<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Year Ended December 31, 1999
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 000-23019
KENDLE INTERNATIONAL INC.
Ohio IRS Employer ID
(State or other jurisdiction No. 31-1274091
of incorporation or organization)
1200 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
513-381-5550
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 2000, 11,497,731 shares of no par value Common Stock were
issued and outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1999 furnished to the Commission pursuant to Rule 14a-3(c) and
portions of the Registrant's Proxy Statement to be filed with the Commission for
its 2000 Annual Meeting of Shareholders are incorporated by reference in Parts
I, II, III, and IV as specified.
See Exhibit Index on page 10.
13 Total Pages
<PAGE> 2
KENDLE INTERNATIONAL INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
Part I Page
<S> <C>
Item 1 - Business.............................................................................3
Item 2 - Properties...........................................................................5
Item 3 - Legal Proceedings....................................................................5
Item 4 - Submission of Matters to a Vote of Security Holders..................................5
Part II
Item 5 - Market for Registrant's Common Equity and Related
Shareholder Matters.............................................................5
Item 6 - Selected Financial Data..............................................................6
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................7
Item 7A - Quantitative and Qualitative Information about Market Risk..........................7
Item 8 - Financial Statements and Supplementary Data..........................................7
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................8
Part III
Item 10 - Directors and Executive Officers of the Registrant..................................8
Item 11 - Executive Compensation..............................................................9
Item 12 - Security Ownership of Certain Beneficial Owners and Management......................9
Item 13 - Certain Relationships and Related Transactions......................................9
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................................................9
</TABLE>
2
<PAGE> 3
PART I
ITEM 1.
BUSINESS
--------
Kendle International Inc., an Ohio corporation established in 1989, (the
"Company"), is a contract research organization (CRO) that provides a broad
range of Phase I through IV clinical research and drug development services to
the pharmaceutical and biotechnology industries. The Company 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 is organized into two segments for financial reporting
purposes. The contract research services group conducts clinical trial
management, clinical data management, statistical analysis, medical writing, and
regulatory consulting and representation. The medical communications group,
Healthcare Communications Inc. (HCC), a wholly-owned subsidiary of the Company,
provides organizational, meeting management, and publication services to
professional associations and pharmaceutical companies.
The Company believes that the outsourcing of drug development
activities by pharmaceutical and biotechnology companies has been increasing and
will continue to increase as these companies strive to increase revenues through
faster drug development while also dealing with cost containment pressures. The
CRO industry, by specializing in clinical 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'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(R) software including
TrialWeb(TM), its clinical trial information web service; (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 the Company's clinical development capabilities in existing
or new therapeutic areas or service offerings.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Limited ("IRC"), a U.K. based regulatory affairs
company for approximately $4.4 million in cash and 87,558 shares of the
Company's Common Stock.
In June, 1999, the Company acquired ESCLI S.A., a CRO located in Paris,
France, for approximately $2.7 million in cash.
In July, 1999, the Company acquired Health Care Communications Inc.
(HCC), a New Jersey based medical communications company, and HCC Health Care
Communications (1991), a Toronto based CRO, for approximately $5.7 million in
cash and 174,559 shares of the Company's Common Stock.
In August, 1999, the Company acquired Specialist Monitoring Services
Limited (SMS), a U.K. based CRO, for approximately $7.5 million in cash and
141,680 shares of the Company's Common Stock.
3
<PAGE> 4
Additionally, in January, 1999, the Company acquired a minority
interest in Digineer, Inc. ("Digineer", formerly Component Software
International, Inc.), an Internet healthcare consulting and development company
for approximately $1.6 million in cash and 19,995 shares of the Company's Common
Stock. Additionally, the Company entered into a Multi-Year Strategic Service
Agreement with Digineer whereby the Company will pay Digineer $7.0 million over
a four year period in exchange for strategic software consulting and development
services.
The Company's net revenues from G.D. Searle & Co. accounted for 24%,
38%, and 54%, of the Company's total net revenues for the years ended December
31, 1999, 1998, and 1997, respectively. Revenues from Centocor, Inc. accounted
for approximately 18% of net revenues for the year ended December 31, 1999 and
were less than 10% in 1998 and 1997.
Segment and geographic information of the Company is contained in Note
16 to the consolidated financial statements on page 43 of the Company's Annual
Report to Shareholders for 1999, and is incorporated herein by reference.
Backlog
- -------
Backlog is based on signed contracts and letters of intent. Backlog at
December 31, 1999 was $128 million compared to $96 million at December 31, 1998.
No assurance can be given that the Company will be able to realize the net
revenues that are included in the backlog. Backlog is not necessarily a
meaningful indicator of future results for a variety of reasons, including, but
not limited to, the following: (i) contracts vary in size and duration, with
revenue from some studies realized over a number of years; (ii) the scope of
contracts may change, either increasing or decreasing the value of the contract;
and (iii) studies may be terminated or delayed by the sponsor or by regulatory
authorities.
Competition
- -----------
The Company competes primarily against in-house research and
development departments of pharmaceutical and biotechnology companies,
universities, teaching hospitals and other full-service CROs, some 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 services
provided, 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
recruit patients into studies, 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 competes with the following CROs, among others:
ClinTrials Research Inc., Covance, Inc., PAREXEL International Corporation,
Pharmaceutical Product Development, Inc. and Quintiles Transnational
Corporation.
Employees
- ---------
As of February 29, 2000, the Company had approximately 1,525 employees.
None of the Company's employees are covered by a collective bargaining
agreement.
4
<PAGE> 5
ITEM 2.
PROPERTIES
----------
The Company leases all of its facilities with the exception of the
Company-owned facility in Ely, United Kingdom. The Company's principal executive
offices are located in Cincinnati, Ohio, where it leases approximately 118,000
square feet under a lease expiring in 2006. The Company also maintains offices
in various other U.S. locations and in Europe and the Pacific Rim.
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.
ITEM 3.
LEGAL PROCEEDINGS
-----------------
The Company currently is not involved in any material litigation, nor,
to the Company's knowledge, is any material litigation currently threatened
against the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
--------------------------------------
"Quarterly Financial Data" on page 21 and "Transfer Agent and Registrar
and Stock Information" on page 45 of the Company's Annual Report to Shareholders
for 1999 are incorporated herein by reference. The Company has not paid
dividends on its Common Stock since its initial public offering in August, 1997.
The Company does not currently intend to pay dividends in the foreseeable
future, but intends instead to reinvest earnings in its business.
Recent Sales of Unregistered Securities
- ---------------------------------------
In January, 1999, the Shareholders of Digineer received a total of
19,995 shares of the Company's Common Stock.
In January, 1999, the Shareholders of IRC received a total of 87,558
shares of the Company's Common Stock. At February 29, 2000, 43,779 of these
shares remained in a general escrow established as of the acquisition date to
provide indemnification for any breach of the sellers' representations and
warranties.
5
<PAGE> 6
In July, 1999, the Shareholders of HCC received a total of 174,559
shares of the Company's Common Stock. At February 29, 2000, 31,943 of these
shares remained in a general escrow established as of the acquisition date to
provide indemnification for any breach of the sellers' representations and
warranties.
In August, 1999, the Shareholder of SMS received 141,680 shares of the
Company's Common Stock. At February 29, 2000, 97,066 of these shares remained in
a general escrow established as of the acquisition date to provide
indemnification for any breach of the seller's representations and warranties.
During the time period from October 14, 1997 to January 2, 2000, Philip
E. Beekman, Charles A. Sanders, Robert Buck, and Mary Beth Price, directors of
Kendle, received a total of 2,791 shares of the Company's Common Stock pursuant
to the table below:
PHILIP E. BEEKMAN CHARLES A. SANDERS
- ----------------- ------------------
October 14, 1997 - 30 Shares October 14, 1997 - 30 Shares
December 31, 1997 - 131 Shares December 31, 1997 - 131 Shares
April 1, 1998 - 81 Shares April 1, 1998 - 81 Shares
July 1, 1998 - 58 Shares July 1, 1998 - 58 Shares
October 1, 1998 - 33 Shares October 1, 1998 - 33 Shares
January 1, 1999 - 68 Shares January 1, 1999 - 68 Shares
April 2, 1999 - 75 Shares April 2, 1999 - 137 Shares
July 2, 1999 - 122 Shares July 2, 1999 - 122 Shares
October 2, 1999 - 181 Shares October 2, 1999 - 121 Shares
January 2, 2000 - 153 Shares January 2, 2000 - 77 shares
ROBERT BUCK MARY BETH PRICE
- ----------- ---------------
April 2, 1999 - 112 Shares April 2, 1999 - 100 Shares
July 2, 1999 - 122 Shares July 2, 1999 - 92 Shares
October 2, 1999 - 181 Shares October 2, 1999 - 241 Shares
January 2, 2000 - 153 Shares
Mr. Beekman, Mr. Sanders, Mr. Buck, and Ms. Price received these
securities in exchange for their services as directors of the Company pursuant
to the 1997 Directors' Compensation Plan.
These issuances were exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) as transactions by an issuer not involving any
public offering.
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
"Selected Financial Data" on page 20 of the Company's Annual Report to
Shareholders for 1999 is incorporated herein by reference.
6
<PAGE> 7
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" begins on page 22 of the Company's Annual Report to
Shareholders for 1999 and is incorporated herein by reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
----------------------------------------------------------
"Quantitative and Qualitative Information about Market Risk" is
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 22 of the Company's Annual Report to
Shareholders for 1999 and is incorporated herein by reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The following Financial Statements of the Registrant beginning on page
27 of its Annual Report to Shareholders for 1999, are incorporated herein by
reference:
1. Consolidated Statements of Income for the years ended December
31, 1999, 1998, and 1997.
2. Consolidated Balance Sheets as of December 31, 1999 and 1998.
3. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997.
4. Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
5. Notes to Consolidated Financial Statements.
6. Report of Independent Accountants.
All supplemental schedules are omitted because of the absence of
conditions under which they are required or because the information is shown in
the Consolidated Financial Statements or Notes thereto.
Unaudited Supplementary Data
- ----------------------------
"Selected Quarterly Financial Data" on page 21 of the Registrant's
Annual Report to Shareholders for 1999 is incorporated herein by reference.
7
<PAGE> 8
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None
PART III
--------
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
DIRECTORS OF THE COMPANY
The name, age and background information for each of the Company's Directors is
set forth in the section entitled ELECTION OF DIRECTORS contained in the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders, and is
hereby incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers of the Company at March 1, 2000, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION OFFICER SINCE
- ---- --- -------- -------------
<S> <C> <C> <C>
Christopher C. Bergen 49 President and Chief Operating 1989
Officer
Candace Kendle 53 Chief Executive Officer and Chairman 1989
of the Board of Directors
Timothy M. Mooney 52 Executive Vice President - Finance 1996
and Chief Financial Officer
Thomas E. Stilgenbauer 52 Executive Vice President - Operations 1999
</TABLE>
Prior to being elected Executive Vice President - Finance and CFO, Mr. Mooney
was Vice President and Chief Financial Officer of The Future Now; prior thereto
Mr. Mooney was the Senior Vice President and Chief Financial Officer of
Hook-SupeRx, Inc.
Prior to being elected Executive Vice President - Operations, Mr. Stilgenbauer
was Senior Vice President - Organizational Development; prior thereto, Mr.
Stilgenbauer was Vice President - Operations for The Loewen Group; and prior
thereto, he was the Senior Vice President - Operations of Hook-SupeRx, Inc.
Information on compliance with Section 16(a) of the Exchange Act set forth in
the section entitled "Compliance with Section 16(a) of the Exchange Act is
contained in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders, and is hereby incorporated herein by reference.
8
<PAGE> 9
ITEMS 11-13.
Information on executive compensation set forth in the section entitled
EXECUTIVE COMPENSATION and the tables therein, the number of shares beneficially
owned by each Director and by all Directors and Executive Officers as a group
set forth in the section entitled SECURTIES OWNERSHIP, and the table therein,
and information on certain transactions with management set forth in the section
entitled CERTAIN TRANSACTIONS are contained in the Company's Proxy Statement for
its 2000 Annual Meeting of Shareholders, and are hereby incorporated herein by
reference. Notwithstanding anything to the contrary set forth herein or in any
of the Company's previous filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, that might incorporate
future filings, including this Form 10-K, the section entitled COMPENSATION
SUBCOMMITTEE REPORT ON EXECUTIVE COMPENSATION and the Performance Graph which
are set forth in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders are not deemed to be incorporated by reference in this Form 10-K.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1 and 2 - All financial statements and schedules required to be filed
by Item 8 of this Form and included in this report have been listed
previously beginning on page 7. No additional financial statements or
schedules are being filed since the requirements of paragraph (d) under
Item 14 are not applicable to the Company.
