<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission file number 000-23019
---------
KENDLE INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1274091
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 700, Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
--------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,103,469 shares of common
stock, no par value, as of April 30, 1999.
1
<PAGE> 2
KENDLE INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Income - Three Months
Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows - Three 6
Months Ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
</TABLE>
2
<PAGE> 3
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,279,526 $ 13,980,300
Available for sale securities 33,794,758 40,768,460
Accounts receivable 30,949,316 28,517,542
Unreimbursed investigator and project costs 6,654,373 4,072,214
Other current assets 3,701,858 4,051,540
------------- -------------
Total current assets 80,379,831 91,390,056
------------- -------------
Property and equipment, net 13,054,099 11,319,793
Excess of purchase price over net assets acquired, net 51,037,860 47,691,537
Other assets 5,818,888 2,838,496
------------- -------------
Total assets $ 150,290,678 $ 153,239,882
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 842,346 $ 910,273
Trade payables 5,318,302 6,252,061
Advances against investigator and project costs 2,880,125 2,695,608
Advance billings 6,103,352 9,722,037
Other accrued liabilities 5,684,757 6,314,274
------------- -------------
Total current liabilities 20,828,882 25,894,253
------------- -------------
Obligations under capital leases, less current portion 1,281,417 1,512,680
Note payable -- escrow agreement 827,679 1,590,000
Other noncurrent liabilities 1,893,971 1,742,902
------------- -------------
Total liabilities 24,831,949 30,739,835
------------- -------------
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 15,000,000 shares authorized; 11,072,445 and
10,955,390 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 75,000 75,000
Additional paid in capital 116,662,164 114,425,511
Retained earnings 9,810,750 7,517,039
Accumulated other comprehensive income:
Net unrealized holdings losses on available for sale securities (238,734) (81,806)
Foreign currency translation adjustment (850,451) 564,303
------------- -------------
Total shareholders' equity 125,458,729 122,500,047
------------- -------------
Total liabilities and shareholders' equity $ 150,290,678 $ 153,239,882
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net revenues $25,764,125 $19,765,139
----------- -----------
Costs and expenses:
Direct costs 12,927,856 10,452,520
Selling, general and administrative
expenses 8,013,116 6,105,718
Depreciation and amortization 1,488,147 900,858
----------- -----------
22,429,119 17,459,096
----------- -----------
Income from operations 3,335,006 2,306,043
Other income (expense):
Interest income 406,144 200,864
Interest expense (79,186) (51,843)
Other 63,747 22,885
----------- -----------
Income before income taxes 3,725,711 2,477,949
Income tax expense 1,432,000 1,033,563
----------- -----------
Net income $2,293,711 $1,444,386
=========== ===========
Income per share data:
Basic:
Net income per share $0.21 $0.18
=========== ===========
Weighted average shares 11,060,372 7,959,716
Diluted:
Net income per share $0.20 $0.17
=========== ===========
Weighted average shares 11,658,623 8,611,089
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 2,293,711 $ 1,444,386
----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustment (1,414,754) (435,222)
Net unrealized holdings gains (losses)
on available for sale securities arising
during the period, net of tax (155,233) 65,232
Reclassification adjustment for holdings
losses included in net income, net of tax (1,695) 0
----------- -----------
Net change in unrealized holdings gains
(losses) on available for sale securities (156,928) 65,232
----------- -----------
Comprehensive income $ 722,029 $ 1,074,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash used in operating activities $ (5,674,744) $ (2,272,576)
------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 7,514,890 8,489,409
Purchases of available for sale securities (700,116)
Acquisitions of property and equipment (1,610,336) (948,170)
Additions to software costs (719,365) (217,865)
Other investments (1,303,550)
Acquisition of business, less cash acquired (4,090,924) (9,798,307)
Funding of note payable in connection with business acquisition (1,590,000)
Cash placed in escrow as a result of business acquisition (2,820,000)
------------ ------------
Net cash used in investing activities (2,499,401) (5,294,933)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 27,686 31,992
Payments on capital lease obligations (299,190) (177,429)
------------ ------------
Net cash used in financing activities (271,504) (145,437)
------------ ------------
Effects of exchange rates on cash and cash equivalents (255,125) (111,617)
Net decrease in cash and cash equivalents (8,700,774) (7,824,563)
Cash and cash equivalents:
Beginning of period 13,980,300 15,766,963
------------ ------------
End of period $ 5,279,526 $ 7,942,400
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with investment in
Component Software International, Inc. $ 371,307
============
Acquisition of Businesses:
Fair value of assets acquired $ 6,269,611 $ 23,230,088
Fair value of liabilities assumed $ (574,624) (4,975,689)
Stock issued $ (1,604,063) (8,456,092)
------------ ------------
Net cash payments $ 4,090,924 $ 9,798,307
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the
consolidated financial statements and notes thereto included in the Form
10-K filed by Kendle International Inc. ("the Company") on March 31, 1999
with the Securities and Exchange Commission.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements.
