 31, 1996, ACER/EXCEL Inc. and Excel each maintained a
"Phantom Stock" plan that provided certain key employees the right to earn
awards.
For both plans, participants earned phantom shares of the Company's common
stock each year, limited to certain defined maximums, based on years of
employment service. Shares earned under the plans were immediately vested. Upon
termination of employment as a result of death, disability, retirement (after
age 55) or termination without cause, the participant was entitled to receive a
cash benefit equal to the book value, adjusted as provided under the plans, as
of such date, of the number of shares in the participant's account.
For the year ended December 31, 1996, compensation costs related to the
plans totaled $91,509 and were determined based on the book value, adjusted as
provided under the plans, of the awards earned by the participants as of that
date. The plans were terminated January 1, 1997, upon the merger of the two
companies. Payments to participants in the plans were made in October 1997.
F-28
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. 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 seven months to five years, with two facility
leases that have escalating rent terms and provisions to extend the leases for
an additional two to five years.
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, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998........................................................ $288,490 $ 464,224
1999........................................................ 263,563 399,614
2000........................................................ 170,756 385,836
2001........................................................ 84,196 419,371
2002........................................................ 62,797 409,802
-------- ----------
Total minimum lease payments................................ 869,802 $2,078,847
==========
Amounts representing interest............................... 133,018
--------
Present value of net minimum lease payments................. 736,784
Current portion............................................. 227,540
--------
Obligations under capital leases, less current portion...... $509,244
========
</TABLE>
Rental expense for the years ended December 31, 1996 and 1997, was $306,901
and $411,346, respectively.
11. MAJOR CUSTOMERS:
The following sets forth the net revenues from customers who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
CUSTOMERS 1996 1997
--------- ------------ ------------
<S> <C> <C>
A...................................................... $1,893,048 $4,459,355
B...................................................... 2,837,323 4,158,641
C...................................................... * 1,553,337
D...................................................... 945,983 *
</TABLE>
- ---------------
* Net revenues did not exceed 10%
12. RELATED PARTY TRANSACTION:
The Company has subcontracted clinical projects to ACERWITS (see Note 1)
and TMP in 1997. Total revenues recognized related to work subcontracted to
these companies were $34,000 and $115,000, respectively.
F-29
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of GMI Gesellschaft
fur Angewandte Mathematik und Informatik mbH
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of GMI Gesellschaft fur Angewandte
Mathematik und Informatik mbH (gmi) for the two years 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 results of operations and cash flows of gmi for the
two years ended December 31, 1996, in conformity with generally accepted
accounting principles in the United States of America.
Coopers & Lybrand
Wirtschaftsprufungsgesellschaft GmbH
Munich, Germany
May 7, 1997
F-30
<PAGE> 76
GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, 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 these financial statements.
F-31
<PAGE> 77
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, June 30, 1997 (unaudited)......... $32,283 $1,292,124 $(265,965) $1,058,442
======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 78
GMI
GESELLSCHAFT FUR ANGEWANDTE
MATHEMATIK UND INFORMATIK mbH
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
USD USD USD USD
<CAPTION>
(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 these financial statements.
F-33
<PAGE> 79
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.
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
In addition to various contract costs previously described, the Company
incurs costs, in excess of contract amounts, which are reimbursable by its
clients. 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.
F-34
<PAGE> 80
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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
---- ---- ----
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
% % %
<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-35
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. MAJOR CUSTOMERS:
The following sets forth the net revenues from customers who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------
CUSTOMERS 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%
3. RELATED PARTY TRANSACTION:
The Company made payments in 1996 totalling approximately $ 107,069 to a
shareholder under a consulting contract.
4. 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-36
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
U-Gene Research B.V.
We have audited the accompanying consolidated statements of operations,
changes in shareholders' equity and cash flows of U-Gene Research B.V. for the
two years 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 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 consolidated results of operations and cash flows
of U-Gene Research B.V. for the two years ended December 31, 1996 in conformity
with generally accepted accounting principles in the United States of America.
Coopers & Lybrand N.V.
Utrecht, The Netherlands
June 17, 1997
F-37
<PAGE> 83
U-GENE RESEARCH B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ----------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
USD USD USD USD
<CAPTION>
(AS RESTATED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................ $9,115,192 $12,507,765 $6,758,161 $5,948,084
---------- ----------- ---------- ----------
Cost and expenses:
Direct costs.......................... 5,917,585 8,107,770 4,613,216 4,371,188
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 6,057,410
---------- ----------- ---------- ----------
Income (loss) from operations........... 881,005 1,296,898 826,599 (109,326)
---------- ----------- ---------- ----------
Other income:
Interest income....................... 6,222 6,623 150 12,454
---------- ----------- ---------- ----------
Income (loss) before income taxes....... 887,227 1,303,521 826,749 (96,872)
Income taxes (benefit).................. 302,735 465,243 292,349 (34,433)
---------- ----------- ---------- ----------
Net income (loss)....................... $ 584,492 $ 838,278 $ 534,400 $ (62,439)
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 84
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 loss (As Restated)
(unaudited)................ (62,439) (62,439)
Translation adjustments (As
Restated) (unaudited)...... (158,719) (158,719)
--- -------- ------- ----------- --------- ----------
Balance June 30, 1997 (As
Restated) (unaudited)...... 299 $172,235 $14,448 $ 1,148,590 $(201,864) $1,133,409
=== ======== ======= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 85
U-GENE RESEARCH B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
USD USD USD USD
<CAPTION>
(AS RESTATED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 584,492 $ 838,278 $ 534,400 $ (62,439)
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) (681,974)
Other current assets...................... 146,613 (117,999) (105,247) (362,596)
Advance billings.......................... (579,848) 1,234,611 (262,781) 45,719
Trade payables............................ 1,007,664 (254,631) (644,529) 596,200
Accrued liabilities and dividends
payable................................. 828,344 201,600 (23,316) (905,561)
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) (1,097,585)
---------- ---------- --------- -----------
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 (158,719)
---------- ---------- --------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 685,920 1,245,640 (926,412) (1,454,981)
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) $ 567,664
========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 86
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 through 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.
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.
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.
F-41
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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
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.
2. 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.
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>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------------
<S> <C> <C>
USD USD
<CAPTION>
(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>
F-42
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. EMPLOYEE BENEFIT PLANS, CONTINUED:
The actuarial present value of benefit obligations and funded status for
the Company's single employer plans were as follows in thousands:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
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>
3. 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.
F-43
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. LEASES, CONTINUED:
Commitments under operating lease contracts can be summarized as follows:
<TABLE>
<CAPTION>
USD
---
<S> <C>
1997.............................................. $488,000
1998.............................................. 459,500
1999.............................................. 125,000
2000.............................................. 62,500
</TABLE>
4. GEOGRAPHICAL SEGMENT INFORMATION:
The following sets forth net revenues from customers in the following
geographical areas:
<TABLE>
<CAPTION>
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>
5. MAJOR CUSTOMERS:
The following sets forth the net revenues from customers who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------ JUNE 30,
CUSTOMERS 1995 1996 1997
--------- ---- ---- ----------------
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%.
6. 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.
F-44
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. TAXES:
Reconciliations of the statutory income tax rate to the effective tax rates
shown in the financial statements are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1996 1996 1997
---- ---- ----------- -----------
<S> <C> <C> <C> <C>
% % % %
<CAPTION>
(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 0.5
---- ---- ---- ----
34.1 35.6 35.4 35.5
==== ==== ==== ====
</TABLE>
Permanent differences comprise partly deductible entertaining expenses and
permanent deductions in relation to capital expenditures.