(b) 3 - Exhibits. (see page 10)
(c) Reports on Form 8-K
During the fiscal quarter ended December 31, 1999, the Company filed no
reports on Form 8-K.
9
<PAGE> 10
Exhibit
Number Description of Exhibit Filing Status
- ------ ---------------------- -------------
2.1 Stock Purchase Agreement dated July 1, 1997 by and
among the Company and Shareholders of U-Gene Research B.V. A
2.2 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. Morrison, T.S.
Schwarz, I.M. Hoepelman , Ph.K. Peterson, J. Remington, M.
Rozenberg-Arska and L.G.W. Sterkman A
2.3 Share Purchase Agreement dated July 2, 1997 by and among the
Company and the Shareholders of GMI Gescellschaft fur Angewandte
Mathematick und Informatik mbH A
2.4 Stock Purchase Agreement dated February 11, 1998 by and among
the Company and the Shareholders of ACER/EXCEL Inc. B
2.5 Escrow Agreement dated February 11, 1998 among the Company,
Tzuo-YanLee, 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 C
2.6 Registration Rights Agreement dated February 11, 1998 among
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 C
2.7 Share Purchase Agreement dated December 23, 1998 by and among
the Company and the Shareholders of Research Consultants
(International) Holdings Limited D
2.8 Escrow Agreement dated January 5, 1999 among the Company, John
Glasby, Gillian Gregory, Michael Roy Broomby and Peter
Nightingale D
2.9 Option Agreement dated September 9, 1998 by and between the
Company and Component Software International, Inc. D
2.10 Notice of Option Exercise dated January 11, 1999 of the Option
Agreement dated September 9, 1998 D
2.11 Multi-Year Strategic Services Agreement dated January 20, 1999
by and between the Company and Component Software
International, Inc. D
2.12 Asset Purchase Agreement dated June 27, 1999 by and among
the Company and the Shareholders of Health Care
Communications, Inc. F
2.13 Stock Purchase Agreement dated June 4, 1999 by and among the
Company and the Shareholders of ESCLI S.A. G
2.14 Asset Purchase Agreement dated July 13, 1999 by and among the
Company and the Shareholders of HCC Health Care Communications
(1991), Ltd. G
2.15 Share Purchase Agreement dated August 31, 1999 by and among the
Company and the Shareholder of Specialist Monitoring Services
Limited G
2.16 Escrow Agreement dated July 13, 1999 by and among the Company,
Geoffrey H. Kalish, M.D., Bradley D. Kalish, Jill Kalish, and
The Fifth Third Bank, as Escrow Agent I
2.17 Escrow Agreement dated August 31, 1999 by and among the Company,
Paul Martin, and The Fifth Third Bank, as Escrow Agent I
3.1 Restated and Amended Articles of Incorporation A
3.2 Amended and Restated Code of Regulations A
3.3 Amendment of the Restated and Amended Articles of Incorporation
to Increase the Authorized Shares E
4 Specimen Common Stock Certificate A
4.1 Shareholder Rights Agreement dated August 13, 1999 between the
Company and The Fifth Third Bank, as Rights Agent H
10.1 Amended and Restated Shareholders' Agreement dated June 26, 1997 A
10.2 Master Lease Agreement dated November 27, 1996 by and between
the Company and Bank One Leasing Corporation, as amended on
April 18, 1997 A
10.6 Master Equipment Lease dated August 16, 1996 by and between the
Company and The Fifth Third Leasing Company A
10.7 Lease Agreement dated December 9, 1991 by and between the
Company and Carew
10
<PAGE> 11
Realty, Inc., as amended on December 30, 1991, March 18, 1996,
October 8, 1996, January 29, 1997, and February 16, 1999 D
10.8 Indemnity Agreement dated June 21, 1996 by and between the
Company and Candace Kendle Bryan A
10.9 Indemnity Agreement dated June 21, 1996 by and between the
Company and Christopher C. Bergen A
10.10 Indemnity Agreement dated June 21, 1996 by and between the
Company and Timothy M. Mooney A
10.11 Indemnity Agreement dated May 14, 1997 by and between the
Company and Charles A. Sanders C
10.12 Indemnity Agreement dated May 14, 1997 by and between the
Company and Philip E. Beekman C
10.13 Indemnity Agreement dated December 10, 1998 by and between the
Company and Robert Buck D
10.14 Indemnity Agreement dated December 10, 1998 by and between the
Company and Mary Beth Price D
10.17 Clinical Trial Service Agreement between the Company and G.D.
Searle & Company dated September 23, 1997 C
10.19 Amended and Restated Credit Agreement dated as of February 26,
1998 by and between the Company and NationsBank, N.A. C
10.21 First Amendment to the Amended and Restated Credit Agreement
dated as of November 25, 1998 by and between the Company and
NationsBank, N.A. D
10.20 MANAGEMENT CONTRACTS AND COMPENSATION PLANS
(a) 1995 Stock Option and Stock Incentive Plan A
(b) 1995 Stock Option and Stock Incentive Plan--Individual
Stock Option Agreement for Incentive Stock Option
(contained in Exhibit 10.20(a)) A
(c) 1997 Stock Option and Stock Incentive Plan A
(d) Form of Protective Compensation and Benefit Agreement A
(e) 1998 Employee Stock Purchase Plan D
(f) 1997 Directors' Compensation Plan D
13 Annual Report to Shareholders for 1999 I
21 List of Subsidiaries I
23.1 Consent of PricewaterhouseCoopers LLP I
27.1 Financial Data Schedule for the year ended December 31, 1999 I
Exhibit
Number Description of Exhibit
- ------ ----------------------
A Incorporated by reference to the Company's Registration Statement No.
333-30581 filed under the Securities Act of 1933
B Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 13, 1997
C Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997
D Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998
E Incorporated by reference to the Company's Proxy Statement for its 1999
Annual Shareholders' Meeting
F Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999
11
<PAGE> 12
G Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999
H Incorporated by reference to the Company's filing on Form 8-A dated
September 7, 1999
I Filed herewith
12
<PAGE> 13
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KENDLE INTERNATIONAL INC.
-------------------------
DATE SIGNED: March 30, 2000 /s/ Candace Kendle
-------------------
Candace Kendle
Chairman and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Candace Kendle Chairman of the Board of March 30, 2000
- ------------------------------ Directors and Chief Executive
Candace Kendle Officer
/s/ Christopher C. Bergen President, Chief Operating March 30, 2000
- ------------------------------ Officer, Secretary and Director
Christopher C. Bergen
/s/ Timothy M. Mooney Executive Vice President, March 30, 2000
- ------------------------------ Chief Financial Officer,
Timothy M. Mooney Treasurer, Assistant Secretary
(Chief Accounting Officer) and
Director
/s/ Philip E. Beekman Director March 30, 2000
- ------------------------------
Philip E. Beekman
/s/ Robert R. Buck Director March 30, 2000
- ------------------------------
Robert R. Buck
/s/ Charles A. Sanders Director March 30, 2000
- ------------------------------
Charles A. Sanders
</TABLE>
13
<PAGE> 1
Exhibit 2.16
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is dated as of the
13th day of July, 1999 among K.A.U., Inc., an Ohio corporation ("U.S.
Purchaser"), 3031298 Nova Scotia Limited, a Nova Scotia, Canada corporation
("Canadian Purchaser"), KENDLE INTERNATIONAL INC., an Ohio corporation
("Kendle") (the aforesaid three companies being collectively referred to herein
as the "Purchasing Group"), all of the foregoing with a mailing address of 441
Vine Street, Suite 700, Cincinnati, Ohio 45202, Attention: Paul F. Ritter, Esq.,
General Counsel HEALTH CARE COMMUNICATIONS, INC., a New Jersey corporation with
a mailing address at 2 Cedar Lane, Chappaqua, New York 10514 ("U.S. Seller"),
HCC HEALTH CARE COMMUNICATIONS (1991) Ltd., a Canadian corporation with a
mailing address which is the same as that of the U.S. Seller ("Canadian Seller")
(the U.S. Seller and the Canadian Seller being collectively referred to as the
"Sellers"), Geoffrey H. Kalish, M.D., an individual with a mailing address at 2
Cedar Lane, Chappaqua, New York 10514, Bradley D. Kalish, an individual with a
mailing address at 251 West 92nd Street, Apartment 5D, New York, New York 10025
and Jill Kalish, an individual with a mailing address at 320 East 39th Street,
Apartment 24R, New York, New York 10016 (the aforesaid three individuals being
collectively referred to herein as "Stockholders" and the Stockholders and the
Sellers being collectively referred to as the "Selling Group"), and THE FIFTH
THIRD BANK with a mailing address of 38 Fountain Square Plaza, Cincinnati, Ohio
45263, as the escrow agent hereunder ("Escrow Agent").
BACKGROUND
A. Effective as of June 27, 1999 Kendle, U.S. Purchaser,
the U.S. Seller and the Stockholders entered into an
Asset Purchase Agreement (the "U.S. Purchase
Agreement"). Pursuant to the terms of said U.S.
Purchase Agreement, U.S. Purchaser is today
purchasing from the U.S. Seller substantially all of
the assets of the U.S. Seller.
B. Effective as of July 13, 1999, Canadian Purchaser,
Canadian Seller and Geoffrey H. Kalish, M.D. entered
into an Asset Purchase Agreement (the "Canadian
Purchase Agreement"). Pursuant to the terms of said
Canadian Purchase Agreement, Canadian Purchaser is
today
1
<PAGE> 2
purchasing from the Canadian Seller substantially all
of the assets of the Canadian Seller.
C. The parties desire to enter into this Escrow
Agreement to provide for an escrow of certain cash and stock
(the "Escrow Property") to provide financial support for
Sellers' obligation to indemnify the Purchasing Group for any
breaches of warranty or representation by the Selling Group
under the U.S. Purchase Agreement and the Canadian Purchase
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set
forth below and other good and valuable consideration, the parties hereto agree
as follows:
1. DESIGNATION AND DELIVERY. The Purchasing Group and the
Selling Group hereby designate The Fifth Third Bank as "Escrow Agent" under this
Escrow Agreement. The Purchasing Group and the Selling Group hereby deliver to
the Escrow Agent a copy of the U.S. Purchase Agreement and the Canadian Purchase
Agreement, which documents are attached hereto and incorporated herein as
Exhibit "A" and "A-1." The Purchasing Group, in accordance with the U.S.
Purchase Agreement and the Canadian Purchase Agreement, hereby delivers to the
Escrow Agent, and the Escrow Agent hereby acknowledges receipt of, cash in the
amount of $500,000 (the "Deposit") and 31,943 shares of the common stock, no par
value, of Kendle (the "Stock").
2. INVESTMENT OF THE DEPOSIT; DIVIDENDS AND DISTRIBUTIONS WITH
RESPECT TO THE DEPOSIT AND STOCK.
(a) The Escrow Agent is hereby authorized to invest
the Deposit in money market funds, including the Fountain Square U.S. Treasury
Obligations Fund sponsored by the Escrow Agent's affiliate, Fountain Square
Funds. The Escrow Agent shall cause all stock dividends and stock distributions
(including shares distributed in a stock split) earned on or with respect to the
Stock to be added to the Escrow Property. The U.S. Seller shall be entitled to
exercise all voting rights with respect to any Stock or other Kendle securities
held from time to time as part of the Escrow Property until such time as, if at
all, any such securities are distributed to Kendle in accordance with Section 5
hereof. The parties further acknowledge that the amount of cash and securities
held as part of the Escrow Property may be reduced or (in the case of securities
only) increased from time to time during the term hereof pursuant to the terms
of this Escrow Agreement. Accordingly, the term "Escrow Property" shall refer to
the sum of (i) the Deposit initially placed in escrow hereunder or to such
lesser amount of cash as may be held in escrow pursuant hereto at any point
during the term hereof and (ii) the Stock initially placed into escrow hereunder
or such lesser or greater number of securities as may be held in escrow pursuant
hereto at any point during the term hereof. The parties agree that interest
earned on, and any other
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<PAGE> 3
accretions to, the Escrow Property (other than stock dividends and other stock
distributions) (collectively, "Seller's Accretions") shall not be deemed to be a
part of the Escrow Property and shall be treated in accordance with Section 2(b)
hereof.
(b) All Seller's Accretions earned on or distributed
with respect to the Escrow Property shall be the property of, and fully taxable
to, the U.S. Seller. On each date on which any portion of the Escrow Property is
released to the U.S. Seller pursuant to this Escrow Agreement (and, in any
event, on the date of the final release of the Escrow Property hereunder), the
Escrow Agent shall pay to the U.S. Seller, all Seller's Accretions which have
accrued on or been received with respect to the Escrow Property through such
date.
(c) The parties acknowledge that, based upon the
Market Value of Kendle common stock as of the Closing Date, 50% of the initial
Escrow Property consists of the Stock and 50% of the initial Escrow Property
consists of cash.