Certain amounts reflected in the prior periods' condensed
consolidated financial statements have been reclassified to be comparable
with the current periods.
2. NET INCOME PER SHARE DATA:
Net income per basic share is computed using the weighted average
common shares outstanding. Net income per diluted share is computed using
the weighted average common shares and potential common shares outstanding.
The weighted average shares used in computing net income per
diluted share have been calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
---------------------------- --------------------------
<S> <C> <C>
Weighted average common shares
outstanding 11,060,372 7,959,716
Stock options 598,251 651,373
---------------------------- --------------------------
Weighted average shares 11,658,623 8,611,089
</TABLE>
7
<PAGE> 8
3. ACQUISITIONS:
In January, 1999, the Company acquired Research Consultants
(International) Holdings Ltd. ("IRC"), a U.K.-based company. Total
acquisition costs consisted of approximately $4.4 million in cash and
87,558 shares of Common Stock. The shares have been placed in an escrow
account pursuant to the IRC Share Purchase Agreement, 50% to be released in
January, 2000 and the remainder in 2001.
The Company acquired ACER/EXCEL Inc. ("ACER/EXCEL") in February,
1998 for approximately $14.4 million in cash and 987,574 shares of the
Company's Common Stock.
The acquisitions have been 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 results from the date of acquisition.
The results of these companies have been included in the condensed
consolidated statements of income for the three months ended March 31,
1999. The following unaudited pro forma results of operations for the three
months ended March 31, 1998 assume the acquisitions occurred at the
beginning of 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
-------------------------
<S> <C>
Net revenues $21,663,594
Net income $1,379,509
Net income per diluted share $0.15
Weighted average shares 9,331,110
</TABLE>
The pro forma financial information is not necessarily indicative
of the operating results that would have occurred had the acquisitions been
consummated as of January 1, 1998, nor are they necessarily indicative of
future operating results.
4. INVESTMENT:
In January, 1999, the Company acquired a minority interest in
Component Software International, Inc. ("CSI"), a software consulting and
development company, for approximately $1.6 million in cash and 19,995 shares of
the Company's Common Stock. Concurrent with this transaction, the Company
entered into a Multi-Year Strategic Service Agreement with CSI whereby the
Company will pay CSI $7.0 million over the next four years in exchange for
strategic software consulting and development services from CSI.
8
<PAGE> 9
5. SEGMENT INFORMATION:
The Company does not manage nor is it organized into separate
operating segments. The Company manages its business in the aggregate, as a
full-service international CRO. Principal financial information by geographic
areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------------- ------------------------
<S> <C> <C>
Net revenues
North America $18,725,904 $13,454,047
Foreign 7,038,221 6,311,092
-------------------------- ------------------------
$25,764,125 $19,765,139
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------- ------------------------
<S> <C> <C>
Identifiable Assets
North America $105,239,622 $113,125,603
Foreign 45,051,056 40,114,279
-------------------------- ------------------------
$150,290,678 $153,239,882
</TABLE>
Net revenues of the Company's wholly-owned subsidiaries have been
included in the condensed consolidated statements of income from the
respective dates of acquisition.
6. NEW ACCOUNTING PRONOUNCEMENT:
In June, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. Since its only derivative transaction
has historically been the use of foreign currency exchange rate hedge
instruments from time to time within a year, management of the Company
anticipates that the adoption of SFAS No. 133 will not have a significant
effect on the Company's results of operations or its financial position.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information set forth and discussed below for the three months
ended March 31, 1999, is derived from the Condensed Consolidated Financial
Statements included herein and should be read in conjunction therewith. The
Company's results of operations for a particular quarter may not be indicative
of results expected during subsequent quarters or for the entire year.
COMPANY OVERVIEW
Kendle International Inc. ("the Company") is an international contract
research organization (CRO) that provides integrated clinical research services
including Phase I through IV drug development, on a contract basis to the
pharmaceutical and biopharmaceutical industries.
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. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured principally by the total costs incurred as a percentage of estimated
total costs for each contract. The estimated total costs of contracts are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. Additionally,
the Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators. Such costs, which are reimbursable by its 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.
The Company's 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; the ability to
maintain large customer contracts or to enter into new contracts, and other
factors. In 1998, the Company's Phase I unit experienced a decline in revenues
and a resulting loss from operations. The Phase I unit results in part reflect
the inherent volatility in Phase I revenues due to the nature of Phase I studies
(shorter duration studies with shorter lead time and higher potential for
cancellation) combined with turnover in certain management personnel. The
Company has taken steps designed to enhance the performance of the Phase I
facility including the hiring of experienced Phase I management personnel
and increasing its Phase I new business development efforts. The Company will
continue to focus on its Phase I unit and further improving its operating
results throughout 1999. However, the decline in revenues and resulting loss
from operations in the Phase I unit could continue if the Company's efforts are
unsuccessful.