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1995 1996 1996 1997
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
USD USD USD USD
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current tax (benefit)................ $ 615,407 $534,189 $268,349 $(71,145)
Deferred tax (benefit)............... (312,672) (68,946) 24,000 36,712
--------- -------- -------- --------
$ 302,735 $465,243 $292,349 $(34,433)
========= ======== ======== ========
</TABLE>
The deferred tax asset relates to temporary differences mainly relating to
the recognition of pension costs.
8. RESTATEMENT (UNAUDITED):
The unaudited financial statements as of and for the six month period ended
June 30, 1997 have been restated to properly reflect the results of operations
during that period. The appropriate amount of revenues and expenses to be
recognized was discovered subsequent to the Company's acquisition by Kendle
International Inc. The restatement resulted in a reduction of net income of
approximately $466,000 from the amount previously reported for the six month
period ended June 30, 1997.
F-45
<PAGE> 91
======================================================
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>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ 2
Prospectus Summary.................... 3
The Company........................... 3
The Offering.......................... 4
Summary Financial and Operating
Data................................ 5
Risk Factors.......................... 7
Use of Proceeds....................... 12
Price Range of Common Stock........... 12
Dividend Policy....................... 12
Capitalization........................ 13
Unaudited Pro Forma Condensed
Consolidated Statements of
Operations.......................... 14
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 34
Certain Transactions.................. 40
Principal and Selling Shareholders.... 40
Description of Capital Stock.......... 41
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 44
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,100,000 SHARES
[KENDLE LOGO]
KENDLE INTERNATIONAL INC.
COMMON STOCK
---------------------------
PROSPECTUS
, 1998
---------------------------
LEHMAN BROTHERS
J.C. BRADFORD & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
======================================================
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following estimated costs and expenses in connection with the issuance
and distribution of the securities being registered hereby are being paid by the
Company. Underwriting discounts and commissions are being paid by the Company
and the Selling Shareholders based on the number of shares sold by each.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 18,078
NASD filing fee............................................. 6,130
The Nasdaq Stock Market listing fee......................... 17,500
Printing and engraving costs................................ 100,000
Legal fees and expenses..................................... 60,000
Accounting fees and expenses................................ 75,000
Transfer Agent and Registrar fees and expenses.............. 5,000
Miscellaneous expenses...................................... 18,292
--------
TOTAL.................................................. $300,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1701.13(E) of the Ohio General Corporation Law allows
indemnification by the Registrant to any person made or threatened to be made a
party to any proceedings, other than a proceeding by or in the right of the
Registrant, by reason of the fact that he is or was a director, officer,
employee or agent of the Registrant, against expenses, including judgments and
fines, if he acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the Registrant and, with respect to
criminal actions, in which he had no reasonable cause to believe that his
conduct was unlawful. Similar provisions apply to actions brought by or in the
right of the Registrant, except that no indemnification shall be made in such
cases when the person shall have been adjudged to be liable for negligence or
misconduct to the Registrant unless determined by the court. The right to
indemnification is mandatory in the case of a director or officer who is
successful on the merits or otherwise in defense of any action, suit or
proceeding or any claim, issue or matter therein. Permissive indemnification is
to be made by a court of competent jurisdiction, the majority vote of a quorum
of disinterested directors, the written opinion of independent counsel or by the
shareholders.
The Registrant's Amended and Restated Code of Regulations provides that the
Registrant shall indemnify its directors and officers to the fullest extent
permitted by law.
The Registrant maintains director and officer liability insurance which
provides coverage against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant issued 987,574 shares in connection with its acquisition of
ACER/EXCEL on February 12, 1998. The issuance was exempt under Section 4(2) of
the Securities Act of 1933.
In addition, the Registrant issues promissory notes and guarantees of
indebtedness in the ordinary course of its business.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- -----------
<S> <C> <C>
1 -- Form of Underwriting Agreement
2.1(1) -- Stock Purchase Agreement dated July 1, 1997 by and among the
Company and Shareholders of U-Gene
</TABLE>
II-1
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- -----------
<S> <C> <C>
2.2(1) -- Escrow Agreement dated June 27, 1997 among the Company,
Keating, Muething & Klekamp, P.L.L., Bio-Medical Research
Holdings, B.V., Utrechtse Particatiemaatschappij B.V., P. J.
Morroson, T.S. Schwarz, I.M. Hoepelman, Ph. K. Peterson, J.
Remington, M.Rozenberg-Arska and L.G.W. Sterkman
2.3(1) -- Share Purchase Agreement dated July 2, 1997 by and among the
Company and Shareholders of gmi
2.4(2) -- Stock Purchase Agreement dated February 11, 1998 by and
among the Company and the Shareholders of ACER/EXCEL
2.5(3) -- Escrow Agreement dated February 11, 1998 among the Company,
Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven
Lee, Jean C. Lee, as Trustee under a Trust dated March 8,
1991 fbo Jennifer Lee, Citicorp Trust-South Dakota and The
Fifth Third Bank
2.6(3) -- Registration Rights Agreement dated February 11, 1998
between the Company and Tzuo-Yan Lee, Jean C. Lee, Michael
Minor, Conway Lee, Steven Lee, Jean C. Lee, as Trustee under
a Trust dated March 8, 1991 fbo Jennifer Lee, Citicorp
Trust-South Dakota
3.1(1) -- Amended and Restated Articles of Incorporation
3.2(1) -- Amended and Restated Code of Regulations
4(1) -- Specimen Common Stock Certificate
5 -- Opinion of Keating, Muething & Klekamp, P.L.L.
10.1(1) -- Amended and Restated Shareholders' Agreement dated June 26,
1997
10.2(1) -- Revolving Credit Loan Agreement, dated August 9, 1996, by
and between the Company and Star Bank, N.A., as amended on
November 27, 1996 and February 13, 1997
10.3(1) -- Promissory Note dated August 9, 1996 made by the Company in
favor of Star Bank, N.A. in the principal amount of
$2,000,000.
10.4(1) -- Master Lease Agreement dated November 27, 1996 by and
between the Company and Bank One Leasing Corporation, as
amended on April 18, 1997
10.5(1) -- Master Equipment Lease dated January 31, 1995 by and between
the Company and Star Bank, N.A.
10.6(1) -- Master Equipment Lease dated August 16, 1996 by and between
the Company and The Fifth Third Leasing Company
10.7(1) -- Lease Agreement dated December 9, 1991, by and between the
Company and Carew Realty, Inc., as amended on December 30,
1991, March 18, 1996, October 8, 1996 and January 29, 1997
10.8(1) -- Indemnity Agreement dated June 21, 1996 by and between the
Company and Candace Kendle Bryan
10.9(1) -- Indemnity Agreement dated June 21, 1996 by and between the
Company and Christopher C. Bergen
10.10(1) -- Indemnity Agreement dated June 21, 1996 by and between the
Company and Timothy M. Mooney
10.11(3) -- Indemnity Agreement dated May 14, 1997 by and between the
Company and Charles A. Sanders
10.12(3) -- Indemnity Agreement dated May 14, 1997 by and between the
Company and Philip E. Beekman
10.13(1) -- Credit Agreement by and between the Company and NationsBank,
N.A. dated June 26, 1997
10.14(1) -- Investment Agreement by and between the Company and
NationsBank Investment Corporation dated June 26, 1997
10.15(1) -- Clinical Development Services Agreement dated January 8,
1996 by and between the Company and Amgen Inc.
10.16(1) -- Clinical Trial Services Agreement dated April 26, 1996 by
and between the Company and G.D. Searle & Co.
</TABLE>
II-2
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------- -----------
<S> <C> <C>
10.17(3) -- Clinical Trial Service Agreement between the Company and
G.D. Searle & Company dated September 23, 1997
10.18(1) -- Clinical Development Agreement dated August 12, 1995 by and
between the Company and Procter & Gamble Pharmaceuticals,
Inc.