3. ESCROW AGENT AS CUSTODIAN; EXPENSES. The Escrow Agent
shall, for all purposes of this Escrow Agreement, be treated as and considered
legally a custodian. The Escrow Agent shall be entitled to rely conclusively
upon the written notice provided in Section 5 and may assume the genuineness of
all signatures and documents and the authority of all signatories. The Escrow
Agent shall have no liability except for gross negligence or willful misconduct
in the performance of its duties under this Escrow Agreement. Kendle and the
Selling Group, collectively, shall each assume and pay one half (1/2) of all
costs and expenses of the Escrow Agent incurred in its capacity as the Escrow
Agent under this Escrow Agreement. The fees of the Escrow Agent are set forth on
Exhibit "B" attached hereto and incorporated herein.
4. RESIGNATION; DISAGREEMENTS.
(a) Escrow Agent (and any successor Escrow Agent) may
at any time resign as such by delivering the Escrow Property to any successor
Escrow Agent designated by the other parties hereto in writing, or to any court
of competent jurisdiction as provided below. The resignation of Escrow Agent
will take effect on the earlier of (i) the appointment of a successor (including
a court of competent jurisdiction), or (ii) the day which is thirty (30) days
after the date of delivery of its written notice of resignation to the other
parties hereto. If at that time Escrow Agent has not received a designation of a
successor Escrow Agent, Escrow Agent's sole responsibility after that time shall
be to retain and safeguard the Escrow Property until receipt of a designation of
successor Escrow Agent or a joint written disposition instruction by the other
parties hereto or a final order of a court of competent jurisdiction.
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<PAGE> 4
(b) In the event of any disagreement between the
other parties hereto resulting in adverse claims or demands being made in
connection with the Escrow Property or in the event that Escrow Agent is in
doubt as to what action it should take hereunder, Escrow Agent shall be entitled
to retain the Escrow Property until Escrow Agent shall have received (i) a final
order of a court of competent jurisdiction directing delivery of the Escrow
Property, or (ii) a written agreement executed by the other parties hereto
directing delivery of the Escrow Property, in which event Escrow Agent shall
disburse the Escrow Property in accordance with such order or agreement. Escrow
Agent shall act on such court order without further question.
5. TERMINATION AND DISTRIBUTION OF ESCROW.
(a) TERMINATION. This Escrow Agreement shall
terminate on the date upon which the Escrow Agent shall have fully distributed
the Escrow Property as provided herein.
(b) CLAIM NOTICES. If, at any time on or prior to the
date falling two (2) years after the date hereof (the "Second Anniversary
Date"), the Escrow Agent shall receive a notice from any of the Purchasing Group
which (i) affirms that the Purchasing Group believes that the members of the
Selling Group are liable to the U.S. or Canadian Purchaser under the U.S.
Purchase Agreement or the Canadian Purchase Agreement, as the case may be, for
breaches of representations or warranties and (ii) states a specific amount (the
"Claimed Amount") which, as a result of the factual basis underlying such
notice, the Purchasing Group, in good faith, believes it is owed, by the Selling
Group (any such notice being herein referred to as a "Claim Notice"), the Escrow
Agent shall continue to hold in escrow the Claimed Amount stated in such notice
until (A) it shall receive further instructions as to the disposition of such
sum in a writing signed by Kendle and either of the Sellers or (B) it shall be
otherwise ordered by a court of competent jurisdiction. The parties acknowledge
that there may be multiple Claim Notices given by the Purchasing Group during
the term hereof. The Escrow Agent shall deliver a copy of each Claim Notice
received by it to the appropriate Seller.
(c) PARTIAL RELEASE. Within 15 days after the date
falling one year after the date hereof (the "First Anniversary Date"), the
Escrow Agent shall release to the U.S. Seller, an amount equal to the excess, if
any, of (i) the Escrow Property as of the First Anniversary Date over (ii) the
sum of (A) $500,000 and (B) any portions of the Escrow Property required, as of
the First Anniversary Date, to be held in escrow pursuant to Section 2(b).
(d) FINAL RELEASE. Within 15 days after the Second
Anniversary Date, the Escrow Agent shall release to the U.S. Seller an amount
equal to the excess, if any, of the Escrow Property as of the Second Anniversary
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<PAGE> 5
Date over the aggregate sum required as of the Second Anniversary Date to be
held in escrow pursuant to Section 5(b).
(e) JOINT WRITTEN DIRECTION. Notwithstanding any
provision in this Section 5 to the contrary, the Escrow Agent may make payments
from the Escrow Property, or from any Seller's Accretions, at any time upon
receipt of a joint written direction from Kendle and either of the Sellers (a
"Joint Written Direction").
(f) NO DISPUTE. If, on or prior to the Second
Anniversary Date, Kendle shall have delivered a Notice of Claim to the Escrow
Agent and appropriate Seller and such Seller shall not have disputed the Notice
of Claim within ten (10) business days after their receipt of the Notice of
Claim, the Claim Amount shall promptly be released to Kendle by the Escrow
Agent.
(g) VALUATION; ALLOCATIONS. For purposes of
determining that portion of the Escrow Property which is to be withheld or
released, as the case may be, under this Section 5 (and except as may be
otherwise provided in a Joint Written Direction), the Market Value of the Stock
shall be used, except that the relevant date used for counting back 20 trading
days shall be (i) the date on which a Claim Notice shall have been given to the
Escrow Agent, (ii) the First Anniversary Date or (iii) the Second Anniversary
Date, as the case may be. In addition, to the extent that any withholding or
release of the Escrow Property by the Escrow Agent is to be effectuated
hereunder, such withholding or release shall be comprised of Stock and cash in
the same percentages referred to in Section 2(c) hereof.
6. DUTIES OF ESCROW AGENT. The duties of the Escrow Agent
under this Escrow Agreement shall be entirely administrative and the Escrow
Agent shall not be liable to any third party as a result of any action or
omission taken or made by it, if taken in good faith, except for gross
negligence or willful misconduct in performing its duties. In the event of
disagreement or dispute between Kendle and the Selling Group with respect to
disposition of the Escrow Property, the Escrow Agent shall have the right to
initiate an appropriate legal proceeding to obtain a judicial determination of
the respective parties' rights to the Escrow Property. No rights are intended to
be granted to any third party hereunder. Kendle and the Selling Group shall
severally (each being responsible for a maximum of fifty percent (50%) of the
indemnity account) indemnify and hold harmless the Escrow Agent and reimburse
the Escrow Agent from and for any and all liability, costs and expenses,
including reasonable attorneys' fees, the Escrow Agent may suffer or incur by
reason of its execution and performance of this Escrow Agreement except for any
such liability, costs or expenses (including attorneys fees) which is a result
of Escrow Agent's own gross negligence or willful misconduct. The Escrow Agent
shall have no duties except those which are expressly set forth herein, and it
shall not be bound by any notice of a claim,
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<PAGE> 6
or demand with respect thereto, or any waiver, modification, amendment,
termination or recission of this Escrow Agreement, unless in writing received by
it and signed by Kendle and either Seller.
In the event that the Escrow Agent shall find it necessary to
consult with counsel of its own choosing in connection with this Escrow
Agreement, the Escrow Agent shall not incur any liability for any action taken
in good faith in accordance with such advice. Kendle and the Selling Group,
jointly and severally, shall indemnify and hold harmless the Escrow Agent for
any liability, loss, claim or damage incurred by the Escrow Agent in connection
with this Escrow except for any such liability, costs, expenses (including
reasonable attorneys' fees), loss, claims or damage which is a result of Escrow
Agent's own gross negligence or willful misconduct. This indemnification shall
survive termination of this Escrow Agreement. Kendle and the Selling Group agree
that Kendle, on the one hand, and the Selling Group, collectively, on the other
hand, shall each assume and pay fifty percent (50%) of all amounts due to Escrow
Agent as a result of this indemnification.
Escrow Agent is not a party to, and is not bound by, any
agreement which may be evidenced by, or arise out, the foregoing instruction,
other than as expressly set forth herein. In the event that any of the terms and
provisions of any other agreement (excluding any amendment to this Escrow
Agreement) between any of the parties hereto, conflict or are inconsistent with
any of the provisions of this Escrow Agreement, the terms and provisions of this
Escrow Agreement shall govern and control in all respects.
7. NOTICES. All notices, consents or other communications
required or permitted to be given under this Escrow Agreement shall be in
writing and shall be deemed to have been duly given:
(a) when delivered personally (including via
recognized courier service, such as Fed Ex)
(b) five (5) business day after being sent by
certified U.S. mail, postage charges prepaid, or
(c) on the date on which a telegram or facsimile is
transmitted to the parties at their respective addresses stated above.
Any party may change its address for notice and the address to
which copies must be sent by giving notice of the new addresses to the other
parties in accordance with this Section 7, except that any such change of
address notice shall not be effective unless and until received.
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<PAGE> 7
8. AMENDMENT. No amendment or modification of this Escrow
Agreement shall be effective unless in writing and signed by the parties.
9. SUPPLEMENTAL ESCROW AGREEMENT.
(a) The parties acknowledge that, pursuant to Section
11(b)(v) of the U.S. Purchase Agreement, in the event, and to the extent, that
any given claim or claims being asserted in good faith by the Purchaser could
not be satisfied out of the assets being held under this Agreement, Purchaser
may seek recourse by depositing earned, but not yet paid, Earnout Amounts with
the Escrow Agent under this Agreement. The parties have now agreed, however,
that any such sums should, contrary to the U.S. Purchase Agreement, be deposited
with the Escrow Agent not under this Agreement but rather under a similar Escrow
Agreement attached hereto as Exhibit C (the "Secondary Escrow Agreement").
Consequently, in the event of any such deposit by the Purchasing Group (which
deposit must be accompanied by a Claim Notice under the Secondary Escrow
Agreement alleging a Claimed Amount at least equal in amount to the amount being
deposited), the attached Secondary Escrow Agreement shall be deemed
automatically, on the date of the first such deposit (regardless whether the
same shall occur prior to or after the termination of this Agreement), to have
been executed and delivered by the parties hereto, and any sums then or
thereafter deposited pursuant to the aforesaid Section 11(b)(v) shall be deemed
to have been deposited thereunder.
(b) The Purchasing Group agrees that any Earnout
Amounts that are deposited with the Escrow Agent in accordance with Section 9(a)
above shall be allocated between cash and Kendle shares in the same percentages
referred to in Section 2(c) above; provided, however, that in the event that
(due to the fact that Earnout Amounts will be composed 67% of cash and 33 % of
Kendle shares) any given Earnout Amount shall not contain a sufficient number of
Kendle shares to comply with the preceding clause of this sentence, Kendle
shall, to the extent of any such deficiency, have the right to deposit with the
Escrow Agent cash instead of Kendle shares. The parties further agree that for
purposes of (i) determining the aggregate number of shares of Kendle stock
which, based upon the related Claim Notice, may be withheld from the U.S. Seller
and deposited in escrow under the Secondary Escrow Agreement and (ii)
implementing the terms of the preceding sentence, all Kendle shares shall be
valued at Market Value, using the 20 trading days preceding [the date on which
the EBIT for the then most recent fiscal year of the U.S. Purchaser shall have
been finally determined under Section 2.2 of the U.S. Purchase Agreement]
(c) The terms of this Section 9 shall survive
termination of this Agreement.
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10. PARTIES IN INTEREST. This Escrow Agreement shall bind,
benefit, and be enforceable by and against each party hereto and their
successors, assigns, heirs and personal representatives. No party shall in any
manner assign any of its rights or obligations under this Escrow Agreement
without the express prior written consent of the other parties.
11. NO WAIVERS. No waiver with respect to this Escrow
Agreement shall be enforceable unless in writing and signed by the party against
whom enforcement is sought. Except as otherwise expressly provided herein, no
failure to exercise, delay in exercising, or single or partial exercise of any
right, power or remedy by any party, and no course of dealing between or among
any of the parties, shall constitute a waiver of, or shall preclude any other or
further exercise of the same or any other right, power or remedy.
12. SEVERABILITY. If any provision of this Escrow Agreement is
construed to be invalid, illegal or unenforceable, then the remaining provisions
hereof shall not be affected thereby and shall be enforceable without regard
thereto.
13. COUNTERPARTS. This Escrow Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall
constitute an original hereof, and it shall not be necessary in making proof of
this Escrow Agreement to produce or account for more than one original
counterpart hereof.
14. CONTROLLING LAW. This Escrow Agreement is made under, and
shall be construed and enforced in accordance with, the laws of the State of
Ohio applicable to agreements made and to be performed solely therein, without
giving effect to principles of conflicts of law.
15. DEFINITIONS. To the extent not specifically defined
herein, all terms used herein shall have the meanings ascribed to them in the
U.S. Purchase Agreement.