10
<PAGE> 11
ACQUISITIONS
In 1998, the Company acquired ACER/EXCEL Inc. ("ACER/EXCEL")
headquartered in Cranford, New Jersey. ACER/EXCEL provides customers with Phase
II through IV clinical services. It also provides drug development services to
the Pacific Rim, through a joint venture which operates a CRO headquartered in
Beijing, China.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Ltd. ("IRC"), a U.K. based regulatory affairs company.
The acquisitions have been 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 condensed
consolidated statements of operations from the dates of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net revenues increased to $25.8 million for the three months ended
March 31, 1999 from $19.8 million for the three months ended March 31, 1998. The
30% increase in net revenues was comprised of organic growth of 19% and growth
from acquisitions of 11%. Revenues from G.D. Searle and Co. accounted for
approximately 29% of net revenues for the three months ended March 31, 1999.
Direct costs increased by $2.5 million, or 24%, from $10.4 million for
the three months ended March 31, 1998 to $12.9 million for the three months
ended March 31, 1999. This increase is primarily comprised of increases in
direct salaries and fringe benefits to support the increases in net revenues for
the period. Direct costs expressed as a percentage of net revenues decreased
from 52.9% for the three months ended March 31, 1998 to 50.2% for the three
months ended March 31, 1999. The decrease in those costs as a percentage of net
revenues is due to the absorption of direct project-related costs over a larger
revenue base.
Selling, general and administrative expenses increased by $1.9 million,
or 31%, from $6.1 million for the three months ended March 31, 1998 to $8.0
million for the three months ended March 31, 1999. The increase is primarily
comprised of an increase 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 including increases in rent and other facilities
expenses, travel, contractual services, recruiting, marketing, advertising, and
other expenses. Selling, general and administrative expenses as a percentage of
net revenues increased from 30.9% for the three months ended March 31, 1998 to
31.1% for the three months ended March 31, 1999.
Depreciation and amortization expense increased $587,000, or 65%, from
$901,000 for the three months ended March 31, 1998 to $1.5 million for the three
months ended March 31, 1999. The increase was due primarily to amortization of
goodwill as a result of the Company's acquisitions.
11
<PAGE> 12
The Company's effective tax rate was 38.4% for the three months
ended March 31, 1999 as compared to 41.7% for the three months ended March
31, 1998. The decrease in the effective tax rate is due to the Company's
investment in tax advantaged securities in 1999 as compared to taxable
securities in 1998 in order to achieve a better after-tax return on these
investments.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $8.7 million for the three
months ended March 31, 1999 as a result of cash used in operating,
investing and financing activities of $5.7 million, $2.5 million and
approximately $300,000, respectively. Net cash used in operating activities
resulted from net income primarily offset by an increase in accounts
receivable and a decrease in advance billings. Fluctuations in accounts
receivable and advance billings occur on a regular basis as services are
performed, milestones or other billing criteria are achieved, invoices are
sent to customers, and payments for outstanding accounts receivable are
collected from customers. Such activity varies by individual customer and
contract.
Investing activities for the three months ended March 31, 1999
consisted of the costs related to the IRC acquisition of $4.1 million (net of
cash acquired), funding of an escrow note in connection with the U-Gene Research
B.V. acquisition of approximately $1.6 million and capital expenditures of
approximately $2.3 million, offset by net proceeds from sales and purchases of
available for sales securities of $6.8 million.
The Company had available for sale securities totaling $33.8 million at
March 31, 1999.
The Company has a $30 million credit facility with certain banks. The
credit facility bears interest at a rate equal to either (a) LIBOR plus the
Applicable Margin (as defined) or (b) the higher of the Bank's prime rate or the
Federal Funds rate plus 0.50%, plus the Applicable Margin. All amounts
outstanding thereunder become due and payable in February, 2001. The facility
includes various restrictive covenants including the maintenance of certain
fixed coverage and leverage ratios as well as minimum net worth levels. At March
31, 1999, there were no amounts outstanding under the credit facility.
The Company's primary cash needs on both a short-term and long-term
basis are for the payment of salaries and fringe benefits, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its credit facility, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and global presence. Any such
acquisitions may require additional external financings and the Company may from
time to time seek to obtain funds from public or private issuances of equity or
debt securities. There can be no assurance that such financings will be
available on terms acceptable to the Company.
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 miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
12
<PAGE> 13
The Company has a detailed plan in place to address the Year 2000
Issue. The Company has formed an ongoing internal review team to address the
Year 2000 Issue that encompasses personnel from various operational and
administrative areas of the Company and involved the engagement of an outside
consultant. Progress against the Year 2000 plan is monitored by this internal
review team and reported to senior management and the Board of Directors on a
regular basis. The project has proceeded according to plan thus far.