10.19(3) -- Amended and Restated Credit Agreement dated as of February
26, 1998 by and between the Company and NationsBank, N.A.
10.20(1) -- Management Contracts and Compensation Plans
(a) -- 1995 Stock Option and Stock Incentive Plan
(b) -- 1995 Stock Option and Stock Incentive
Plan--Individual Stock Option Agreement for Incentive Stock
Option (contained in Exhibit 10.20(a))
(c) -- 1997 Stock Option and Stock Incentive Plan
(d) -- Form of Protective Compensation and Benefit Agreement
21(1) -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Coopers & Lybrand N.V.
23.3 -- Consent of Coopers & Lybrand GmbH
23.4 -- Consent of Keating, Muething & Klekamp, P.L.L. (contained in
Exhibit 5)
24 -- Powers of Attorney (contained in Signature Page)
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement No.
333-3058.
(2) Incorporated by reference to the Company's Form 8-K dated November 13, 1997.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1997.
ITEM 17. UNDERTAKINGS.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Cincinnati, State of Ohio,
on the 22nd day of May, 1998.
KENDLE INTERNATIONAL INC.
BY: */s/ CANDACE K. BRYAN
------------------------------------
Candace K. Bryan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. The persons whose names appear with an
asterisk (*) below hereby designate Candace K. Bryan and Christopher C. Bergen,
or either of them, as attorney-in-fact to sign all amendments including any
post-effective amendments to this Registration Statement as well as any related
registration statement (or amendment thereto) filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
* /s/ CANDACE K. BRYAN Chairman of the Board of Directors May 22, 1998
- ------------------------------------------------ and Chief Executive Officer
Candace K. Bryan (principal executive officer)
*/s/ CHRISTOPHER C. BERGEN President, Chief Operating Officer, May 22, 1998
- ------------------------------------------------ Secretary and Director
Christopher C. Bergen
* /s/ TIMOTHY M. MOONEY Vice President -- Finance, Chief May 22, 1998
- ------------------------------------------------ Financial Officer, Treasurer,
Timothy M. Mooney Assistant Secretary (principal
financial officer and principal
accounting officer) and Director
*/s/ PHILIP E. BEEKMAN Director May 22, 1998
- ------------------------------------------------
Philip E. Beekman
*/s/ CHARLES A. SANDERS Director May 22, 1998
- ------------------------------------------------
Charles A. Sanders
</TABLE>
II-4
<PAGE> 1
Exhibit 1
2,100,000 SHARES
KENDLE INTERNATIONAL INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______ __, 1998
Lehman Brothers Inc.
J.C. Bradford & Co.
NationsBanc Montgomery LLC
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Kendle International Inc., an Ohio corporation (the "Company"), and
certain shareholders of the Company named in Schedule 2 hereto (the "Selling
Shareholders"), propose to sell an aggregate of 2,100,000 shares (the "Firm
Stock") of the Company's common stock, no par value per share (the "Common
Stock"). Of the 2,100,000 shares of the Firm Stock, 2,000,000 are being sold by
the Company and 100,000 by the Selling Shareholders. In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 315,000 shares of the
Common Stock on the terms and for the purposes set forth in Section 5 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company and the Selling
Shareholders by the Underwriters.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 (No. 333-_______),
including Amendments No. [__] thereto, with respect to the Stock has
(i) been prepared by the Company in conformity with the requirements
of the Securities Act of 1933 (the "Securities Act") and the rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, (ii) been filed
with the Commission under the Securities Act, and (iii) become
effective under the Securities Act; a final prospectus is now
proposed to be filed with the Commission. Copies of such
registration statement, Amendments No. [__] thereto and the form of
such final prospectus have been delivered by the Company to you as
the representatives (the "Representatives") of the Underwriters. As
used in this Agreement, "Effective Time" means the date and the time
as of which such registration statement was declared effective by
the Commission; "Effective Date" means the date of the Effective
Time; "Preliminary Prospectus" means each prospectus included in
such registration statement or amendments thereof before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations; "Registration
Statement" means such registration statement, as amended at the
Effective Time, including all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations in accordance with Section 6(a) hereof and
deemed to be a part of the Registration Statement as of the
Effective Time pursuant to paragraph (b) of Rule 430A of the Rules
and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of
Rule 424(b) of the Rules and Regulations with any changes thereto
<PAGE> 2
made by the Company with the consent of the Representatives. The
Commission has not issued any order preventing or suspending the use
of any Preliminary Prospectus. "Rule 462(b) Registration Statement"
means a registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations relating to the offering covered by the
Registration Statement.
(b) The Registration Statement conforms, and any Rule
462(b) Registration Statement and the Prospectus and any
post-effective amendments or supplements to the Registration
Statement or the Prospectus when they become effective or are filed
with the Commission, as the case may be, conform in all respects to
the requirements of the Securities Act and the Rules and Regulations
and do not and will not, as of the applicable effective date (as to
the Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein (as to the Prospectus, in
light of the circumstances under which they were made) not
misleading; provided that no representation or warranty is made as
to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with
written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
(c) The Company and each of its subsidiaries (as defined in
Section 17) have been duly incorporated and are validly existing as
corporations in good standing (or the local law equivalent) under
the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing (or the local
law equivalent) as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the conduct
of their respective businesses requires such qualification, except
where the failure to be so qualified or in good standing would not
have a material adverse effect on the Company and its subsidiaries
(taken as a whole), and have all power and authority necessary to
own or hold their respective properties and to conduct the
businesses in which they are engaged. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21 to the
Registration Statement.
(d) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; and all of the
issued shares of capital stock of each subsidiary of the Company
have been duly and validly authorized and issued and are fully paid
and non-assessable and (except for directors' qualifying shares) are
owned directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor
as provided herein, will be duly and validly issued, fully paid and
non-assessable; and the Stock will conform to the description
thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby which are described in the Registration
Statement and the Prospectus (hereinafter, the "Reorganization")
will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
actions result in any violation of the provisions of the charter,
code of regulations or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation
of any court or governmental agency or body having
<PAGE> 3
jurisdiction over the Company or any of its subsidiaries or any of
their properties or assets; and except for the registration of the
Stock under the Securities Act and the Rules and Regulations and
such consents, approvals, authorizations, registrations or
qualifications as may be required under the Securities Exchange Act
of 1934 (the "Exchange Act") and applicable state or foreign
securities laws in connection with the purchase and distribution of
the Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery
and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby and the
Reorganization, other than such actions as are contemplated in the
Prospectus or such actions as have already been taken.
(h) [Except as described in the Registration Statement, (i)
the Company has not sold or issued any shares of Common Stock during
the six-month period preceding the date of the Prospectus, including
any sales pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act and (ii) there is no commitment, plan or arrangement
to issue, and no outstanding option, warrant or other right calling
for the issuance of, any share of capital stock of the Company or of
any subsidiary or any security or other instrument that by its terms
is convertible into exercisable for, or exchangeable for capital
stock of the Company.]
(i) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with
its business from fire, explosion, flood or other calamity, whether
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus nor has the Company incurred or
undertaken any liability or obligation, direct or contingent, that
are material to the Company except for liabilities or obligations
(i) incurred or undertaken in the ordinary course of business or
(ii) described in the Registration Statement, and, since such date,
there has not been any change in the capital stock or long-term debt
of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse
change, in or affecting the general affairs, management, financial
position, stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries (taken as a whole),
otherwise than as set forth or contemplated in the Prospectus.
(j) The financial statements (including the related notes
and supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly in all
material respects the financial condition and results of
operations of the entities purported to be shown thereby, at
the dates and for the periods indicated, and have been prepared
in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved.