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IN WITNESS WHEREOF, the parties have executed, or caused their
duly authorized representatives to execute, this Escrow Agreement on the date
first written above.
KENDLE INTERNATIONAL INC.
-------------------------
By: /S/ RAFAEL MANCERA
------------------
Name: RAFAEL MANCERA
--------------
Title: DIRECTOR, M&A
-------------
K.A.U. Inc.,
By: /S/ RAFAEL MANCERA
------------------
Name: RAFAEL MANCERA
--------------
Title: ASSISTANT SECRETARY
-------------------
3031298 NOVA SCOTIA LIMITED
By: /S/ RAFAEL MANCERA
------------------
Name: RAFAEL MANCERA
--------------
Title: ASSISTANT SECRETARY
-------------------
SELLING GROUP
/S/ GEOFFREY H. KALISH, M.D.
----------------------------
Geoffrey H. Kalish, M.D.
/S/ BRADLEY D. KALISH
----------------------------
Bradley D. Kalish
/S/ JILL KALISH
----------------------------
Jill Kalish
HCC HEALTH CARE
COMMUNICATIONS (1991), LTD.
By: /S/ GEOFFREY H KALISH, M.D.
---------------------------
Name: GEOFFREY H. KALISH, M.D.
--------------------------
Title: PRESIDENT
---------
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HEALTH CARE
COMMUNICATIONS, INC.
By: /S/ GEOFFREY H. KALISH, M.D.
-----------------------------
Name: GEOFFREY H. KALISH , M.D.
-------------------------
Title: PRESIDENT
---------
Received and accepted:
THE FIFTH THIRD BANK
Escrow Agent
By: /S/ GREG HAHN
-----------------------
Name: GREG HAHN
-----------------------
Title: ASSISTANT VICE PRESIDENT
------------------------
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EXHIBIT "A"
-----------
PURCHASE AGREEMENT
------------------
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<PAGE> 12
EXHIBIT "B"
-----------
ESCROW AGENT FEES
-----------------
Closing and Acceptance Fees.........................................$4,000.00
Annual Administrative Fee...........................................$3,000.00
The fees listed above relate specifically to duties described in the Escrow
Agreement dated July 13, 1999 between Fifth Third Bank, Kendle International
Inc. and Health Care Communications, Inc. Extraordinary services or services not
specifically contemplated therein may be additional. All out of pocket expenses
including and not limited to postage, insurance, stationary, travel expenses,
wire fees, legal fees, etc. will be passed along over and above the fees stated.
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EXHIBIT "C"
-----------
SECONDARY ESCROW AGREEMENT
THIS SECONDARY ESCROW AGREEMENT ("Escrow Agreement") is among
K.A.U., Inc., an Ohio corporation ("U.S. Purchaser"), 3031298 Nova Scotia
Limited, a Nova Scotia, Canada corporation ("Canadian Purchaser"), KENDLE
INTERNATIONAL INC., an Ohio corporation ("Kendle") (the aforesaid three
companies being collectively referred to herein as the "Purchasing Group"), all
of the foregoing with a mailing address of 441 Vine Street, Suite 700,
Cincinnati, Ohio 45202, Attention: Paul F. Ritter, Esq., General Counsel HEALTH
CARE COMMUNICATIONS, INC., a New Jersey corporation with a mailing address at 2
Cedar Lane, Chappaqua, New York 10514 ("U.S. Seller"), HCC HEALTH CARE
COMMUNICATIONS (1991) Ltd., a Canadian corporation with a mailing address which
is the same as that of the U.S. Seller ("Canadian Seller") (the U.S. Seller and
the Canadian Seller being collectively referred to as the "Sellers"), Geoffrey
H. Kalish, M.D., an individual with a mailing address at 2 Cedar Lane,
Chappaqua, New York 10514, Bradley D. Kalish, an individual with a mailing
address at 251 West 92nd Street, Apartment 5D, New York, New York 10025 and Jill
Kalish, an individual with a mailing address at 320 East 39th Street, Apartment
24R, New York, New York 10016 (the aforesaid three individuals being
collectively referred to herein as "Stockholders" and the Stockholders and the
Sellers being collectively referred to as the "Selling Group"), and THE FIFTH
THIRD BANK with a mailing address of 38 Fountain Square Plaza, Cincinnati, Ohio
45263, as the escrow agent hereunder ("Escrow Agent").
BACKGROUND
----------
C. Effective as of June 27, 1999 Kendle, U.S. Purchaser, the U.S.
Seller and the Stockholders entered into an Asset Purchase
Agreement (the "U.S. Purchase Agreement"). Pursuant to the
terms of said U.S. Purchase Agreement, U.S. Purchaser
purchased from the U.S. Seller substantially all of the assets
of the U.S. Seller.
D. Effective as of July 13, 1999, Canadian Purchaser, Canadian
Seller and Geoffrey H. Kalish, M.D. entered into an Asset
Purchase Agreement (the "Canadian Purchase Agreement").
Pursuant to the terms of said Canadian
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Purchase Agreement, Canadian Purchaser purchased from the
Canadian Seller substantially all of the assets of the
Canadian Seller.
C. The parties have previously agreed to enter into this
Escrow Agreement to provide for an escrow of certain cash and stock (the "Escrow
Property") to provide financial support for Sellers' obligation to indemnify the
Purchasing Group for any breaches of warranty or representation by the Selling
Group under the U.S. Purchase Agreement and the Canadian Purchase Agreement.
D. The agreement providing for the creation of this Agreement
was the Escrow Agreement, dated the Closing Date, entered into by the parties
hereto in connection with the U.S. and Canadian Purchase Agreements (the
"Primary Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants set
forth below and other good and valuable consideration, the parties hereto agree
as follows:
1. DESIGNATION AND DELIVERY. The Purchasing Group and the
Selling Group hereby designate The Fifth Third Bank as "Escrow Agent" under this
Escrow Agreement. The Purchasing Group and the Selling Group have previously
delivered to the Escrow Agent a copy of the U.S. Purchase Agreement and the
Canadian Purchase Agreement, which documents are incorporated herein by
reference. The Purchasing Group, in accordance with the U.S. Purchase Agreement,
the Canadian Purchase Agreement, and the Primary Escrow Agreement, hereby
delivers to the Escrow Agent, and the Escrow Agent hereby acknowledges receipt
of, certain cash (the "Deposit") and shares of the common stock, no par value,
of Kendle (the "Stock"). The Escrow Agent shall, promptly after its receipt of
the Deposit and the Stock (the date of occurrence of which shall be deemed for
all purposes to be the "Effective Date" of this Agreement), confirm to the U.S.
Seller the amount of the Deposit and the number of Kendle shares constituting
the Stock.
2. INVESTMENT OF THE DEPOSIT; DIVIDENDS AND DISTRIBUTIONS WITH
RESPECT TO THE DEPOSIT AND STOCK.
(a) The Escrow Agent is hereby authorized to invest
the Deposit in money market funds, including the Fountain Square U.S. Treasury
Obligations Fund sponsored by the Escrow Agent's affiliate, Fountain Square
Funds. The Escrow Agent shall cause all stock dividends and stock distributions
(including shares distributed in a stock split) earned on or with respect to the
Stock to be added to the Escrow Property. The U.S. Seller shall be entitled to
exercise all voting rights with respect to any Stock or other Kendle securities
held
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<PAGE> 15
from time to time as part of the Escrow Property until such time as, if at all,
any such securities are distributed to Kendle in accordance with Section 5
hereof. The parties further acknowledge that the amount of cash and securities
held as part of the Escrow Property may be reduced or increased from time to
time during the term hereof pursuant to the terms of this Escrow Agreement and
the U.S. Purchase Agreement. Accordingly, the term "Escrow Property" shall refer
to the sum of (i) the Deposit initially placed in escrow hereunder or to such
greater or lesser amount of cash as may be held in escrow pursuant hereto at any
point during the term hereof and (ii) the Stock initially placed into escrow
hereunder or such lesser or greater number of securities as may be held in
escrow pursuant hereto at any point during the term hereof. The parties agree
that interest earned on, and any other accretions to, the Escrow Property (other
than stock dividends and other stock distributions) (collectively, "Seller's
Accretions") shall not be deemed to be a part of the Escrow Property and shall
be treated in accordance with Section 2(b) hereof.
(b) All Seller's Accretions earned on or distributed
with respect to the Escrow Property shall be the property of, and fully taxable
to, the U.S. Seller. On each date on which any portion of the Escrow Property is
released to the U.S. Seller pursuant to this Escrow Agreement (and, in any
event, on the date of the final release of the Escrow Property hereunder), the
Escrow Agent shall pay to the U.S. Seller, all Seller's Accretions which have
accrued on or been received with respect to the Escrow Property through such
date.
3. ESCROW AGENT AS CUSTODIAN; EXPENSES. The Escrow Agent
shall, for all purposes of this Escrow Agreement, be treated as and considered
legally a custodian. The Escrow Agent shall be entitled to rely conclusively
upon the written notice provided in Section 5 and may assume the genuineness of
all signatures and documents and the authority of all signatories. The Escrow
Agent shall have no liability except for gross negligence or willful misconduct
in the performance of its duties under this Escrow Agreement. Kendle and the
Selling Group, collectively, shall each assume and pay one half (1/2) of all
costs and expenses of the Escrow Agent incurred in its capacity as the Escrow
Agent under this Escrow Agreement. The fees of the Escrow Agent are set forth on
Exhibit "B" attached to the Primary Escrow Agreement and incorporated herein.
4. RESIGNATION; DISAGREEMENTS.
(a) Escrow Agent (and any successor Escrow Agent) may
at any time resign as such by delivering the Escrow Property to any successor
Escrow Agent designated by the other parties hereto in writing, or to any court
of competent jurisdiction as provided below. The resignation of Escrow Agent
will take effect on the earlier of (i) the appointment of a successor (including
a court of competent jurisdiction), or (ii) the day which is thirty (30) days
after the date of delivery of its written notice of resignation to the other
parties hereto. If at that
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<PAGE> 16
time Escrow Agent has not received a designation of a successor Escrow Agent,
Escrow Agent's sole responsibility after that time shall be to retain and
safeguard the Escrow Property until receipt of a designation of successor Escrow
Agent or a joint written disposition instruction by the other parties hereto or
a final order of a court of competent jurisdiction.
(b) In the event of any disagreement between the
other parties hereto resulting in adverse claims or demands being made in
connection with the Escrow Property or in the event that Escrow Agent is in
doubt as to what action it should take hereunder, Escrow Agent shall be entitled
to retain the Escrow Property until Escrow Agent shall have received (i) a final
order of a court of competent jurisdiction directing delivery of the Escrow
Property, or (ii) a written agreement executed by the other parties hereto
directing delivery of the Escrow Property, in which event Escrow Agent shall
disburse the Escrow Property in accordance with such order or agreement. Escrow
Agent shall act on such court order without further question.
5. TERMINATION AND DISTRIBUTION OF ESCROW.
(a) TERMINATION. This Escrow Agreement shall
terminate on the date upon which the Escrow Agent shall have fully distributed
the Escrow Property as provided herein.
(b) CLAIM NOTICES. Simultaneously with any deposit of
any cash or Kendle shares hereunder in accordance with the U.S. Purchase
Agreement and the Primary Escrow Agreement, U.S. Purchaser shall give to the
Escrow Agent a notice which (i) affirms that the Purchasing Group believes that
the members of the Selling Group are liable to the U.S. or Canadian Purchaser
under the U.S. Purchase Agreement or the Canadian Purchase Agreement for
breaches of representations or warranties and (ii) states a specific amount (at
least equal to the value of the Escrow Property than being deposited) (the
"Claimed Amount") which, as a result of the factual basis underlying such
notice, the Purchasing Group, in good faith, believes it is owed, by the Selling
Group (any such notice being herein referred to as a "Claim Notice"), the Escrow
Agent shall continue to hold in escrow the Claimed Amount stated in such notice
(or, if less, the Escrow Property then being deposited) until (A) it shall
receive further instructions as to the disposition of such property in a writing
signed by Kendle and either of the Sellers or (B) it shall be otherwise ordered
by a court of competent jurisdiction. The parties acknowledge that there may be
multiple Claim Notices given by the Purchasing Group during the term hereof. The
Escrow Agent shall deliver a copy of each Claim Notice received by it to the
appropriate Seller. The U.S. Purchaser represents that it has tendered to the
Escrow Agent a Claim Notice, conforming to the above, with respect to the
initial Escrow Property deposited with the Escrow Agent hereunder.
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<PAGE> 17
(c) JOINT WRITTEN DIRECTION. Notwithstanding any
provision in this Section 5 to the contrary, the Escrow Agent may make payments
from the Escrow Property, or from any Seller's Accretions, at any time upon
receipt of a joint written direction from Kendle and either of the Sellers (a
"Joint Written Direction").
