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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission file number 000-23019
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KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,704,878 shares of common
stock, no par value, as of July 31, 2000.
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KENDLE INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 2000 and 1999; Six Months
Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended June 30, 2000 and 1999; Six
Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibit Index 22
</TABLE>
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,306 $ 5,720
Available for sale securities 19,555 19,524
Accounts receivable 42,424 51,186
Unreimbursed investigator and project costs 7,026 9,117
Other current assets 6,933 5,101
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Total current assets 80,244 90,648
--------- ---------
Property and equipment, net 15,003 14,683
Excess of purchase price over net assets acquired, net 71,698 71,075
Other assets 9,745 7,976
--------- ---------
Total assets $ 176,690 $ 184,382
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 747 $ 725
Amounts outstanding under credit facility 6,500 8,700
Trade payables 6,337 5,619
Advances against investigator and project costs 2,476 2,624
Advance billings 11,443 14,539
Other accrued liabilities 10,171 13,603
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Total current liabilities 37,674 45,810
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Obligations under capital leases, less current portion 523 763
Other noncurrent liabilities 4,844 4,163
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Total liabilities 43,041 50,736
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Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized;
no shares issued and outstanding
Common stock -- no par value; 45,000,000 shares authorized;
11,704,470 and 11,489,318 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 75 75
Additional paid in capital 122,364 120,544
Retained earnings 14,326 15,246
Accumulated other comprehensive income:
Net unrealized holdings losses on available for sale securities (397) (434)
Foreign currency translation adjustment (2,719) (1,785)
--------- ---------
Total accumulated other comprehensive income (3,116) (2,219)
--------- ---------
Total shareholders' equity 133,649 133,646
--------- ---------
Total liabilities and shareholders' equity $ 176,690 $ 184,382
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 30,002 $ 27,854 $ 64,300 $ 53,618
-------- -------- -------- --------
Costs and expenses:
Direct costs 19,252 14,886 38,689 27,814
Selling, general and
administrative expenses 10,179 8,921 20,842 16,934
Depreciation and amortization 1,972 1,529 3,591 3,017
Employee severance and other costs 2,980 2,980
-------- -------- -------- --------
34,383 25,336 66,102 47,765
-------- -------- -------- --------
Income (loss) from operations (4,381) 2,518 (1,802) 5,853
Other income (expense):
Interest income 230 313 473 719
Interest expense (138) (51) (297) (130)
Other 33 (178) 74 (114)
-------- -------- -------- --------
Income (loss) before income taxes (4,256) 2,602 (1,552) 6,328
Income tax expense (benefit) (1,680) 1,001 (632) 2,433
-------- -------- -------- --------
Net income (loss) $ (2,576) $ 1,601 $ (920) $ 3,895
======== ======== ======== ========
Income (loss) per share data:
Basic:
Net income (loss) per share $ (0.22) $ 0.14 $ (0.08) $ 0.35
======== ======== ======== ========
Weighted average shares 11,699 11,101 11,660 11,081
Diluted:
Net income (loss) per share $ (0.22) $ 0.14 $ (0.08) $ 0.33
======== ======== ======== ========
Weighted average shares 11,699 11,597 11,660 11,633
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(2,576) $ 1,601 $ (920) $ 3,895
------- ------- ------- -------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (140) (592) (934) (2,007)
Net unrealized holding gains (losses)
on available for sale securities arising
during the period, net of tax 53 (268) 37 (423)
Reclassification adjustment for holding
gains included in net income, net of tax (46) (47)
------- ------- ------- -------
Net change in unrealized holding gains
(losses) on available for sale securities 53 (314) 37 (470)
------- ------- ------- -------
Comprehensive income (loss) $(2,663) $ 695 $(1,817) $ 1,418
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) For the Six Months Ended
June 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 11,638 $ (3,257)
-------- --------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 19,309
Purchases of available for sale securities (5,369)
Acquisitions of property and equipment (2,629) (2,824)
Additions to software costs (999) (1,559)
Other investments (697) (1,303)
Acquisitions of businesses, less cash acquired (1,757) (6,412)
Contingent purchase price paid in connection with prior acquisition (2,680)
Funding of note payable in connection with business acquisition (1,590)
-------- --------
Net cash provided by (used in) investing activities (8,762) 252
-------- --------
Cash flows from financing activities:
Net repayments under credit facility (2,200)
Amounts payable - book overdraft (1,636)
Proceeds from exercise of stock options 18 69
Payments on capital lease obligations (340) (520)
Other (76)
-------- --------
Net cash used in financing activities (4,158) (527)
-------- --------
Effects of exchange rates on cash and cash equivalents (132) (365)
Net decrease in cash and cash equivalents (1,414) (3,897)
Cash and cash equivalents:
Beginning of period 5,720 13,980
-------- --------
End of period $ 4,306 $ 10,083
======== ========
Supplemental schedule of noncash investing and financing activities:
Issuance of Common Stock in connection with contingent
purchase price relating to prior acquisition $ 1,040
======== ========
Issuance of Common Stock in connection with investment in
Digineer, Inc. $ 371
======== ========
Issuance of Common Stock in connection with Employee
Stock Purchase Plan $ 502
======== ========
Acquisitions of Businesses:
Fair value of assets acquired $ 3,117 $ 9,706
Fair value of liabilities assumed (618) (1,690)
Stock issued (742) (1,604)
-------- --------
Net cash payments $ 1,757 $ 6,412
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months and six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and notes thereto included in the Form 10-K
for the year ended December 31, 1999 filed by Kendle International Inc. ("the
Company") with the Securities and Exchange Commission.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
2. NET INCOME (LOSS) PER SHARE DATA:
Net income (loss) 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>
(in thousands) Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------- ------------------
<S> <C> <C>
Weighted average common shares
outstanding 11,699 11,101
Stock options -- 496
------ ------
Weighted average shares 11,699 11,597
</TABLE>
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<TABLE>
<CAPTION>
(in thousands) Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
----------------- ----------------
<S> <C> <C>
Weighted average common shares
outstanding 11,660 11,081
Stock options -- 552
------ ------
Weighted average share 11,660 11,633
</TABLE>
Options to purchase approximately 1,300,000 of common stock shares
(approximately 400,000 shares of common stock equivalents) were outstanding
during the three and six months ended June 30, 2000 but were not included in the
computation of earnings per diluted share because the effect would be
antidilutive.
Options to purchase approximately 300,000 shares of common stock were
outstanding during the three and six months ended June 30, 1999, but were not
included in the computation of earnings per diluted share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
3. ACQUISITIONS:
Details of the Company's acquisitions since 1999 are listed below. 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
escrow accounts referred to have been established at acquisition date to provide
indemnification of sellers' representations and warranties.
Valuation of Common Stock issued in the acquisitions was based on the
market price of the shares discounted for lock-up restrictions and lack of
registration of the shares. The results of operations are included in the
Company's results from the respective dates of acquisition.
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $2.1 million in cash and 78,500
shares of the Company's Common Stock. The shares were placed in an escrow
account, 67% to be released in April, 2001 and the remainder in April, 2002.
In August, 1999, the Company acquired Specialist Monitoring Services, a
contract research organization located in Crowthorne, United Kingdom. Total
acquisition costs consisted of approximately $7.5 million in cash and 141,680
shares of the Company's Common Stock. Of the total purchase price, approximately
$100,000 in cash and 97,066 shares were placed in an escrow account, 50% to be
released in August, 2000 and the remainder in August, 2001.
In July, 1999, the Company acquired Health Care Communications Inc.
("HCC"), a New Jersey based medical communications company, and HCC Health Care
Communications (1991) Ltd., a Toronto based contract research organization.
Total acquisition costs consisted of
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approximately $5.7 million in cash and 174,559 shares of the Company's Common
Stock. Of the total purchase price, $500,000 in cash and 31,943 shares were
placed in an escrow account, of which $131,690 and 17,541 shares were released
in July, 2000 and the remainder to be released in July, 2001.
The purchase price of HCC may be increased dependent upon the
achievement of certain operating results from acquisition date through December
31, 2001. Total additional consideration could reach $10.9 million, payable 67%
in cash and 33% in shares of the Company's Common Stock, if HCC meets the
targeted operating results. For the period from acquisition date through
December 31, 1999, HCC reached its operating target, and in April, 2000 the
Company paid $2.7 million in cash and issued 124,473 shares of the Company's
Common Stock to the former shareholders of HCC. The purchase price has been
increased by $3.7 million.