The pro forma financial statements and other pro forma
financial information (including the notes thereto) included in the
Registration Statement and the Prospectus (i) present fairly in all
material respects the information shown therein, (ii) have been
prepared in accordance with the applicable requirements of
Rule 11-02 of the Rules and Regulations, (iii) have been
prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements
and (iv) have been properly compiled on the basis described
therein and the assumptions used in the preparation of the
pro forma financial statements and other pro forma
information (including the notes thereto) and included in the
Registration Statement and the Prospectus are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(k) Coopers & Lybrand L.L.P., who have certified certain
financial statements of the Company, whose report appears in the
Prospectus and who have delivered
<PAGE> 4
the initial letter referred to in Section 9(g) hereof, are
independent public accountants as required by the Securities Act and
the Rules and Regulations.
(l) The Company and each of its subsidiaries do not own any
real property. The Company and each of its subsidiaries have good
and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not materially
affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the
Company and its subsidiaries; and all real property and buildings
held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
(m) The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the
value of their respective properties and as is customary for
companies engaged in similar businesses in similar industries.
(n) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for
the conduct of their respective businesses. The Company has no
reason to believe that the conduct of its business will conflict
with, and has not received any notice of any claim of conflict with,
any such rights of others, nor, to the best of the Company's
knowledge is there an infringement by others of such rights of the
Company which would result in a material adverse effect on the
stockholders' equity, assets, liabilities, business, results of
operations, condition (financial or otherwise), cash flows, affairs
or prospects of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect").
(o) There are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries is a party or of
which any property or assets of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, might have a Material Adverse
Effect; and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(p) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to
the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement.
(q) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other
hand, which is required to be described in the Prospectus which is
not so described.
(r) No labor disturbance by the employees of the Company
exists or, to the knowledge of the Company, is imminent which might
be expected to have a Material Adverse Effect.
(s) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable
event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company would
have any liability; the Company has not incurred and does not expect
to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action
<PAGE> 5
or by failure to act, which would cause the loss of such
qualification.
(t) The Company has filed all federal, state, local and
foreign income and franchise tax returns required to be filed
through the date hereof and has paid all taxes due thereon, and no
tax deficiency has been determined adversely to the Company or any
of its subsidiaries which has had (nor does the Company have any
knowledge of any tax deficiency which, if determined adversely to
the Company or any of its subsidiaries, might have) a Material
Adverse Effect.
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or
granted any securities, (ii) incurred any liability or obligation,
direct or contingent, other than liabilities and obligations which
were incurred in the ordinary course of business, (iii) entered into
any transaction not in the ordinary course of business or (iv)
declared or paid any dividend on its capital stock.
(v) The Company (i) makes and keeps accurate books and
records and (ii) maintains internal accounting controls which
provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of its financial
statements and to maintain accountability for its assets, (C) access
to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is
compared with existing assets at reasonable intervals.
(w) Neither the Company nor any of its subsidiaries (i) is
in violation of its charter, code of regulations or by-laws, (ii) is
in default in any material respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant
or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties
or assets is subject or (iii) is in violation in any respect of any
law, ordinance, governmental rule, regulation or court decree to
which it or its property or assets may be subject or has failed to
obtain any license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of
its property or to the conduct of its business where such violation
or failure would have a Material Adverse Effect. Each such
indenture, mortgage, deed of trust, loan agreement, lease license or
other agreement is in full force and effect.
(x) Neither the Company nor any of its subsidiaries, nor
any director, officer, agent, employee or other person associated
with or acting on behalf of the Company or any of its subsidiaries,
has used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate
funds; violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(y) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous
substances by the Company or any of its subsidiaries (or, to the
knowledge of the Company, any of their predecessors in interest) at,
upon or from any of the property now or previously owned or leased
by the Company or its subsidiaries in violation of any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit,
except for any violation or remedial action which would not have, or
could not be reasonably likely to have, singularly or in the
aggregate with all such violations and remedial actions, a Material
Adverse Effect; there has been no material spill, discharge, leak,
emission,
<PAGE> 6
injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its
subsidiaries or with respect to which the Company or any of its
subsidiaries have knowledge, except for any such spill, discharge,
leak, emission, injection, escape, dumping or release which would
not have or would not be reasonably likely to have, singularly or in
the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a Material Adverse
Effect; and the terms "hazardous wastes", "toxic wastes", "hazardous
substances" and "medical wastes" shall have the meanings specified
in any applicable local state, federal and foreign laws or
regulations with respect to environmental protection.
(z) Neither the Company nor any subsidiary is an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(aa) The Company and each of its subsidiaries possess such
permits, licenses, approvals, consents, orders and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies, court, department, commission or any board, bureau, review
board or similar organization (collectively, "Authority") necessary
to conduct the business now operated by them, except where the
failure to possess the same would not, singly or in the aggregate,
have a Material Adverse Effect; the Company and each of its
subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force
and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect; and neither the
Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses, which singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result
in a Material Adverse Effect.
(ab) The Company and each of its subsidiaries are in
compliance with all applicable laws, statutes, ordinances, rules
regulations, injunctions or decrees, certificates of need, or any
other published requirements or mandatory policies of any Authority
(collectively, "Laws") of any applicable jurisdiction, the
enforcement of which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect. Neither
the Company nor any of its subsidiaries has received any written
notice from any Authority to the effect that the Company or any
subsidiary is not in compliance with any Laws, nor that the Company
or any subsidiary is the subject or target of any investigation with
respect to any violation or possible violation of any Laws, the
violation of or non-compliance with which would reasonably be
expected to have a Material Adverse Effect.
(ac) The Company has been advised that the Common Stock
(including the Stock) has been approved for quotation on the Nasdaq
National Market, upon official notice of issuance thereof, with
trading scheduled to begin at the Effective Time, or at such later
time as the Underwriters may request.
2. Representations, Warranties and Agreements of the Selling
Shareholders. Each Selling Shareholder severally represents, warrants and agrees
that:
(a) Such Selling Shareholder has, and immediately prior
to the First Delivery Date (as defined in Section 5 hereof) will
have, good and valid title to the shares of Stock to be sold by such
Selling Shareholder hereunder on such date, free and clear of all
liens, encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title to
such shares, free and clear of all liens, encumbrances, equities or
claims, will pass to the several Underwriters.
(b) Such Selling Shareholder has full right, power and
authority to enter into this Agreement; the execution, delivery and
performance of this Agreement by such Selling Shareholder and the
consummation by such Selling Shareholder of the transactions
contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument
<PAGE> 7
to which such Selling Shareholder is a party or by which such
Selling Shareholder is bound or to which any of the property or
assets of such Selling Shareholder is subject, nor will such actions
result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over such Selling Shareholder or the property or assets
of such Selling Shareholder; and, except for the registration of the
Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency
or body is required for the execution, delivery and performance of
this Agreement by such Selling Shareholder and the consummation by
such Selling Shareholder of the transactions contemplated hereby.
(c) The Registration Statement and the Prospectus and
any further amendments or supplements to the Registration Statement
or the Prospectus when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided that no representation or warranty
is made as to information contained in or omitted from the
Registration Statement or the Prospectus in reliance upon and in
conformity with written information furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically
for inclusion therein.
(d) Such Selling Shareholder has no reason to believe
that the representations and warranties of the Company contained in
Section 1 hereof are not materially true and correct, is familiar
with the Registration Statement and the Prospectus (as amended or
supplemented) and has no knowledge of any material fact, condition
or information not disclosed in the Registration Statement, as of
the effective date, or the Prospectus (or any amendment or
supplement thereto), as of the applicable filing date, which has
adversely affected or may adversely affect the business of the
Company and is not prompted to sell shares of Common Stock by any
information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
(e) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause
or result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,000,000 shares of
the Firm Stock and each Selling Shareholder hereby agrees to sell the number of
shares of the Firm Stock set forth opposite his or her name in Schedule 2
hereto, severally and not jointly, to the several Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase the number of shares
of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto.