6. DUTIES OF ESCROW AGENT. The duties of the Escrow Agent
under this Escrow Agreement shall be entirely administrative and the Escrow
Agent shall not be liable to any third party as a result of any action or
omission taken or made by it, if taken in good faith, except for gross
negligence or willful misconduct in performing its duties. In the event of
disagreement or dispute between Kendle and the Selling Group with respect to
disposition of the Escrow Property, the Escrow Agent shall have the right to
initiate an appropriate legal proceeding to obtain a judicial determination of
the respective parties' rights to the Escrow Property. No rights are intended to
be granted to any third party hereunder. Kendle and the Selling Group shall
severally (each being responsible for a maximum of fifty percent (50%) of the
indemnity account) indemnify and hold harmless the Escrow Agent and reimburse
the Escrow Agent from and for any and all liability, costs and expenses,
including reasonable attorneys' fees, the Escrow Agent may suffer or incur by
reason of its execution and performance of this Escrow Agreement except for any
such liability, costs or expenses (including attorneys fees) which is a result
of Escrow Agent's own gross negligence or willful misconduct. The Escrow Agent
shall have no duties except those which are expressly set forth herein, and it
shall not be bound by any notice of a claim, or demand with respect thereto, or
any waiver, modification, amendment, termination or recission of this Escrow
Agreement, unless in writing received by it and signed by Kendle and either
Seller.
In the event that the Escrow Agent shall find it necessary to
consult with counsel of its own choosing in connection with this Escrow
Agreement, the Escrow Agent shall not incur any liability for any action taken
in good faith in accordance with such advice. Kendle and the Selling Group,
jointly and severally, shall indemnify and hold harmless the Escrow Agent for
any liability, loss, claim or damage incurred by the Escrow Agent in connection
with this Escrow except for any such liability, costs, expenses (including
reasonable attorneys' fees), loss, claims or damage which is a result of Escrow
Agent's own gross negligence or willful misconduct. This indemnification shall
survive termination of this Escrow Agreement. Kendle and the Selling Group agree
that Kendle, on the one hand, and the Selling Group, collectively, on the other
hand, shall each assume and pay fifty percent (50%) of all amounts due to Escrow
Agent as a result of this indemnification.
Escrow Agent is not a party to, and is not bound by, any
agreement which may be evidenced by, or arise out, the foregoing instruction,
other than as expressly set forth herein. In the event that any of the terms and
provisions of any
17
<PAGE> 18
other agreement (excluding any amendment to this Escrow Agreement) between any
of the parties hereto, conflict or are inconsistent with any of the provisions
of this Escrow Agreement, the terms and provisions of this Escrow Agreement
shall govern and control in all respects.
7. NOTICES. All notices, consents or other communications
required or permitted to be given under this Escrow Agreement shall be in
writing and shall be deemed to have been duly given:
(a) when delivered personally (including via
recognized courier service, such as Fed Ex)
(b) five (5) business day after being sent by
certified U.S. mail, postage charges prepaid, or
(c) on the date on which a telegram or facsimile is
transmitted to the parties at their respective addresses stated above.
Any party may change its address for notice and the address to
which copies must be sent by giving notice of the new addresses to the other
parties in accordance with this Section 7, except that any such change of
address notice shall not be effective unless and until received.
8. AMENDMENT. No amendment or modification of this Escrow
Agreement shall be effective unless in writing and signed by the parties.
9. PARTIES IN INTEREST. This Escrow Agreement shall bind,
benefit, and be enforceable by and against each party hereto and their
successors, assigns, heirs and personal representatives. No party shall in any
manner assign any of its rights or obligations under this Escrow Agreement
without the express prior written consent of the other parties.
10. NO WAIVERS. No waiver with respect to this Escrow
Agreement shall be enforceable unless in writing and signed by the party against
whom enforcement is sought. Except as otherwise expressly provided herein, no
failure to exercise, delay in exercising, or single or partial exercise of any
right, power or remedy by any party, and no course of dealing between or among
any of the parties, shall constitute a waiver of, or shall preclude any other or
further exercise of the same or any other right, power or remedy.
11. SEVERABILITY. If any provision of this Escrow Agreement is
construed to be invalid, illegal or unenforceable, then the remaining provisions
hereof shall not be affected thereby and shall be enforceable without regard
thereto.
18
<PAGE> 19
12. COUNTERPARTS. This Escrow Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall
constitute an original hereof, and it shall not be necessary in making proof of
this Escrow Agreement to produce or account for more than one original
counterpart hereof.
13. CONTROLLING LAW. This Escrow Agreement is made under, and
shall be construed and enforced in accordance with, the laws of the State of
Ohio applicable to agreements made and to be performed solely therein, without
giving effect to principles of conflicts of law.
14. DEFINITIONS. To the extent not specifically defined
herein, all terms used herein shall have the meanings ascribed to them in the
U.S. Purchase Agreement.
19
<PAGE> 1
Exhibit 2.17
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is dated as of the 31st day
of August 1999 among KENDLE U.K. INC., an Ohio corporation with a mailing
address of 441 Vine Street, Suite 700, Cincinnati, Ohio 45202, Attention: Paul
F. Ritter, Esq., General Counsel ("Kendle"), and PAUL MARTIN of 38 Wellington
Business Park, Crowthorne, Berkshire, RG45 6LS (the "Seller"), and FIFTH THIRD
BANK with a mailing address of 38 Fountain Square Plaza, Cincinnati, Ohio 45263,
as the escrow agent hereunder ("Escrow Agent").
BACKGROUND
A. Effective as of August 31, 1999 Kendle and the Seller entered into a
Share Purchase Agreement (the "Purchase Agreement"). Pursuant to the terms of
said Purchase Agreement, Kendle (or its assignee) will purchase from the Seller
all of the issued and outstanding capital stock of Specialist Monitoring
Services Limited ("SMS").
B. The parties desire to enter into this Escrow Agreement to provide
for an escrow of seventy one thousand three hundred and twenty seven pounds
((pound)71,327) in cash (the "Cash") and ninety seven thousand and sixty six
(97,066) shares of common stock, no par value per share, of Kendle International
Inc. (the " Kendle Shares").
NOW, THEREFORE, in consideration of the mutual covenants set forth
below and other good and valuable consideration, the parties hereto agree as
follows:
1. DESIGNATION AND DELIVERY. Kendle and Seller hereby designate Fifth
Third Bank as "Escrow Agent" under this Escrow Agreement. Kendle and Seller
hereby deliver to the Escrow Agent a copy of the Purchase Agreement, which
agreement is attached hereto as Exhibit "A." Kendle, in accordance with the
Purchase Agreement, hereby delivers to the Escrow Agent, and the Escrow Agent
hereby acknowledges receipt of, the Cash and a certificate or certificates, each
duly endorsed in blank or with stock powers duly endorsed in blank evidencing
the ninety seven thousand and sixty six (97,066) Kendle Shares (the Cash and the
Kendle Shares together being the "Deposit").
2. CONVERSION AND INVESTMENT OF THE DEPOSIT; DIVIDENDS AND
DISTRIBUTIONS WITH RESPECT TO THE DEPOSIT. The Escrow Agent is hereby directed
to convert all cash deposits delivered in non-U.S. currency to U.S. Dollars at
prevailing rates and authorized to invest the Cash and any other cash in the
Escrow Fund (as defined hereinafter) in money market funds, including the Fifth
Third U.S. Treasury Obligations Fund sponsored by the Escrow Agent's affiliate,
Fifth Third Funds. The Escrow Agent shall cause all dividends, distributions
(including shares distributed in a stock split), proceeds from any sale or
liquidation, or other income earned
<PAGE> 2
on or with respect to the Deposit to be added to the Deposit. Such deposited
dividends, distributions or other income shall, together with the Deposit,
constitute the "Escrow Fund" to be distributed as provided in Section 5 hereof.
The Seller shall be entitled to exercise all voting rights with respect to the
Kendle Shares and any other securities held from time to time as part of the
Escrow Fund until such time as any such securities are distributed to Kendle in
accordance with Section 5 hereof.
3. ESCROW AGENT AS CUSTODIAN; EXPENSES. The Escrow Agent shall, for all
purposes of this Escrow Agreement, be treated as and considered legally a
custodian. The Escrow Agent shall be entitled to rely conclusively upon the
written notice provided in Section 5 and may assume the genuineness of all
signatures and documents and the authority of all signatories. The Escrow Agent
shall have no liability except for gross negligence or willful misconduct in the
performance of its duties under this Escrow Agreement. Kendle shall assume and
pay all costs and expenses of the Escrow Agent incurred in its capacity as the
Escrow Agent under this Escrow Agreement. The fees of the Escrow Agent are set
forth on Exhibit "B" attached hereto and incorporated herein.
4. RESIGNATION; DISAGREEMENTS.
(a) Escrow Agent (and any successor Escrow Agent) may at any
time resign as such by delivering the Escrow Fund to any successor
Escrow Agent designated by the other parties hereto in writing, or to
any court of competent jurisdiction as provided below. The resignation
of Escrow Agent will take effect on the earlier of (a) the appointment
of a successor (including a court of competent jurisdiction), or (b)
the day which is thirty (30) days after the date of delivery of its
written notice of resignation to the other parties hereto. If at that
time Escrow Agent has not received a designation of a successor Escrow
Agent, Escrow Agent's sole responsibility after that time shall be to
retain and safeguard the Escrow Fund until receipt of a designation of
successor Escrow Agent or a joint written disposition instruction by
the other parties hereto or a final non-appealable order of a court of
competent jurisdiction.
(b) In the event of any disagreement between the other parties
hereto resulting in adverse claims or demands being made in connection
with the Escrow Fund or in the event that Escrow Agent is in doubt as
to what action it should take hereunder, Escrow Agent shall be entitled
to retain the Escrow Fund until Escrow Agent shall have received (i) a
final non-appealable order of a court of competent jurisdiction
directing delivery of the Escrow Fund, or (ii) a written agreement
executed by the other parties hereto directing delivery of the Escrow
Fund, in which event Escrow Agent shall disburse the Escrow Fund in
accordance with such order or agreement. Any court order shall be
accompanied by a legal opinion by counsel for the presenting party
satisfactory to Escrow Agent to the effect that the order is final and
non-appealable. Escrow Agent shall act on such court order and legal
opinion without further question.
2
<PAGE> 3
5. TERMINATION AND DISTRIBUTION OF ESCROW.
(a) Except as provided in Section 5(f), this Escrow Agreement
shall terminate upon the earlier of (i) August 31, 2001, or (ii) the
date upon which the Escrow Agent shall have distributed the Escrow Fund
as provided herein;
(b) If, on or prior to August 31, 2000, the date that is the
first anniversary of the closing of the transactions contemplated by
the Purchase Agreement (the "Anniversary Date"), Kendle shall not have
delivered to the Escrow Agent and Seller a notice of claim with respect
to the Escrow Fund based on breaches by the Seller of warranties or
representations contained in the Purchase Agreement ("Notice of
Claim"), one half (1/2) of the Cash and one half (1/2) of the Kendle
Shares, plus all dividends, distributions and other income earned
thereupon, shall promptly be released to Seller by the Escrow Agent;
(c) If, on or prior to the Anniversary Date, Kendle shall have
delivered a Notice of Claim to the Escrow Agent and Seller and Seller
shall not have disputed the Notice of Claim within ten (10) business
days after their receipt of the Notice of Claim, the Cash and the
Kendle Shares, plus all dividends, distributions and other income
earned thereupon, (or such lesser amount as may be specified in
Kendle's Notice of Claim), shall promptly be released to Kendle by the
Escrow Agent;
(d) If, on or prior to August 31, 2001, the date that is the
second anniversary of the closing of the transactions contemplated by
the Purchase Agreement (the "Second Anniversary Date"), Kendle shall
not have delivered to the Escrow Agent and Seller a Notice of Claim,
one half (1/2) of the Cash and one half (1/2) of the Kendle Shares,
plus all dividends, distributions and other income earned thereupon,
shall be promptly released to Seller by the Escrow Agent;
(e) If, on or prior to the Second Anniversary Date, Kendle
shall have delivered a Notice of Claim to the Escrow Agent and Seller,
and Seller shall not have disputed the Notice of Claim within ten (10)
business days after their receipt of the Notice of Claim, the remainder
of the Cash and the Kendle Shares, plus all dividends, distributions
and other income earned thereupon, (or such lesser amount as may be
specified in Kendle's Notice of Claim), shall promptly be released to
Kendle by the Escrow Agent; and,
(f) If, on or prior to the Second Anniversary, Kendle shall
have delivered a Notice of Claim or multiple Notices of Claim to the
Escrow Agent and Seller which is or are timely disputed by Seller, the
Escrow Agent shall hold the Cash and the Kendle Shares, plus all
dividends, distributions and other income earned thereupon, until the
dispute or disputes is or are resolved by a court of competent
jurisdiction, even if resolution of the disputes occurs after August
31, 2001, and shall distribute the Cash and
3
<PAGE> 4
the Kendle Shares, plus all dividends, distributions and other income
earned thereupon, either pursuant to joint written instructions from
Kendle and Seller or pursuant to court order.