In June, 1999, the Company acquired ESCLI S.A., a contract research
organization located in Paris, France, for approximately $2.7 million in cash.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Limited (IRC), a U.K.-based regulatory affairs company.
Total acquisition costs consisted of approximately $4.4 million in cash and
87,558 shares of the Company's Common Stock. The shares were placed in an escrow
agreement, 50% of which were released in January , 2000 and the remainder to be
released in January, 2001.
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of each year:
<TABLE>
<CAPTION>
(in thousands) Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
Net revenues $64,996 $60,726
Net income (loss) $(848) $3,907
Net income (loss) per diluted share $(0.07) $0.32
Weighted average shares 11,702 12,053
</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, 1999, nor are they necessarily indicative of future
operating results.
4. EMPLOYEE SEVERANCE AND OTHER COSTS:
In order to bring its cost structure more in line with current revenue
projections, in the second quarter of 2000 the Company announced a plan to
eliminate approximately 125 full-time positions globally. In the second quarter
of 2000, the Company eliminated approximately 100 of these positions. In
connection with the workforce reduction, the Company recorded a pre-tax charge
of approximately $3.0 million ($1.8 million net of tax) in the second quarter of
2000, consisting primarily of severance, outplacement, other employee benefit
costs, and facility related charges. As of June 30, 2000, $1.9 million remains
accrued and is reflected in Other
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Accrued Liabilities in the Company's Balance Sheet. The amounts accrued as
employee severance and other costs are detailed as follows:
<TABLE>
<CAPTION>
(in thousands) Employee
Severance and
Outplacement Facilities Other Total
------------- ---------- ----- -----
<S> <C> <C> <C> <C>
Amount accrued $1,270 $1,140 $570 $2,980
Amount paid 631 143 9 783
Non-cash charges 245 41 286
------ ------ ---- ------
Liability at June 30, 2000 $ 639 $ 752 $520 $1,911
</TABLE>
5. SEGMENT INFORMATION:
With its July, 1999 acquisition of HCC, the Company is now managed
through two reportable segments, the contract research services group and the
medical communications group. The contract research services group includes
clinical trial management, clinical data management, statistical analysis,
medical writing, and regulatory consultation and representation. The medical
communications group, which includes only HCC, provides organizational, meeting
management and publication services to professional organizations and
pharmaceutical companies. Overhead costs are included in the contract research
services group and have not been allocated. Information is not presented for the
three and six month periods ended June 30, 1999 because the Company had not yet
acquired HCC, and therefore managed its business in the aggregate.
<TABLE>
<CAPTION>
(in thousands) Contract
Research Medical
Services Communications Total
-------- -------------- -----
<S> <C> <C> <C>
Three Months Ended June 30, 2000
Net revenues $28,696 $1,306 $30,002
Net income (loss) (2,926) 350 (2,576)
Six Months Ended June 30, 2000
Net revenues $61,598 $2,702 $64,300
Net income (loss) (1,658) 738 (920)
June 30, 2000:
Identifiable assets $159,923 $16,767 $176,690
</TABLE>
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6. NEW ACCOUNTING PRONOUNCEMENT:
In March, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("APB 25"). FIN 44 clarifies the application of APB 25 for certain issues
such as the following: the definition of an employee for purposes of applying
APB 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; and the accounting for options that have been repriced.
Most provisions of FIN 44 are effective as of July 1, 2000. The impact of FIN 44
will be dependent on the nature and terms of stock compensation plans offered by
the Company in the future.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101, which was delayed by the issuance of SAB 101A in
March, 2000 and SAB 101B in June, 2000 is required in the fourth quarter of
2000. The Company is currently evaluating the impact, if any, SAB 101 will have
on its consolidated financial position or results of operations.
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, 2000 (January
1, 2001 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 the
Company's 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information set forth and discussed below for the three and six
months ended June 30, 2000 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 biotechnology industries. Kendle also provides
organizational, meeting management, and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications Inc. (HCC). The Company is managed through two reportable
segments, the contract research services group and the medical communications
group. The medical communications group includes only HCC.