Each Underwriter shall be obligated to purchase from the Company, and from each
Selling Shareholder, that number of shares of the Firm Stock which represents
the same proportion of the number of shares of the Firm Stock to be sold by the
Company, and by each Selling Shareholder, as the number of shares of the Firm
Stock set forth opposite the name of such Underwriter in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 315,000 shares of Option Stock. Such option is granted solely for
the purpose of covering
<PAGE> 8
overallotments in the sale of Firm Stock and is exercisable as provided in
Section 5 hereof. Shares of Option Stock shall be purchased severally for the
account of the Underwriters in proportion to the number of shares of Firm Stock
set opposite the name of such Underwriters in Schedule 1 hereto. The respective
purchase obligations of each Underwriter with respect to the Option Stock shall
be adjusted by the Representatives so that no Underwriter shall be obligated to
purchase Option Stock other than in 100 share amounts. The price of both the
Firm Stock and any Option Stock shall be $_____ per share.
The Company and the Selling Shareholders shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the offices of Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, at 10:00 A.M., New York
City time, on the third full business day following the Effective Date or at
such other date or place as shall be determined by agreement between the
Representatives, the Company and the Selling Shareholders. This date and time
are sometimes referred to as the "First Delivery Date." On the First Delivery
Date, the Company and the Selling Shareholders shall deliver or cause to be
delivered certificates representing the Firm Stock to the Representatives for
the account of each Underwriter against payment to or upon the order of the
Company and the Selling Shareholders of the purchase price by certified or
official bank check or checks payable in New York Clearing House (next-day)
funds. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in
such names and in such denominations as the Representatives shall request in
writing not less than two full business days prior to the First Delivery Date.
For the purpose of expediting the checking and packaging of the certificates for
the Firm Stock, the Company and the Selling Shareholders shall make the
certificates representing the Firm Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in New York Clearing House (next-day) funds. Time shall
be of the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Option Stock shall be registered in such names and
in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the
<PAGE> 9
checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than the Commission's close of
business on the second business day following the execution and
delivery of this Agreement or, if applicable, such earlier time as
may be required by Rule 430A(a)(3) under the Securities Act; to make
no further amendment or any supplement to the Registration Statement
or to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish the Representatives
with copies thereof; to advise the Representatives, promptly after
it receives notice thereof, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to each of the Representatives and
to counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each
amendment thereto filed with the Commission, including all consents
and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number
of the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement) and any Rule
462(b) Registration Statement and (ii) each Preliminary Prospectus,
the Prospectus and any amended or supplemented Prospectus; and, if
the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock
or any other securities relating thereto and if at such time any
events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to
amend or supplement the Prospectus in order to comply with the
Securities Act, to notify the Representatives and, upon their
request, to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many
copies as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to
the Registration Statement or the Prospectus or any supplement to
the Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by
the Commission;
(e) Prior to filing with the Commission any amendment to
the Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing, which consent shall not be unreasonably withheld or delayed;
(f) As soon as practicable after the Effective Date, to
make generally
<PAGE> 10
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section
11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date,
to furnish to the Representatives copies of all materials furnished
by the Company to its shareholders and all public reports and all
reports and financial statements furnished by the Company to the
principal national securities exchange upon which the Common Stock
may be listed pursuant to requirements of or agreements with such
exchange (or the Nasdaq National Market if the Common Stock is so
listed thereon) or to the Commission pursuant to the Exchange Act or
any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as
to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock; provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the
Prospectus, not to, directly or indirectly, offer for sale, sell,
grant any option to purchase or otherwise dispose of (or enter into
any transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock and
shares issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans existing on the
date hereof or pursuant to currently outstanding options, warrants
or rights), sell or grant options, rights or warrants with respect
to any shares of Common Stock (other than the grant of options
pursuant to option plans existing on the date hereof), or waive the
restrictions on sale contained in any agreement or award letter to
which the options or shares of Common Stock of any officer or
director of the Company are subject without the prior written
consent of Lehman Brothers Inc. on behalf of the Representatives;
and to cause each person that was a shareholder of the Company prior
to the issuance of the Stock to be sold hereunder to furnish to the
Representatives, prior to the First Delivery Date, a letter or
letters, in form and substance satisfactory to counsel to the
Underwriters, pursuant to which each such person shall agree not to,
directly or indirectly, offer for sale, sell, grant any option to
purchase or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any shares
of Common Stock for a period of 180 days from the date of the
Prospectus, without the prior written consent of Lehman Brothers
Inc. on behalf of the Representatives;
(j) Prior to the Effective Date, to apply for the inclusion
of the Stock on the Nasdaq National Market and to use its best
efforts to complete that inclusion, subject only to official notice
of issuance or the effectiveness of the Registration Statement and
evidence of satisfactory distribution, prior to the First Delivery
Date;
(k) Prior to filing with the Commission any reports required
by Rule 463 of the Rules and Regulations, to furnish a copy thereof
to the counsel for the Underwriters and receive and consider its
comments thereon, and to deliver promptly to the Representatives a
signed copy of each such report filed by it with the Commission;
(l) To apply the net proceeds from the sale of the Stock
being sold by the Company as set forth in the Prospectus;
(m) To comply with all registration, filings and reporting
requirements of the Exchange Act, which may from time to time be
applicable to the Company and to comply with all provisions of all
undertakings contained in the Registration Statement; and
(n) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
<PAGE> 11
Commission thereunder.
7. Further Agreements of the Selling Shareholders. Each Selling
Shareholder agrees:
(a) For a period of 90 days from the date of the
Prospectus, not to, directly or indirectly, offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which
is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common
Stock (other than the Stock), without the prior written consent of
Lehman Brothers Inc.
(b) That the Stock to be sold by such Selling Shareholder
hereunder is subject to the interest of the Underwriters and that
the obligations of such Selling Shareholder hereunder shall not be
terminated by any act of such Selling Shareholder, by operation of
law, by the death or incapacity of such Selling Shareholder or, in
the case of a trust, by the death or incapacity of any executor or
trustee or the termination of such trust, or the occurrence of any
other event.
(c) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States
Treasury Department Form W-9.
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of printing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the stock; (e) the filing fees and expenses (including related fees
and expenses of counsel to the Underwriters) incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (f) any applicable listing or other related fees; (g) the
fees and expenses of qualifying the Stock under the securities laws of the
several jurisdictions as provided in Section 6(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the Underwriters, which fees shall not exceed $15,000); (h) the fees
and expenses of any transfer agent or registrar for the Stock; and (i) all other
costs and expenses incident to the performance of the obligations of the Company
and the Selling Shareholders under this Agreement; provided that, except as
provided in this Section 8 and in Section 13, the Underwriters shall pay their
own costs and expenses, including the costs and expenses of their counsel, any
transfer taxes on the Stock which they may sell and the expenses of advertising
any offering of the Stock made by the Underwriters and the Selling Shareholders
shall pay the fees and expenses of their counsel and any transfer taxes payable
in connection with their respective sales of Stock to the Underwriters and
reimburse the Company for their pro rata share of the fees and expenses paid by
the Company in connection with the offering of the Stock.