The Company's Year 2000 plan encompasses the following: (a) inventory
and assessment, (b) remediation, and (c) validation and implementation. To
date, the Company's key financial and operational systems have been inventoried
and detailed plans are in place for the required systems modifications or
replacements. Implementation of required changes to critical business systems,
including testing of those changes, is substantially complete. The remainder of
the plan, including remediation of certain European clinical data management
systems, is expected to be ongoing in 1999, with completion expected by
September 30, 1999.
The Company has initiated formal communications with its suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. These suppliers
include utility companies, telecommunications companies and business specific
product suppliers such as software and hardware providers and Phase I unit
equipment providers. To date, responses have been received from approximately
52% of the Company's inventory of suppliers. There can be no guarantee that the
systems of other companies on which the Company's systems rely will be converted
in a timely manner, 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.
Incremental costs, which include contractor costs to modify existing
systems and costs of internal resources involved in achieving Year 2000
compliance, are charged to expense as incurred. The Company has utilized both
internal and external resources to reprogram or replace and test the software
for Year 2000 modifications. Costs for the Year 2000 project are estimated to
total $840,000, of which approximately 54% has been spent through March 31,
1999. Approximately $200,000 of the $380,000 of costs which remain relate to the
replacement of certain of the Company's noncritical business systems.
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. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and the ability of third parties with whom the
Company has business relationships to successfully address their own Year
2000 concerns.
The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a business
critical system. These procedures will be expanded to include specific
procedures for potential Year 2000 Issues. Contingency plans to protect the
business from Year 2000 related interruptions are being developed. The
13
<PAGE> 14
Company expects these plans to be completed during the second quarter of 1999
and they will include, for example, development of backup procedures and
identification of alternative suppliers.
Worst-case scenarios resulting from Year 2000 problems could include
the following: loss of electrical, water and other utility services which could
result in disruption of the Company's services; software and embedded technology
failure which could disrupt the Company's equipment, systems and networks
resulting in an inability to perform existing and future studies and/or have an
adverse impact on the health and well being of patients; the loss of
telecommunications capabilities (both voice and data), which could result in an
inability of the Company to internally communicate or to communicate with, among
others, its customers and investigational sites; and the inability of the
Company's third party investigational sites to become Year 2000 compliant, which
could result in the loss to the Company of their services. As previously
discussed, the Company is currently in the process of developing contingency
plans to address the consequences of these issues, should they arise. These or
other events could result in business slowdowns or suspensions and have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999 (January
1, 2000 for the Company). SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Since its only
derivative transaction has historically been the use of foreign currency
exchange rate hedge instruments from time to time within a year, management of
the Company anticipates that the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its financial
position.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. 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.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-
14
<PAGE> 15
looking statement, changes in general economic conditions, the ability of the
combined businesses to be integrated with the Company's operations, the
Company's ability to meet deadlines regarding Year 2000 readiness, ability to
penetrate new markets, the ability of joint venture businesses to be integrated
with the Company's operations, and the ability to maintain large customer
contracts or to enter into new contracts, and the other risk factors set forth
in the Company's SEC filings, copies of which are available upon request from
the Company's investor relations department.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
In January, 1999 the Company acquired Research Consultants
(International) Holdings Ltd. Total acquisition costs consisted of $4.4 million
in cash and 87,558 shares of Kendle Common Stock. Also in January, 1999, the
Company acquired a minority interest in Component Software International, Inc.
for $1.6 million in cash and 19,995 shares of the Company's Common Stock. Both
issuances of Common Stock were exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) of such Act.
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
------------ -----------
27.1 Financial Data Schedule For the Three
Months Ended March 31, 1999
(b) No reports on Form 8-K were filed during the quarter.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace K. Kendle
------------------------------------------
Date: May 17, 1999 Candace K. Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
------------------------------------------
Date: May 17, 1999 Timothy M. Mooney
Executive Vice President - Chief Financial
Officer
17
<PAGE> 18
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------------- -----------
27.1 Financial Data Schedule For the Three
Months Ended March 31, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,280
<SECURITIES> 33,795
<RECEIVABLES> 30,949
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,380
<PP&E> 18,968
<DEPRECIATION> (5,914)
<TOTAL-ASSETS> 150,291
<CURRENT-LIABILITIES> 20,829
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 125,384
<TOTAL-LIABILITY-AND-EQUITY> 150,291
<SALES> 25,764
<TOTAL-REVENUES> 25,764
<CGS> 12,928
<TOTAL-COSTS> 22,429
<OTHER-EXPENSES> (470)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 3,726
<INCOME-TAX> 1,432
<INCOME-CONTINUING> 2,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,294
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
</TABLE>