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 generally 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; or the ability to
maintain large customer contracts or to enter into new contracts. In addition,
the Company's aggregate backlog is not necessarily a meaningful indicator of
future results. Accordingly, no assurance can be given that the Company will be
able to realize the net revenues included in the backlog. In the first six
months of 2000, the Company was negatively impacted by contract delays and
slower than anticipated start-ups on new projects. Delays of projects are often
the result of decisions made by the Company's customers or regulatory
authorities, and are typically not controllable by the Company.
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As a high percentage of the Company's operating costs are relatively fixed,
these factors can cause significant variations in quarterly results.
In the second quarter of 2000, the Company announced a global workforce
reduction program in order to bring its cost structure more in line with current
revenue projections. In connection with this workforce reduction, the Company
recorded a pre-tax charge of approximately $3.0 million ($1.8 million, net of
tax) consisting of severance, outplacement, related facilities costs, and other
charges. This initiative is expected to reduce costs by approximately $800,000
per quarter in the last half of 2000. The Company expects to realize the full
savings of this initiative of approximately $4.0 million in 2001.
ACQUISITIONS
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $2.1 million in cash and 78,500
shares of the Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net revenues increased to $30.0 million for the three months ended June
30, 2000 from $27.9 million for the three months ended June 30, 1999. The 8%
increase in net revenues was comprised of growth from acquisitions of 17% offset
by a decline in organic revenues of 9%. The decrease in organic revenues is
primarily attributable to the continuing slowdown in clinical development
activities. Approximately 40% of the Company's net revenues for the three months
ended June 30, 2000 were derived from operations outside of the United States
compared to 27% for the three months ended June 30, 1999. Revenues from G.D.
Searle and Co. and Centocor, Inc. accounted for approximately 14% and 12%,
respectively, of net revenues for the three months ended June 30, 2000.
Direct costs increased by $4.4 million, or 29%, from $14.9 million for
the three months ended June 30, 1999 to $19.3 million for the three months ended
June 30, 2000. 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 were 64.2% for
the three months ended June 30, 2000 compared to 53.4% for the three months
ended June 30, 1999. The increase in these costs as a percentage of net revenues
is due to project delays in the second quarter 2000 that caused a lower than
anticipated revenue base to absorb direct costs.
Selling, general and administrative expenses increased by $1.3 million,
or 14%, from $8.9 million for the three months ended June 30, 1999 to $10.2
million for the three months ended June 30, 2000. Selling, general and
administrative expenses expressed as a percentage of net revenues were 34% for
the three months ended June 30, 2000 compared to 32% for the corresponding 1999
period. The increase in these costs as a percentage of net revenues is due to
the existence of an infrastructure that was established to support a higher
revenue base. These costs are expected to decrease as cost savings from the
workforce reduction program are realized in the third and fourth quarters of
2000.
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Depreciation and amortization expense increased $500,000, or 29%, from
$1.5 million for the three months ended June 30, 1999 to $2.0 million for the
three months ended June 30, 2000. The increase was due primarily to amortization
of goodwill as a result of the Company's acquisitions.
As previously mentioned, the Company recorded a pre-tax charge of
approximately $3.0 million ($1.8 million net of tax) for employee severance and
other costs associated with the workforce reduction program. As of June 30,
2000, $1.1 million was charged against the accrual and approximately $1.9
million remains accrued in Other Accrued Liabilities in the Company's Balance
Sheet.
Inclusive of the $1.8 million after tax charge relating to the
workforce reduction program, the net loss for the second quarter of 2000 was
$2.6 million compared to net income of $1.6 million for the corresponding period
of 1999. Excluding the effect of this charge, the net loss was $800,000 for the
second quarter of 2000.
The Company's effective tax rate was 39.5% for the three months ended
June 30, 2000 as compared to 38.5% for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net revenues increased to $64.3 million for the six months ended June
30, 2000 from $53.6 million for the six months ended June 30, 1999. The 20%
increase in net revenues was comprised of organic growth of 2% and growth from
acquisitions of 18%. Approximately 37% of the Company's net revenues for the six
months ended June 30, 2000 were derived from operations outside of the United
States compared to 27% for the six months ended June 30, 1999. Revenues from
G.D. Searle and Co. and Centocor, Inc. accounted for approximately 18% and 13%,
respectively, of net revenues for the six months ended June 30, 2000.