9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Shareholders contained herein, to the performance by the Company
and the Selling Shareholders of their obligations hereunder, and to each of the
following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a) hereof, and the
Representatives shall have received notice thereof, not later than
the first full business day next following the date of this
Agreement or such later date as shall be consented to in writing by
the Representatives; no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated
or threatened by the Commission; and any request of the Commission
for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
<PAGE> 12
(b) No Underwriter shall have discovered and disclosed
to the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which, in
the reasonable opinion of Kramer, Levin, Naftalis & Frankel, counsel
for the Underwriters, is material or omits to state a fact which in
the reasonable opinion of such counsel, is material and is required
to be stated therein or is necessary to make the statements therein
not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement,
the Stock, the Registration Statement and the Prospectus, and all
other legal matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all material
respects to counsel for the Underwriters, and the Company shall have
furnished to such counsel all documents and information that they
may reasonably request to enable them to pass upon such matters.
(d) Keating, Muething & Klekamp, P.L.L. shall have
furnished to the Representatives their written opinion, as counsel
to the Company, addressed to the Underwriters and dated such
Delivery Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) The Company and each of its subsidiaries
have been duly incorporated and are validly existing as
corporations in good standing (or the local law
equivalent) under the laws of their respective
jurisdictions of incorporation, are duly qualified to do
business and are in good standing (or the local law
equivalent) as foreign corporations in each jurisdiction
in which their respective ownership or lease of property
or the conduct of their respective businesses requires
such qualification, except where the failure to be so
qualified or in good standing would not have a Material
Adverse Effect, and have all power and authority
necessary to own or hold their respective properties and
conduct the businesses in which they are engaged;
(ii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued
shares of capital stock of the Company have been duly
and validly authorized and issued, are fully paid and
nonassessable and conform to the description thereof
contained in the Prospectus; and all of the issued
shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued
and are fully paid, nonassessable and (except for
directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(iii) Other than as set forth in the Prospectus,
there are (A) no preemptive or other rights to subscribe
for or to purchase the capital stock of the Company
arising under the Ohio General Corporation Law, or, to
the knowledge of such counsel, otherwise, (B) to the
knowledge of such counsel no outstanding options,
warrants or other rights calling for the issuance of any
share of capital stock of the Company or other
instrument that by its terms is convertible into,
exercisable for or exercisable for capital stock of the
Company, and no rights, by contract or otherwise, to
require registration under the Securities Act of shares
of Stock, and (C) no restriction upon the voting or
transfer of, any shares of the Stock pursuant to the
Company's charter or by-laws or any agreement or other
instrument known to such counsel;
(iv) To the best of such counsel's knowledge and
other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of
which any property or assets of the Company or any of
its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries,
might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of
operations, business or prospects of the Company and its
subsidiaries (taken as a whole); and, to the best of
such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities
or
<PAGE> 13
threatened by others;
(v) This Agreement has been duly authorized,
executed and delivered by the Company;
(vi) The shares of Stock being delivered on such
Delivery Date have been duly and validly authorized,
and, when issued and delivered to and paid for by the
Underwriters pursuant to the terms of this Agreement,
will be validly issued, fully paid and non-assessable;
and the shares of Stock being delivered on such Delivery
Date conform to the description thereof contained in the
Prospectus under the caption "Description of Capital
Stock". Upon delivery of the payment for the Stock to be
sold by the Company to the Underwriters pursuant to this
Agreement, each Underwriter (assuming that it acquires
such Shares without notice of any adverse claim, as such
term is used in Section 8-302 of the Uniform Commercial
Code in effect in the State of New York) will acquire
good and marketable title to the Stock so sold and
delivered to it, free and clear of all liens, pledges,
charges, claims, security interests, restrictions on
transfer, agreements or other defects of title
whatsoever (other than those resulting from any action
taken by such Underwriter);
(vii) The Registration Statement, including any
Rule 462(b) Registration Statement, was declared
effective under the Securities Act as of the date and
time specified in such opinion, the Prospectus was filed
with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such
opinion on the date specified therein and no stop order
suspending the effectiveness of the Registration
Statement has been issued and, to the knowledge of such
counsel, no proceeding for that purpose is pending or
threatened by the Commission;
(viii) The Registration Statement, including any
Rule 462(b) Registration Statement, and the Prospectus
and any further amendments or supplements thereto made
by the Company prior to such Delivery Date (other than
the financial statements and related schedules therein,
as to which such counsel need express no opinion) comply
as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations;
(ix) All descriptions in the Prospectus of
contracts and other documents to which the Company or
any of its subsidiaries is a party are accurate as
summaries in all material respects. To the best of such
counsel's knowledge, there are no contracts or other
documents which are required to be described in the
Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as
exhibits to the Registration Statement;
(x) To the best of such counsel's knowledge,
there are no contracts, agreements or understandings
between the Company and any person granting such person
the right to require the Company to file a registration
statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such
person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being
registered pursuant to any other registration statement
filed by the Company under the Securities Act;
(xi) The Common Stock (including the Stock) is
duly authorized for listing on the Nasdaq National
Market, subject only to official notice of issuance;
(xii) Except for the registration of the Stock
under the Securities Act and such consents, approvals,
authorizations, registrations and qualifications as may
be required under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing
or registration with, any such
<PAGE> 14
court or governmental agency or body is required for the
consummation of the Reorganization; and the
Reorganization has been consummated;
(xiii) The issue and sale of the shares of Stock
being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions
of this Agreement and the consummation of the
transactions contemplated hereby and the Reorganization
will not conflict with or result in a breach or
violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or
any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such actions
result in any violation of the provisions of the
charter, code of regulations, or by-laws of the Company
or any of its subsidiaries, nor will such actions result
in any violation of any statute or any order, rule or
regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their
properties or assets; and except for the registration of
the Stock under the Securities Act and the Rules and
Regulations and such consents, approvals,
authorizations, registrations or qualifications as may
be required under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing
or registration with, any such court or governmental
agency or body is required for the execution, delivery
and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby and
the Reorganization;
(xiv) To the best of such counsel's knowledge,
neither the Company nor any subsidiary of the Company is
in violation of its charter, code of regulations or
by-laws and no default by the Company or any subsidiary
exists in the due performance or observance of any
material obligation, agreement, covenant or condition
contained in any material contract or other agreement or
instrument that is described or referred to in the
Registration Statement or the Prospectus or filed as an
exhibit to the Registration Statement;
(xv) To the best of such counsel's knowledge, the
Company and its subsidiaries are in compliance in all
material respects with all applicable and material laws,
statutes, injunctions or decrees, certificates of need,
ordinances, rules or regulations of any Authority of any
applicable jurisdiction except as reflected in the
Prospectus or where the failure to comply would not have
a Material Adverse Effect; and
(xvi) The Company is not, and upon the issuance
and sale of the Stock as contemplated in the Agreement
and the application of the net proceeds therefrom as
described in the Prospectus will not be, an "investment
company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
In rendering such opinion, such counsel may (i) state
that their opinion is limited to matters governed by the Federal
laws of the United States of America, the laws of the State of Ohio
and the General Corporation Law of the State of Delaware; and (ii)
in respect of matters of fact, rely upon certificates of officers of
the Company or its subsidiaries, provided that such counsel shall
state that they believe that both the Underwriters and they are
justified in relying upon such certificates. Such counsel shall also
have furnished to the Representatives a written statement, addressed
to the Underwriters and dated such Delivery Date, in form and
substance satisfactory to the Representatives, to the effect that
(x) such counsel has acted as counsel to the Company on certain
other matters and has acted as counsel to the Company in connection
with the preparation of the Registration Statement, and (y) based on
the foregoing, no facts have come to the attention of such counsel
which lead them to believe that the Registration Statement, as of
the Effective Date and as of such Delivery Date, contains any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus, as of its
date and as of such Delivery Date, contains any untrue statement of
a material fact or omits to state a material fact required to be
stated therein or
<PAGE> 15
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
foregoing opinion and statement may be qualified by a statement to
the effect that such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the financial statements
or financial data contained in the Registration Statement or the
Prospectus except for the statements made in the Prospectus under
the captions "Shares Eligible for Future Sale" and "Description of
Capital Stock," insofar as such statements relate to the Stock and
concern legal matters.