(g) The value of any Kendle Shares released to Kendle pursuant
to this Section 5 shall be determined by reference to the average
closing bid price for shares of Kendle common stock on the NASDAQ
National Market System during the twenty (20) trading days prior to
either the date of a disputed claim is finally determined or, if a
claim is not disputed, the date of release.
6. DUTIES OF ESCROW AGENT. The duties of the Escrow Agent under this
Escrow Agreement shall be entirely administrative and the Escrow Agent shall not
be liable to any third party as a result of any action or omission taken or made
by it, if taken in good faith, except for gross negligence or willful misconduct
in performing its duties. In the event of disagreement or dispute between Kendle
and Seller with respect to disposition of the Escrow Fund, the Escrow Agent
shall promptly initiate an appropriate legal proceeding to obtain a judicial
determination of the respective parties' rights to the Escrow Fund. No rights
are intended to be granted to any third party hereunder. Kendle and Seller shall
severally (each being responsible for fifty percent (50%) of the indemnity
account) indemnify, defend and hold harmless the Escrow Agent and reimburse the
Escrow Agent from and for any and all liability, costs and expenses, including
reasonable attorneys' fees, the Escrow Agent may suffer or incur by reason of
its execution and performance of this Escrow Agreement. The Escrow Agent shall
have no duties except those which are expressly set forth herein, and it shall
not be bound by any notice of a claim, or demand with respect thereto, or any
waiver, modification, amendment, termination or recision of this Escrow
Agreement, unless in writing received by it and signed by Kendle and/or Seller.
In the event that the Escrow Agent shall find it necessary to
consult with counsel of its own choosing in connection with this Escrow
Agreement, the Escrow Agent shall not incur any liability for any action taken
in good faith in accordance with such advice. Kendle and Seller, jointly and
severally, shall indemnify and hold harmless the Escrow Agent for any liability,
loss, claim or damage incurred by the Escrow Agent in connection with this
Escrow except for any such liability, costs, expenses (including reasonable
attorneys' fees), loss, claims or damage which is a result of Escrow Agent's own
gross negligence or willful misconduct. This indemnification shall survive
termination of this Escrow Agreement. Kendle and Seller agree that Kendle, on
the one hand, and Seller, collectively, on the other hand, shall each assume and
pay fifty percent (50%) of all amounts due to Escrow Agent as a result of this
indemnification.
Escrow Agent is not a party to, and is not bound by, any
agreement which may be evidenced by, or arise out, the foregoing instruction,
other than as expressly set forth herein. In the event that any of the terms and
provisions of any other agreement (excluding any amendment to this Escrow
Agreement) between any of the parties hereto, conflict or are inconsistent with
any of the provisions of this Escrow Agreement, the terms and provisions of this
Escrow Agreement shall govern and control in all respects.
4
<PAGE> 5
7. NOTICES. All notices, consents or other communications required or
permitted to be given under this Escrow Agreement shall be in writing and shall
be deemed to have been duly given:
(a) when delivered personally,
(b) five (5) business day after being sent by an overnight
delivery service, postage or delivery charges prepaid, or
(c) on the date on which a telegram or facsimile is
transmitted to the parties at their respective addresses stated above.
Any party may change its address for notice and the address to which copies must
be sent by giving notice of the new addresses to the other parties in accordance
with this Section 7, except that any such change of address notice shall not be
effective unless and until received.
8. AMENDMENT. No amendment or modification of this Escrow Agreement
shall be effective unless in writing and signed by the parties.
9. PARTIES IN INTEREST. This Escrow Agreement shall bind, benefit, and
be enforceable by and against each party hereto and their successors, assigns,
heirs and personal representatives. No party shall in any manner assign any of
its rights or obligations under this Escrow Agreement without the express prior
written consent of the other parties.
10. NO WAIVERS. No waiver with respect to this Escrow Agreement shall
be enforceable unless in writing and signed by the party against whom
enforcement is sought. Except as otherwise expressly provided herein, no failure
to exercise, delay in exercising, or single or partial exercise of any right,
power or remedy by any party, and no course of dealing between or among any of
the parties, shall constitute a waiver of, or shall preclude any other or
further exercise of the same or any other right, power or remedy.
11. SEVERABILITY. If any provision of this Escrow Agreement is
construed to be invalid, illegal or unenforceable, then the remaining provisions
hereof shall not be affected thereby and shall be enforceable without regard
thereto.
12. COUNTERPARTS. This Escrow Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall constitute
an original hereof, and it shall not be necessary in making proof of this Escrow
Agreement to produce or account for more than one original counterpart hereof.
5
<PAGE> 6
13. CONTROLLING LAW. This Escrow Agreement is made under, and shall be
construed and enforced in accordance with, the laws of the State of Ohio
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law.
14. DEFINITIONS. To the extent not specifically defined herein, all
terms used herein shall have the meanings ascribed to them in the Purchase
Agreement.
(remainder of page intentionally blank)
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed, or caused their
duly authorized representatives to execute, this Escrow Agreement on the
date first written above.
KENDLE U.K. INC.
By:/s/NIGEL PAGE
-------------------------------
Name: Nigel Page
Title: Vice President, European Operations
/s/PAUL MARTIN
-------------------------------
PAUL MARTIN
Received and accepted:
FIFTH THIRD BANK
Escrow Agent
By: /s/ FRED T. OVERBECK
--------------------
Name: Fred T. Overbeck
Title: Assistant Vice President
7
<PAGE> 8
EXHIBIT "A"
-----------
PURCHASE AGREEMENT
8
<PAGE> 9
EXHIBIT "B"
-----------
ESCROW AGENT FEES
Closing and Acceptance Fees...........................................$4,800.00
Annual Administrative Fee.............................................$1,500.00
The fees listed above relate specifically to duties described in the Escrow
Agreement dated August 31, 1999, between Fifth Third Bank, Kendle U.K. Inc. and
Paul Martin. Extraordinary services or services not specifically contemplated
therein may be additional. All out of pocket expenses including and not limited
to postage, insurance, stationary, travel expenses, wire fees, legal fees, etc.
will be passed along over and above the fees stated.
9
<PAGE> 1
Exhibit 13
FINANCIAL REVIEW
20 selected financial data
21 quarterly financial data
22 management's discussion and analysis
27 report of independent accountants
28 consolidated statements of income
29 consolidated balance sheets
30 consolidated statements of shareholders' equity
32 consolidated statements of cash flows
34 notes to consolidated financial statements
44 management team
45 corporate information
<PAGE> 2
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME(1)
Net revenues $ 117,151 $ 89,516 $ 44,233 $ 12,959 $ 6,118
Costs and expenses:
Direct costs 61,032 44,880 23,883 6,631 2,787
Selling, general and administrative 37,316 29,157 13,538 4,823 2,553
Depreciation and amortization 6,731 4,711 1,583 316 168
- ---------------------------------------------------------------------------------------------------------------------------
105,079 78,748 39,004 11,770 5,508
Income from operations 12,072 10,768 5,229 1,189 610
Interest income 1,059 1,587 369 15 6
Interest expense (367) (284) (425) (65) (69)
Other (67) (13) (59) (5)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 12,697 12,058 5,114 1,134 547
Income taxes 4,968 4,893 1,451
- ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 7,729 7,165 3,663 1,134 547
Extraordinary item, net of tax benefit (1,140)
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 7,729 $ 7,165 $ 2,523 $ 1,134 $ 547
Pro Forma Net Income(2) $ 1,914 $ 681 $ 328
INCOME PER SHARE DATA (PRO FORMA FOR 1995 - 1997)
Basic:
Income per share before extraordinary item $ 0.69 $ 0.75 $ 0.60 $ 0.19 $ 0.09
Extraordinary item per share (0.22)
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share $ 0.69 $ 0.75 $ 0.38 $ 0.19 $ 0.09
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares 11,251 9,589 5,055 3,650 3,650
Diluted:
Income per share before extraordinary item $ 0.65 $ 0.70 $ 0.53 $ 0.17 $ 0.09
Extraordinary item per share (0.20)
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share $ 0.65 $ 0.70 $ 0.33 $ 0.17 $ 0.09
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares 11,826 10,226 5,763 4,017 3,852
CONSOLIDATED BALANCE SHEET DATA(1,3)
Working capital $ 44,838 $ 65,496 $ 20,710 $ (294) $ (139)
Total assets 184,382 153,240 79,625 8,623 2,432
Total long-term debt 763 3,103 3,087 761 151
Total shareholders' equity 133,646 122,500 50,349 944 345
</TABLE>
(1) From 1997 to 1999, the Company made seven acquisitions. See Note 12 to the
consolidated financial statements.
(2) Pro forma net income reflects the application of corporate income taxes to
the Company's net income at an assumed statutory combined federal, state
and local rate which would have been recorded if the Company had been
taxed as a C corporation during such periods.
(3) In 1998 and 1997, the Company and its shareholders completed Common Stock
offerings, in which the Company raised net proceeds of $51.4 million and
$45.2 million, respectively.
KENDLE INTERNATIONAL INC.
20
<PAGE> 3
<TABLE>
<CAPTION>
Quarterly Financial Data (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net revenues $ 25,764 $ 27,854 $29,942 $ 33,591
Income from operations 3,335 2,518 2,632 3,587
Net income 2,294 1,601 1,685 2,149
Net income per diluted share 0.20 0.14 0.14 0.18
Ranges of stock price
High 29.44 20.31 16.50 11.00
Low 17.00 12.31 7.63 5.38
1998
Net revenues $ 19,766 $ 22,534 $22,869 $ 24,347
Income from operations 2,307 2,604 2,754 3,103
Net income 1,444 1,559 2,009 2,153
Net income per diluted share 0.17 0.17 0.18 0.19
Ranges of stock price
High 27.25 31.38 35.00 32.75
Low 15.00 21.75 22.88 19.88
</TABLE>
KENDLE INTERNATIONAL INC.
21
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth and discussed below is derived from the Company's
Consolidated Financial Statements included herein and should be read in
conjunction therewith.
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
organizations and pharmaceutical companies through its subsidiary, Health Care
Communications, Inc. (HCC). With its acquisition of HCC, the Company is now
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 compo-
nents, and range in duration from a few months to several years. The contract
typically requires a portion of the contract fee 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 sub- contracting
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 associates, unreimbursed project-related costs and an allocation of
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 associates and professional
services, as well as unallocated costs related to facilities, information
systems and other costs.
ACQUISITIONS
In 1999, the Company acquired Research Consultants (International) Holdings
Limited (IRC), a U.K.-based regulatory affairs company, ESCLI S.A., a CRO based
in Paris, France and Specialist Monitoring Services Limited, a U.K.-based CRO.
The Company also acquired HCC, a U.S.-based medical communications company.
The acquisitions have been accounted for using the purchase method of
accounting, with goodwill as a result of the transactions being amortized over
thirty years. The results of operations are included in the Company's
consolidated statements of income from the dates of acquisition.
RESULTS OF OPERATIONS
Net Revenues
Net revenues increased to $117.2 million for the year ended December 31, 1999.
This compares to $89.5 million and $44.2 million for the years ended December
31, 1998, and 1997, respectively. The 31% increase in net revenues in 1999 was
comprised of organic growth of 18% and growth from acquisitions of 13%. The 102%
increase in net revenues in 1998 was comprised of organic growth of 64% and
growth from acquisitions of 38%. Approximately 30%, 25%, and 23% of the
Company's net revenues in 1999, 1998, and 1997, respectively were derived from
the Company's operations outside of the United States. Revenues from G.D. Searle
and Co. accounted for approximately 24%, 38%, and 54% of net revenues for the
years ended December 31, 1999, 1998, and 1997, respectively. Revenues from
Centocor, Inc. accounted for approximately 18% of net revenues for the year
ended December 31, 1999 and were less than 10% in 1998 and 1997.
NET REVENUES
$ MILLION
1997 1998 1999
44.2 89.5 117.2
KENDLE INTERNATIONAL INC.
22
<PAGE> 5
The CRO industry in general continues to be dependent on the research and
development efforts of the principal pharmaceutical and biotechnology com-
panies as major customers, and the Company believes this dependence will
continue. The loss of business from any of the Company's major customers
could have a material adverse effect on the Company.