Direct costs increased by $10.9 million, or 39%, from $27.8 million for
the six months ended June 30, 1999 to $38.7 million for the six months ended
June 30, 2000. This increase is primarily comprised of increases in direct
salaries and fringe benefits to support the increases in net revenues for the
period and increases in direct costs due to the impact of acquisitions. Direct
costs expressed as a percentage of net revenues were 60.2% for the six months
ended June 30, 2000 compared to 51.9% for the six months ended June 30, 1999.
The increase in these costs as a percentage of net revenues is due to project
delays in the six months ended June 30, 2000 that caused a lower than
anticipated revenue base to absorb direct costs as well as the varying levels of
profitability within the mix of contracts in the six months ended June 30, 2000
compared to the six months ended June 30, 1999.
.
Selling, general and administrative expenses increased by $3.9 million,
or 23%, from $16.9 million for the six months ended June 30, 1999 to $20.8
million for the six months ended June 30, 2000. Selling, general and
administrative expenses expressed as a percentage of net revenues remained
constant at 32% for the six months ended June 30, 2000 and 1999.
Depreciation and amortization expense increased $600,000, or 19%, from
$3.0 million for the six months ended June 30, 1999 to $3.6 million for the six
months ended June 30, 2000. The increase was due primarily to amortization of
goodwill as a result of the Company's acquisitions.
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Inclusive of the $1.8 million after tax charge relating to the
workforce reduction program, the net loss for the six months ended June 30, 2000
was $900,000 compared to net income of $3.9 million for the corresponding period
of 1999. Excluding the effect of this charge, net income was $900,000 for the
six months of 2000.
The Company's effective tax rate was 40.7% for the six months ended
June 30, 2000 as compared to 38.4% for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.4 million for the six months
ended June 30, 2000 as a result of cash used in investing and financing
activities of $8.8 million and $4.2 million respectively, offset by cash
provided by operating activities of $11.6 million. Net cash provided by
operating activities primarily resulted from net loss adjusted for non-cash
activity and a decrease in accounts receivable and unreimbursed investigator and
project costs offset by 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 six months ended June 30, 2000 consisted
of capital expenditures of approximately $3.6 million, cash paid for contingent
purchase price of $2.7 million, and cash paid for the acquisition of SYNERmedica
of $1.8 million (net of cash acquired).
The Company had available for sale securities totaling $19.6 million at
June 30, 2000.
Financing activities for the six months ended June 30, 2000 consisted
primarily of net repayments under the Company's credit facility of $2.2 million.
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 June
30, 2000 the Company fell below the minimum permitted fixed charge coverage
ratio. The Company is in the process of seeking and expects to receive an
amendment with respect to the minimum permitted fixed charge ratio for future
periods. At June 30, 2000, $6.5 million was 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
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offerings, therapeutic base and global presence. Any such acquisitions may
require additional external financing and the Company may from time to time
seek to obtain funds from public or private issuance of equity or debt
securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
FOREIGN CURRENCY
The Company operates on a global basis and is therefore exposed to
various types of currency risks. Two specific transaction risks arise from the
nature of the contracts the Company executes with its customers since from time
to time contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. The first risk occurs as revenue recognized for services rendered
is denominated in a currency different from the currency in which the
subsidiary's expenses are incurred. As a result, the subsidiary's net revenues
and resultant net income can be affected by fluctuations in exchange rates.
Although some contracts state that currency fluctuations from the rates in
effect at the time the contract is executed up to a specified threshold
(generally plus or minus a few percentage points) will be absorbed by the
Company, and fluctuations in excess of the threshold are the customer's
responsibility, most contracts do not specifically address responsibility for
currency fluctuations. Historically, fluctuations in exchange rates from those
in effect at the time contracts were executed have not had a material effect
upon the Company's consolidated financial results.
The second risk results from the passage of time between the invoicing
of customers under these contracts and the ultimate collection of customer
payments against such invoices. Because the contract is denominated in a
currency other than the subsidiary's local currency, the Company recognizes a
receivable at the time of invoicing at the local currency equivalent of the
foreign currency invoice amount. Changes in exchange rates from the time the
invoice is prepared until the payment from the customer is received will result
in the Company receiving either more or less in local currency than the local
currency equivalent of the invoice amount at the time the invoice was prepared
and the receivable established. This difference is recognized by the Company as
a foreign currency transaction gain or loss, as applicable, and is reported in
other income (expense) in the consolidated statements of income.