(e) Keating, Muething & Klekamp, P.L.L. shall have furnished to the
Representatives their written opinion, as counsel to the Selling
Shareholders, addressed to the Underwriters and dated the First Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) Each Selling Shareholder has full right, power and
authority to enter into this Agreement; the execution, delivery and
performance of this Agreement by each Selling Shareholder and the
consummation by each Selling Shareholder of the transactions
contemplated hereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any statute, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such
counsel to which any Selling Shareholder is a party or by which any
Selling Shareholder is bound or to which any of the property or
assets of any Selling Shareholder is subject, nor will such actions
result in any violation of any statute or any order, rule or
regulation known to such counsel of any court or governmental agency
or body having jurisdiction over any Selling Shareholder or the
property or assets of any Selling Shareholder; and, except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of
the Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery
and performance of this Agreement by any Selling Shareholder and the
consummation by any Selling Shareholder of the transactions
contemplated hereby;
(ii) This Agreement has been duly executed and delivered
by each Selling Shareholder;
(iv) Immediately prior to the First Delivery Date, each
Selling Shareholder had good and valid title to the shares of Stock
to be sold by such Selling Shareholder under this Agreement, free
and clear of all liens, encumbrances, equities or claims, and full
right, power and authority to sell, assign, transfer and deliver
such shares to be sold by such Selling Shareholder hereunder; and
(v) Good and valid title to the shares of Stock to be
sold by each Selling Shareholder under this Agreement, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters.
In rendering such opinion, such counsel may (i) state that their opinion
is limited to matters governed by the Federal laws of the United States of
America, the laws of the State of Ohio and the General Corporation Law of
the State of Delaware and (ii) in rendering the opinion in Section
9(e)(iv) above, rely upon a certificate of each Selling Shareholder in
respect of matters of fact as to ownership of and liens, encumbrances,
equities or claims on the shares of Stock sold by such Selling
Shareholder, provided that such counsel shall furnish copies thereof to
the Representatives and state that they believe that both the Underwriters
and they are
<PAGE> 16
justified in relying upon such certificate. Such counsel shall also have
furnished to the Representatives a written statement, addressed to the
Underwriters and dated the First Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that (x) such counsel
has acted as counsel to each Selling Shareholder on a regular basis and
has acted as counsel to each Selling Shareholder in connection with the
preparation of the Registration Statement, and (y) based on the foregoing,
no facts have come to the attention of such counsel which lead them to
believe that the Registration Statement, as of the Effective Date,
contained any untrue statement of a material fact relating to any Selling
Shareholder or omitted to state such a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, or that the Prospectus contains any untrue statement of a
material fact relating to any Selling Shareholder or omits to state such a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not assume
any responsibility for the accuracy, completeness or fairness of the
financial statements contained in the Registration Statement or the
Prospectus.
(f) The Representatives shall have received from Kramer, Levin,
Naftalis & Frankel, counsel for the Underwriters, such opinion or
opinions, dated such Delivery Date, with respect to the issuance and sale
of the Stock, the Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the Representatives
shall have received from Coopers & Lybrand L.L.P. a letter, in form and
substance satisfactory to the Representatives, addressed to the
Underwriters and dated the date hereof (i) confirming that they are
independent public accountants within the meaning of the Securities Act
and are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, and (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date hereof), the conclusions
and findings of such firm with respect to the financial information and
other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(h) At each such Delivery Date, the Representatives shall have
received from Coopers & Lybrand L.L.P. a letter (the "bring-down letter")
of such accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants within
the meaning of the Securities Act and are in compliance with the
applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the
date of the bring-down letter (or, with respect to matters involving
changes or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the financial
information and other matters covered by the letter furnished pursuant to
clause (g) of this Section 9 and (iii) confirming in all material respects
the conclusions and findings set forth in the letter furnished pursuant to
clause (g) of this Section 9.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chief Executive Officer and
its chief financial officer stating that:
(i) The representations, warranties and agreements of
the Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 9(a) and 9(k) have
been fulfilled; and
<PAGE> 17
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading (as to the Prospectus, in
light of the circumstances under which they were made), and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(j) Each Selling Shareholder shall have furnished to the
Representatives on the First Delivery Date a certificate, dated the First
Delivery Date, signed by, or on behalf of, such Selling Shareholder stating that
the representations, warranties and agreements of such Selling Shareholder
contained herein are true and correct as of the First Delivery Date and that
such Selling Shareholder has complied with all agreements contained herein to be
performed by such Selling Shareholder at or prior to the First Delivery Date.
(k) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion flood, or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus or (ii) since such date there shall not have been any change in
the capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is, in the judgment of the Representatives, so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(l) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
in the over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any
other regulatory body or governmental authority having jurisdiction, (ii)
a banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(l) The Nasdaq National Market shall have approved the Stock for
inclusion subject only to official notice of issuance or effectiveness of
the Registration Statement and evidence of satisfactory distribution.
(m) The National Association of Securities Dealers, Inc., upon
review of the terms of the underwriting arrangements for the public
offering of the Stock, shall have raised no objection thereto.
(n) Prior to any Delivery Date, the Company shall have furnished to
the Representatives such other information, certificates and documents as
they may reasonably request.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form
<PAGE> 18
and substance reasonably satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or (B) in
any blue sky application or other document prepared or executed by the Company
(or based upon any written information furnished by the Company) specifically
for the purpose of qualifying any or all of the Stock under the securities laws
of any state or other jurisdiction (any such application, document or
information being hereinafter called a "Blue Sky Application"), (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and in conformity
with written information concerning such Underwriter furnished to the Company
through the Representatives by or on behalf of any Underwriter specifically for
inclusion therein. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to any Underwriter or to any
officer, employee or controlling person of that Underwriter.
(b) The Selling Shareholders, severally in proportion to the number
of shares of Stock to be sold by each of them hereunder, shall indemnify and
hold harmless each Underwriter, its officers and employees, and each person, if
any, who controls any Underwriter within the meaning of the Securities Act, from
and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
that Underwriter, officer, employee or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
each Underwriter, its officers and employees and each such controlling person
for any legal or other expenses reasonably incurred by that Underwriter, its
officers and employees or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Selling
Shareholders shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of, or is based upon, any
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or in any such amendment or supplement in reliance upon and in conformity with
<PAGE> 19
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein. The foregoing indemnity agreement is in addition to any
liability which the Selling Shareholders may otherwise have to any Underwriter
or any officer, employee or controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such Underwriter furnished to the Company through the Representatives by or on
behalf of that Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling person for
any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee or controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure; and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnifying party, otherwise than under this Section
10. If any such claim or action shall be brought against an indemnified party,
and it shall notify the indemnifying party thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party shall not be
liable to the indemnified party under this Section 10 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that the Representatives shall have the right to employ counsel to represent
jointly the Representatives and those other Underwriters and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriters against the Company or the Selling Shareholders under this Section
10 if, in the reasonable judgment of the Representatives, it is advisable for
the Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
fees and expenses of such separate counsel shall be paid by the Company or the
Selling Shareholders. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the indemnifying
party or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such
<PAGE> 20
settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), 10(b) or 10(c) in respect of any loss, claim, damage
or liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Shareholders on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Selling
Shareholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the Stock
purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Shareholders or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 10(e) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section 10 shall be deemed to include, for
purposes of this Section 10(e), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10(e), unless
guilty of a fraudulent misrepresentation (within the meaning of Section 11(F) of
the Securities Act), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Stock underwritten
by it and distributed to the public was offered to the public exceeds the amount
of any damages which such Underwriter has otherwise paid or become liable to pay
by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10(e) are
several in proportion to their respective underwriting obligations and not
joint.