OPERATING EXPENSES
$ MILLIONS 1997 1998 1999
- ------------------------------------------------------------------------
Direct Costs $23.9 $ 44.9 $ 61.0
Selling, General & Administrative 13.5 29.2 37.3
Depreciation and Amortization 1.6 4.7 6.7
Direct costs increased by $16.1 million, or 36%, for the year ended December 31,
1999 as compared to 1998. As compared to 1997, direct costs increased by $21.0
million, or 88%, in 1998. The increases are a result of increases in direct
salaries and fringe benefits to support the increases in net revenues for the
periods. Direct costs expressed as a percentage of net revenues were 52.1%,
50.1%, and 54.0% for the years ended December 31, 1999, 1998, and 1997,
respectively. The change in these costs as a percentage of net revenues is due
to the varying levels of profitability within the mix of contracts among
periods.
Selling, general and administrative expenses increased by $8.1 million, or 28%,
for the year ended December 31, 1999 as compared to 1998. These expenses
increased $15.7 million, or 115%, for the year ended December 31, 1998 as
compared to 1997. The increases are primarily comprised of increases in
salaries and benefits, rent and other facility expenses, travel, contractual
services, recruiting, marketing, advertising and other expenses resulting from
the Company's continued efforts to increase its infrastructure to support the
growth in business. In 1999, the Company incurred significant costs to hire and
retain new business development associates in connection with the implementation
of its strategic account management program. Selling, general and administrative
expenses as a percentage of net revenues were 31.9% for the year ended December
31, 1999, 32.6% in 1998, and 30.6% in 1997. In 1998 and the first half of 1999,
the Company made significant investments in infrastructure to support the
growth in business. These investments caused this percentage to be higher in
1998 as compared to 1997; however, in the last half of 1999, the Company was
able to leverage these investments allowing this percentage to decrease in 1999
as compared to 1998.
Depreciation and amortization expense increases from 1997 through 1999 are the
result of the amortization of goodwill as a result of the Company's acquisi-
tions and an increase in depreciation expense as a result of the Company's
increased level of capital expenditures.
INCOME TAXES
The Company's effective tax rate was 39.1% for the year ended December 31, 1999
as compared to 40.6% in 1998 and 28.4% in 1997. The decrease in the Company's
effective tax rate from 1998 to 1999 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. There were no income
taxes recorded with respect to periods prior to the Company's August, 1997
initial public offering (IPO) as the Company was taxed as an S corporation.
SEGMENT INFORMATION
Net revenues from the contract research services group and the medical
communications group were $114.5 million and $2.7 million, respectively, for the
year ended December 31, 1999. Net income from the contract research services
group and the medical communications group was $7.0 million and $0.7 million,
respectively, for the year ended December 31, 1999. Information is not presented
for prior years because the Company had not yet acquired HCC, and managed its
business as one segment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $8.3 million for the year ended December
31, 1999 as a result of cash used in operating and investing activities of $5.0
million and $11.9 million respectively, offset by cash provided by financing
activities of $9.2 million. Net cash used in operating activities resulted from
net income primarily offset by an increase in accounts receivable. 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
WORKING CAPITAL
$ MILLIONS
1997 1998 1999
20.7 65.5 44.8
KENDLE INTERNATIONAL INC.
23
<PAGE> 6
payments for outstanding accounts receivable are collected from customers. Such
activity varies by individual customer and contract. Accounts receivable, net of
advance billings, increased from $18.8 million at December 31, 1998 to $36.6
million at December 31, 1999. During 1999, the Company experienced customers
becoming more aggressive in managing their own cash flow which caused an
increase in the amount of time certain customers took to pay their invoices.
Additionally, certain contracts contain milestone payment schedules that require
a larger portion of the contract value to be paid near the end of the study,
when compared to historical milestone payment schedules. Because the Company is
in the latter stages of several of these contracts, the payment schedules have
caused the unbilled accounts receivable to grow and accordingly have had a
negative impact on the Company's operating cash flow. The Company does not
anticipate any difficulties in achieving the remaining milestones and
collecting the unbilled accounts receivable related to these contracts.
Investing activities for the year ended December 31, 1999 consisted primarily of
the costs related to the Company's acquisitions of $20.7 million (net of cash
acquired) and capital expenditures of $10.8 million offset by net proceeds from
sales and purchases of available for sale securities of $20.9 million.
Financing activities for the year ended December 31, 1999 consisted primarily of
net borrowings under the Company's credit facility of $8.7 million.
Cash and cash equivalents decreased by $1.8 million for the year ended December
31, 1998 as a result of cash provided by financing activities of $50.6 million
offset by cash used in operating and investing activities of $1.9 million and
$50.7 million, respectively. Net cash used in operating activities resulted pri-
marily from net income offset by additional working capital used to support the
Company's growth.
CASH, CASH EQUIVALENTS &
AVAILABLE FOR SALE SECURITIES
$ MILLIONS
1997 1998 1999
24.2 54.8 25.2
Investing activities during 1998 consisted primarily of the costs related to the
Company's acquisition of $12.7 million (net of cash acquired) and the purchase
of available for sale securities (net of proceeds) of $30.4 million. Financing
activities consisted primarily of net proceeds of $51.4 million as a result of
the Company's follow-on offering of Common Stock.
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, offset by cash used in investing
activities of $34.4 million. Net cash provided by operating activities resulted
from net income and the net change in working capital items. Investing
activities during the year consisted primarily of the costs related to the
Company's acquisitions of $22.9 million (net of cash acquired). Financing
activities consisted primarily of $45.2 million of net proceeds from the
Company's IPO.
The Company had available for sale securities totaling $19.5 million and $40.8
million at December 31, 1999 and 1998, respectively.
Capital expenditures were $10.8 million, $7.3 million and $3.1 million in 1999,
1998, and 1997, respectively.
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
Percentage (as defined) or (b) the higher of the Bank's prime rate or the
Federal Funds rate plus 0.50%, plus the Applicable Percentage. 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
December 31, 1999, there was $8.7 million 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.
KENDLE INTERNATIONAL INC.
24
<PAGE> 7
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 contracts are
occasionally 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 ($1.8) million at December 31, 1999
compared to $564,000 at December 31, 1998.
IMPACT OF THE YEAR 2000
The Company initiated a program in 1998 to identify and address issues associ-
ated 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 expects to incur approximately $50,000 in 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 PRONOUNCEMENTS
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 its only
derivative transaction has historically been the occasional use of foreign
currency exchange rate hedge instruments 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.
KENDLE INTERNATIONAL INC.
25
<PAGE> 8
CAUTIONARY STATEMENT FOR
FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report 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 that may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any for-
ward-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 that 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, 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.
KENDLE INTERNATIONAL INC.
26
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Kendle International Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Kendle International
Inc. and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
February 22, 2000
Cincinnati, Ohio
KENDLE INTERNATIONAL INC.
27
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 117,151 $ 89,516 $ 44,233
Cost and expenses:
Direct costs 61,032 44,880 23,883
Selling, general and administrative 37,316 29,157 13,538
Depreciation and amortization 6,731 4,711 1,583
- ---------------------------------------------------------------------------------------------
105,079 78,748 39,004
- ---------------------------------------------------------------------------------------------
Income from operations 12,072 10,768 5,229
Other income (expense):
Interest income 1,059 1,587 369
Interest expense (367) (284) (425)
Other (67) (13) (59)
- ---------------------------------------------------------------------------------------------
625 1,290 (115)
Income before income taxes and extraordinary item 12,697 12,058 5,114
Income taxes 4,968 4,893 1,451
- ---------------------------------------------------------------------------------------------
Income before extraordinary item 7,729 7,165 3,663
Extraordinary item, net of tax benefit (1,140)
- ---------------------------------------------------------------------------------------------
Net Income $ 7,729 $ 7,165 $ 2,523
Pro forma income data:
Income before extraordinary item $ 3,663
Pro forma adjustment for income taxes 609
- ---------------------------------------------------------------------------------------------
Pro forma income before extraordinary item 3,054
Extraordinary item, net of tax benefit (1,140)
- ---------------------------------------------------------------------------------------------
Pro forma net income $ 1,914
Income per share data (pro forma for 1997):
Basic:
Income per share before extraordinary item $ 0.69 $ 0.75 $ 0.60
Extraordinary item per share (0.22)
- ---------------------------------------------------------------------------------------------
Net income per share $ 0.69 $ 0.75 $ 0.38
- ---------------------------------------------------------------------------------------------
Weighted average shares 11,251 9,589 5,055
Diluted:
Income per share before extraordinary item $ 0.65 $ 0.70 $ 0.53
Extraordinary item per share (0.20)
- ---------------------------------------------------------------------------------------------
Net income per share $ 0.65 $ 0.70 $ 0.33
- ---------------------------------------------------------------------------------------------
Weighted average shares 11,826 10,226 5,763
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
KENDLE INTERNATIONAL INC.
28
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,720 $ 13,980
Available for sale securities 19,524 40,768
Accounts receivable 51,186 28,518
Unreimbursed investigator and project costs 9,117 4,072
Other current assets 5,101 4,052
- -------------------------------------------------------------------------------------------------------------
Total current assets 90,648 91,390
Property and equipment, net 14,683 11,320
Excess of purchase price over net assets acquired, net 71,075 47,692
Other assets 7,976 2,838
- -------------------------------------------------------------------------------------------------------------
Total assets $ 184,382 $ 153,240
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 725 $ 910
Amounts outstanding under credit facility 8,700
Trade payables 5,619 4,964
Advances against investigator and project costs 2,624 2,696
Advance billings 14,539 9,722
Other accrued liabilities 13,603 7,602
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 45,810 25,894
Obligations under capital leases, less current portion 763 1,513
Note payable 1,590
Deferred income taxes payable 3,762 1,376
Other liabilities 401 367
- -------------------------------------------------------------------------------------------------------------
Total liabilities 50,736 30,740
Shareholders' equity:
Preferred stock--no par value; 100,000 shares authorized; none issued
and outstanding
Common stock--no par value; 45,000,000 shares authorized; 11,489,318
and 10,955,390 shares issued and outstanding at December 31, 1999
and 1998, respectively 75 75
Additional paid-in capital 120,544 114,426
Retained earnings 15,246 7,517
Accumulated other comprehensive income:
Net unrealized holding losses on available for sale securities (434) (82)
Foreign currency translation adjustment (1,785) 564
- -------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (2,219) 482
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 133,646 122,500
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 184,382 $ 153,240
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
KENDLE INTERNATIONAL INC.
29
<PAGE> 12
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
NUMBER PAID-IN RETAINED
(IN THOUSANDS, EXCEPT SHARE DATA) OF SHARES AMOUNT CAPITAL EARNINGS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 3,650,000 $ 75 $ 270 $ 599
Net income 2,523
Other comprehensive income:
Foreign currency translation adjustment
Net unrealized holding gains on
available for sale securities, net of tax
Reclassification adjustment for holding
gains included in net income, net of tax
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income
- ----------------------------------------------------------------------------------------------------------------
Distributions to shareholders (2,309)
Reclassification of S corporation retained
earnings to additional paid-in capital 461 (461)
Net proceeds from sale of Common Stock 3,540,000 45,198
Issuance of Common Stock for acquisition 191,304 2,678
Warrants issued and subsequently converted 153,738 1,502
Shares issued under stock plans 47,325 44
Income tax benefit from exercise of stock options 34
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 7,582,367 75 50,187 352
Net income 7,165
Other comprehensive income:
Foreign currency translation adjustment
Net unrealized holding gains on
available for sale securities, net of tax
Reclassification adjustment for holding
gains included in net income, net of tax
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income
- ----------------------------------------------------------------------------------------------------------------
Net proceeds from sale of Common Stock 2,315,000 51,371
Issuance of Common Stock for acquisition 987,574 12,542
Shares issued under stock plans 70,449 131
Income tax benefit from exercise of stock options 195
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 10,955,390 75 114,426 7,517
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME EQUITY INCOME
<S> <C> <C> <C>
Balance, January 1, 1997 $ 944
Net income 2,523 $2,523
Other comprehensive income:
Foreign currency translation adjustment $ (264) (264) (264)
Net unrealized holding gains on
available for sale securities, net of tax 35 35 35
Reclassification adjustment for holding
gains included in net income, net of tax (36) (36) (36)
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $2,258
- ----------------------------------------------------------------------------------------------------------------
Distributions to shareholders (2,309)
Reclassification of S corporation retained
earnings to additional paid-in capital
Net proceeds from sale of Common Stock 45,198
Issuance of Common Stock for acquisition 2,678
Warrants issued and subsequently converted 1,502
Shares issued under stock plans 44
Income tax benefit from exercise of stock options 34
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 (265) 50,349
Net income 7,165 $7,165
Other comprehensive income:
Foreign currency translation adjustment 828 828 828
Net unrealized holding gains on
available for sale securities, net of tax 39 39 39
Reclassification adjustment for holding
gains included in net income, net of tax (120) (120) (120)
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $7,912
- ----------------------------------------------------------------------------------------------------------------
Net proceeds from sale of Common Stock 51,371
Issuance of Common Stock for acquisition 12,542
Shares issued under stock plans 131
Income tax benefit from exercise of stock options 195
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 482 122,500
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
KENDLE INTERNATIONAL INC.