The Company's consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
consolidated financial statements. The Company's foreign subsidiaries translate
their financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account, referred to as the foreign currency translation adjustment account.
This account exists only in the foreign subsidiary's U.S. dollar balance sheet
and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. Foreign currency translation adjustments, reported as a separate
component of shareholders' equity were $(2.7) million at June 30, 2000 compared
to $(1.8) million at December 31, 1999.
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IMPACT OF THE YEAR 2000
The Company initiated a program in 1998 to identify and address issues
associated with the ability of its date-sensitive software to recognize the Year
2000 properly. The Company spent approximately $900,000 in order to prepare for
the Year 2000 of which approximately 20% was paid to third party service
providers. The Company has not experienced any significant problems associated
with the date change and does not expect to incur additional expense in 2000 as
it continues to monitor and test ongoing compliance. While the Company does not
anticipate any significant problems regarding the Year 2000, there can be no
assurance that problems will not arise in the future.
NEW ACCOUNTING PRONOUNCEMENT
In March, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("APB 25"). FIN 44 clarifies the application of APB 25 for certain issues
such as the following: the definition of an employee for purposes of applying
APB 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; and the accounting for options that have been repriced.
Most provisions of FIN 44 are effective as of July 1, 2000. The impact of FIN 44
will be dependent on the nature and terms of stock compensation plans offered by
the Company in the future.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101, which was delayed by the issuance of SAB 101A in
March 2000 and SAB 101B in June, 2000 is required in the fourth quarter of 2000.
The Company is currently evaluating the impact, if any, SAB 101 will have on its
consolidated financial position or results of operations.
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, 2000 (January
1, 2001 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 the
Company's 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.
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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-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue to attract and
retain qualified personnel, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint venture businesses to be integrated with the Company's
operations, the fixed price nature of contracts or the loss of large contracts,
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, the effects of exchange rate
fluctuations, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $2.1 million in cash and 78,500
shares of the Company's Common Stock.
In April, 2000 the Company paid $2.7 million in cash and issued 124,473
shares of the Company's Common Stock to the former Shareholders of HCC relating
to the earnout provisions contained in the HCC Asset Purchase Agreement.
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held May 17,
2000. At such meeting, the Shareholders of the Company elected the following as
Directors of the Company: Candace Kendle, Philip E. Beekman, Christopher C.
Bergen, Robert R. Buck, Timothy M. Mooney, and Charles A. Sanders. Share were
voted as follows: Candace Kendle (FOR: 8,867,768 AGAINST: 964,406), Philip E.
Beekman (FOR: 9,311,157 AGAINST: 521,017), Christopher C. Bergen (FOR: 8,867,298
AGAINST: 964,876), Robert R. Buck (FOR: 9,305,407 AGAINST: 526,767), Timothy M.
Mooney (FOR: 9,307,207 AGAINST: 524,967), and Charles A. Sanders (FOR: 9,311,767
AGAINST: 520,407).
The Shareholders also approved the Amendment to the Company's 1997
Stock Option and Stock Incentive Plan to increase the number of authorized
shares of Common Stock reserved for issuance. In connection with such approval,
there were 5,907,470 shares voted for the approval of the amendment, 2,199,086
shares cast against, and 18,507 shares cast to abstain.
In addition, the Shareholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the calendar year 2000. In connection with such ratification, 9,784,179 shares
were voted for ratification, 38,211 shares cast against, and 9,784 shares cast
to abstain.
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 Six
Months Ended June 30, 2000
27.2 Financial Data Schedule For the Three
Months Ended June 30, 2000
(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle
--------------------------------
Date: August 11, 2000 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
--------------------------------
Date: August 11, 2000 Timothy M. Mooney
Executive Vice President - Chief
Financial Officer
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KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
27.1 Financial Data Schedule For the Six
Months Ended June 30, 2000
27.2 Financial Data Schedule For the Three
Months Ended June 30, 2000
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