(f) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning
over-allotments on the inside front cover page of, and the concession and
reallowance figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
10. Defaulting Underwriters. If, on either Delivery Date, any
Underwriter defaults in the performance of its obligations under this Agreement,
the remaining non-defaulting Underwriters shall be obligated to purchase the
Stock which the defaulting Underwriter agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set opposite the name of each remaining non-defaulting Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 hereto; provided, however, that the remaining non-defaulting Underwriters
shall not be obligated to purchase any of the Stock on such Delivery Date if the
total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of shares of the Stock to be purchased on such Delivery Date, and
any remaining non-defaulting Underwriter shall not be obligated to purchase more
than 110% of the number of shares of the Stock which it agreed to purchase on
such Delivery Date pursuant to the terms of Section 3.
<PAGE> 21
If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining Underwriters or other underwriters
satisfactory to the Representatives do not elect to purchase the shares which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the Underwriters to purchase, and of the Company to sell, the
Option Stock) shall terminate without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Shareholders, except
that the Company will continue to be liable for the payment of expenses to the
extent set forth in Sections 8 and 13. As used in this Agreement, the term
"Underwriter" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 11, purchases Firm Stock which a defaulting Underwriter agreed but
failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have to the Company and the Selling Shareholders for
damages caused by its default. If other underwriters are obligated or agree to
purchase the Stock of a defaulting or withdrawing Underwriter, either the
Representatives or the Company may postpone the Delivery Date for up to seven
full business days in order to effect any changes that in the opinion of counsel
for the Company or counsel for the Underwriters may be necessary in the
Registration Statement, the Prospectus or in any other document or arrangement.
12. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company and the Selling Shareholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 9(i)
or 9(j) shall have occurred or if the Underwriters shall decline to purchase the
Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If the Company or any
Selling Shareholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Shareholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled, the Company
will reimburse the Underwriters for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) incurred by the Underwriters in
connection with this Agreement and the proposed purchase of the Stock, and upon
demand the Company shall pay the full amount thereof to the Representatives. If
this Agreement is terminated pursuant to Section 11 by reason of the default of
one or more Underwriters, neither the Company nor any Selling Shareholder shall
be obligated to reimburse any defaulting Underwriter on account of those
expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent
by mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-526- 6588), with a copy, in the case
of any notice pursuant to Section 10(c), to the Director of
Litigation, Office of the General Counsel, Lehman Brothers Inc., 3
World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company
set forth in the Registration Statement, Attention: Timothy Mooney
(Fax: 513-562-1797), with a copy to Keating, Meuthing & Klekamp,
P.L.L. 1800 Provident Tower, One East Fourth Street, Cincinnati,
Ohio 45202, Attention: William J. Keating, Jr.;
(c) if to any Selling Shareholder, shall be delivered or
sent by mail, telex or facsimile transmission to such Selling
Shareholder at the address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any
<PAGE> 22
request, consent, notice or agreement given or made on behalf of the
Underwriters by Lehman Brothers Inc. on behalf of the Representatives.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company and
the Selling Shareholders, and their respective successors. This Agreement and
the terms and provisions hereof are for the sole benefit of only those persons,
except that (A) the representations, warranties, indemnities and agreements of
the Company and the Selling Shareholders contained in this Agreement shall also
be deemed to be for the benefit of the person or persons, if any, who control
any Underwriter within the meaning of Section 15 of the Securities Act and (B)
the indemnity agreement of the Underwriters contained in Section 10(b) of this
Agreement shall be deemed to be for the benefit of directors of the Company,
officers of the Company who have signed the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed to
give any person, other than the persons referred to in this Section 15, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Shareholders and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[Balance of Page Intentionally Blank]
<PAGE> 23
If the foregoing correctly sets forth the agreement of the Company,
the Selling Shareholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
KENDLE INTERNATIONAL INC.
By:_______________________________________
Name:
Title:
The Selling Shareholders:
____________________________
By:_______________________________________
Name:
____________________________
By:_______________________________________
Name:
Accepted:
LEHMAN BROTHERS INC.
J.C. BRADFORD & CO.
NationsBanc Montgomery LLC
For themselves and as Representatives
of the Several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By ______________________________
Authorized Representative
<PAGE> 24
SCHEDULE 1
----------
Number of
Underwriter Shares
- ----------- ---------
Lehman Brothers Inc.
J.C. Bradford & Co.
NationsBanc Montgomery LLC
Total 2,100,000
---------
<PAGE> 25
SCHEDULE 2
- ----------
Name and Address Number of Shares
of Selling Shareholder of Firm Stock
- --------------------------------------------
Total 100,000
<PAGE> 1
[Keating, Muething & Klekamp, P.L.L. Letterhead]
FACSIMILE (513) 579-6956
May 22, 1998
EXHIBIT 5
Direct Dial: (513) 579-6468
Kendle International Inc.
700 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
Ladies and Gentlemen:
We have examined the corporate records and proceedings of Kendle
International Inc. (the "Corporation") with respect to:
1. The organization of the Corporation;
2. The legal sufficiency of all corporate proceedings of the Corporation in
connection with the creation and issuance of all of the present outstanding and
issued Common Shares of the Corporation;
3. The legal sufficiency of all corporate proceedings taken in connection
with the authorization of the issuance of 2,000,000 Common Shares, plus up to an
additional 315,000 Common Shares to cover an over-allotment option, all to be
issued in a public offering pursuant to a Registration Statement filed with the
Securities and Exchange Commission.
Based upon such examination, we are of the opinion:
1. That the Corporation is a duly organized and validly existing
corporation under the laws of the State of Ohio;
2. That the Corporation has taken all necessary and required corporate
action in connection with the proposed issuance of the aforesaid 2,315,000
Common Shares and that when, and if, issued, delivered and paid for, the
aforesaid 2,315,000 Common Shares will be duly authorized, validly issued,
fully paid and non-assessable Common Shares of the Corporation free of any claim
of pre-emptive rights; and
3. That the 100,000 Common Shares which are being sold by the selling
<PAGE> 2
shareholders are duly authorized, legally issued, fully paid and
non-assessable Common Shares of the Corporation free of any claim of
pre-emptive rights.
We hereby consent to the reference to our firm in the Registration
Statement and the Prospectus part thereof as the attorneys who will pass upon
legal matters in connection with the aforesaid Common Shares and to the filing
of this opinion as an exhibit to the Registration Statement. In providing this
consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Commission promulgated thereunder.
Yours truly,
KEATING, MUETHING & KLEKAMP, P.L.L.
BY: /s/ Edward E. Steiner
-------------------------
Edward E. Steiner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated February 18, 1998, except as to the information presented in
Note 5 for which the date is March 9, 1998 on our audits of the consolidated
financial statements of Kendle International Inc.; and of our report dated March
27, 1998 on our audits of the financial statements of ACER/EXCEL INC. We also
consent to the reference to our firm under the caption "Experts" and "Selected
Financial Data".
Coopers & Lybrand LLP
Cincinnati, Ohio
May 20, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated June 17, 1997 on our audit of the consolidated financial
statements of U-Gene Research B.V. We also consent to the reference to our firm
under the caption "Experts" and "Selected Financial Data".
Coopers & Lybrand N.V.
May 21, 1998, Utrecht, The Netherlands
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated May 7, 1997, on our audits of the financial statements of gmi
gesellschaft fur angewandte mathematik und informatik mbH. We also consent to
the references to our firm under the captions "Experts".
Coopers & Lybrand
Wirtschaftsprufungsgesellschaft GmbH
Munich, Germany
May 20, 1998