30
<PAGE> 13
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income 7,729
Other comprehensive income:
Foreign currency translation adjustment
Net unrealized holding losses on
available for sale securities, net of tax
Reclassification adjustment for holding
losses included in net income, net of tax
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income
- -----------------------------------------------------------------------------------------------------------------
Issuance of Common Stock for
investment and acquisitions 423,792 5,275
Shares issued under stock plans 110,136 702
Income tax benefit from exercise of stock options 141
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 11,489,318 $ 75 $120,544 $ 15,246
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income 7,729 $7,729
Other comprehensive income:
Foreign currency translation adjustment (2,349) (2,349) (2,349)
Net unrealized holding losses on
available for sale securities, net of tax (570) (570) (570)
Reclassification adjustment for holding
losses included in net income, net of tax 218 218 218
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $5,028
- -----------------------------------------------------------------------------------------------------------------
Issuance of Common Stock for
investment and acquisitions 5,275
Shares issued under stock plans 702
Income tax benefit from exercise of stock options 141
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (2,219) $ 133,646
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
KENDLE INTERNATIONAL INC.
31
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,729 $ 7,165 $ 2,523
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 6,731 4,711 1,583
Deferred income taxes 2,355 719 245
Extraordinary item, net of tax 1,140
Other 88 (54) (31)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (20,606) (10,867) (6,080)
Other current assets (481) (1,111) (388)
Other assets (74) (52) (141)
Investigator and project costs (4,132) 2,528 (3,668)
Trade payables 597 (4,262) 7,049
Advance billings 2,574 (203) 1,292
Accrued liabilities and other 184 (452) 2,956
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,035) (1,878) 6,480
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available for sale securities (20,244) (42,530) (10,939)
Proceeds from sale and maturity of available for sale securities 41,137 12,122 2,500
Acquisitions of property and equipment (6,557) (5,830) (2,545)
Additions to internally developed software (4,215) (1,433) (531)
Acquisitions of businesses, less cash acquired (20,727) (12,675) (22,872)
Other investments (1,305) (360)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,911) (50,706) (34,387)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facility 18,300 13,845
Repayments under credit facility (9,600) (18,845)
Proceeds from issuance of Common Stock 90 51,491 46,743
Amounts payable - book overdraft 1,340
Payments on capital lease obligations (934) (846) (513)
Debt issue costs (60) (539)
Proceeds from subordinated debt borrowings 3,500
Distributions to shareholders (2,559)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 9,196 $ 50,585 $ 41,632
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
KENDLE INTERNATIONAL INC.
32
<PAGE> 15
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effects of exchange rates on cash and cash equivalents $ (510) $ 212 $ (5)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,260) (1,787) 13,720
CASH AND CASH EQUIVALENTS
Beginning of year 13,980 15,767 2,047
- ----------------------------------------------------------------------------------------------------------------
End of year $ 5,720 $ 13,980 $ 15,767
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 431 $ 295 $ 425
Cash paid during the year for income taxes $ 1,905 $ 5,177 $ 480
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Acquisition of equipment under capital leases $ 20 $ 75 $ 1,637
Issuance of Common Stock in connection with investment $ 371
Amounts accrued for contingent consideration
pursuant to acquisition agreement (Note 12) $ 4,000
Issuance of Common Stock in connection with
employee stock purchase plan $ 502
Note payable under escrow agreement for acquisition $ 1,530
Interest on note payable under escrow agreement for acquisition $ 180
Acquisitions of businesses:
Fair value of assets acquired $ 29,748 $ 30,193 $ 34,750
Fair value of liabilities assumed or incurred (4,117) (4,976) (9,200)
Stock issued (4,904) (12,542) (2,678)
- ----------------------------------------------------------------------------------------------------------------
Net cash payments $ 20,727 $ 12,675 $ 22,872
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
KENDLE INTERNATIONAL INC.
33
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Kendle International Inc. (the "Company") is an international contract research
organization (CRO) providing integrated clinical research services, including
Phase I through IV drug development, on a contract basis to the pharmaceutical
and biotechnology industries. The Company also provides organizational, meeting
management, and publication services to professional organizations and
pharmaceutical companies through its subsidiary, Health Care Communications Inc.
(HCC). The Company has operations in North America, Europe and Asia.
Principles of Consolidation and Organization
The consolidated financial statements include the financial information of
Kendle International Inc. and its wholly-owned subsidiaries. Investments in
unconsolidated companies, which are at least 20% owned and the Company can
exercise significant influence but not control, are carried at cost plus equity
in undistributed earnings since acquisition. Investments in unconsolidated
companies, which are less than 20% owned and the Company cannot exercise
significant influence, are carried at cost.
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.
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 foreign subsidiaries and investments are
translated into U.S. dollars at year-end exchange rates. Income statement
accounts are translated at average exchange rates for the year. Resultant
translation adjustments are recorded as a separate component of shareholders'
equity. Foreign currency transaction gains and losses are included in the
consolidated statements of income.
As a significant percentage of the Company's cash flow from operations is
derived from operations outside the United States, the Company is 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.
The Company maintains its demand deposits with certain financial institutions.
The balance of one account occasionally 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 income, 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 principally 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.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.
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.
KENDLE INTERNATIONAL INC.
34
<PAGE> 17
Direct 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.
Concentration of Credit Risk
Accounts receivable represents amounts due from customers who are concentrated
mainly in the pharmaceutical and biotechnology industries. The concentration
of credit risk is subject to the financial and industry conditions of the
Company's customers. The Company does not require collateral or other securities
to support customer receivables. The Company monitors the creditworthiness of
its customers, and credit losses have been immaterial and consistent with
management's expectations. Management considers the likelihood of material
credit risk exposure as remote.
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 leases is recorded at the present value of future mini-
mum lease payments and is amortized over the estimated useful lives of the
assets, not to exceed the terms of the related leases. Accumulated amortiza-
tion on equipment under capital leases was $2.7 million and $1.9 million at
December 31, 1999 and 1998, respectively.
Internally Developed Software
The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management. These
costs are amortized on a straight-line basis over the estimated useful
life of the product, not to exceed five years. Unamortized software costs
included in the consolidated balance sheets at December 31, 1999 and 1998 were
$6.2 million and $2.0 million, respectively. The related accumulated
amortization at December 31, 1999 and 1998 was $0.7 million and $0.2 million,
respectively.
Excess of Purchase Price Over Net Assets Acquired
The excess of cost over the fair value of the net assets acquired in the
Company's acquisitions is being amortized on a straight-line basis over a thirty
year period. Excess of purchase price over net assets acquired is evaluated
periodically as events or circumstances indicate a possible inability to recover
its 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 based on discounted expected future
cash flows. Accumulated amortization of the excess of purchase price over net
assets acquired was $4.0 million and $2.0 million at December 31, 1999 and 1998,
respectively.
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 $33.3 million, $41.6 million, and $48.7 million for the
years ended December 31, 1999, 1998, and 1997, respectively.
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.
KENDLE INTERNATIONAL INC.
35
<PAGE> 18
The weighted average shares used in computing net income per diluted share
have been calculated as follows:
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
Weighted average common shares outstanding 11,251 9,589 5,055
Stock options 507 637 610
Contingently issuable shares 68
Stock purchase warrants 98
- --------------------------------------------------------------------------------
Weighted average shares 11,826 10,226 5,763
- --------------------------------------------------------------------------------
For additional disclosure regarding the contingently issuable shares, see Note
12, Acquisitions.
Options to purchase approximately 398,000 and 89,000 shares of Common Stock were
outstanding during 1999 and 1998 respectively, 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.
Income Taxes
Since August, 1997, upon terminating its S corporation status, the Company has
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, 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
income 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 associates in accordance
with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees." Under APB No. 25, the Company recognizes 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.
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board (FASB) issued 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 occasionally
within a year, management 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.
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, 1999 and 1998 is as follows:
KENDLE INTERNATIONAL INC.
36
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
UNREALIZED
(IN THOUSANDS) COST LOSS VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Debt securities:
Municipal securities $20,246 $(722) $19,524
1998
Debt securities:
Municipal securities 40,850 (82) 40,768
- ------------------------------------------------------------------------------------------
Contractual maturities of debt securities are as follows at December 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(IN THOUSANDS) COST FAIR VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Due within one year $ ---- $ ----
Due after one year through five years 13,086 12,804
Due after five years through ten years 7,160 6,720
- ------------------------------------------------------------------------------------------
Total debt securities $ 20,246 $ 19,524
- ------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sales and maturities of investments in securities were $41.1
million, $12.1 million, and $2.5 million in 1999, 1998, and 1997, respectively.
Gross gains (losses) realized on these sales and maturities were approximately
($218,000), $120,000, and $36,000 during 1999, 1998, and 1997, respectively.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, available for sale securities, amounts outstanding under
credit facility, and notes payable, approximate their fair value.
4. ACCOUNTS RECEIVABLE:
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.
- --------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1999 1998
- --------------------------------------------------------------
Billed $ 21,161 $ 20,269
Unbilled 30,025 8,249
- --------------------------------------------------------------
$ 51,186 $ 28,518
- --------------------------------------------------------------
5. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------
Furnishings, equipment and other $19,554 $ 12,069
Equipment under capital leases 4,195 4,290
Less: accumulated depreciation and amortization (9,066) (5,039)
- ------------------------------------------------------------------------------
Property and equipment, net $14,683 $ 11,320
- ------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1999, 1998, and 1997 was
$3.1 million, $1.8 million, and $0.5 million.
6. OTHER ACCRUED LIABILITIES:
Other accrued liabilities at December 31, 1999 and 1998 consisted of the
following:
- ------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------
Accrued compensation and related payroll
withholdings and taxes $ 2,817 $ 3,700
Amounts payable - book overdraft 2,734 1,288
Amounts accrued for contingent consideration pursuant
to acquisition agreement (Note 12) 4,000
Other 4,052 2,614
- ------------------------------------------------------------------------------
$13,603 $ 7,602
- ------------------------------------------------------------------------------
KENDLE INTERNATIONAL INC.
37
<PAGE> 20
7. DEBT:
The Company has a $30 million credit facility (the "Amended and Restated Senior
Credit Facility") which bears interest at either LIBOR plus the Applicable
Percentage (as defined) or the higher of the bank's prime rate or the Federal
Funds rate plus 0.50%, plus the Applicable Percentage. All amounts
outstanding thereunder are payable in February, 2001. 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. Amounts outstanding under this credit facility totaled
$8.7 million at December 31, 1999. There were no amounts outstanding under the
facility at December 31, 1998. Interest is payable on $4.0 million of the
outstanding balance at a rate of 7.0%, and on the remaining $4.7 million at a
rate of 8.5%.
8. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a 401(k) retirement plan covering substantially all U.S.
associates who have completed at least six months of service and meet mini- mum
age requirements. The Company makes a matching contribution of 25% of each
participant's contribution of up to 6% of salary. The Company's matching
contribution to this plan totaled approximately $306,000, $239,000, and $31,000
for the years ended December 31, 1999, 1998, and 1997, respectively.
Employee Stock Purchase Plan
In 1998, the Company's Board of Directors adopted the Kendle International Inc.
Employee Stock Purchase Plan (the "Purchase Plan") which is intended to pro-
vide eligible employees an opportunity to acquire the Company's Common Stock.
Participating employees have the option to purchase shares at 85% of the lower
of the fair market value of the Common Stock on the first or last day of the
Purchase Period. The Purchase Period is defined as the twelve month period
beginning on July 1 of each year. The Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The Board of Directors has reserved 500,000 shares of Common
Stock for issuance under the Purchase Plan. During 1999, 46,747 shares were
purchased under the Purchase Plan. At December 31, 1999, 453,253 shares were
available for issuance under the Purchase Plan.
Incentive Stock Option and Stock Incentive Plan
In 1997, the Company established a plan that provides for the grant of up to
1,000,000 stock options, consisting of both incentive and non-qualified stock
options (the "1997 Plan"). Participation in the 1997 Plan is at the discretion
of the Board of Directors' Compensation Subcommittee, which is responsible for
administration of the Plan. The exercise price of incentive stock 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 stock
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
Subcommittee 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, 2007. The Company has reserved
1,000,000 shares of Common Stock for the 1997 Plan, of which 169,300 are
available for grant at December 31, 1999.
The 1997 Plan replaced a similar plan under which 531,298 options were out-
standing at December 31, 1999.
Aggregate stock option activity during 1999, 1998, and 1997 was as follows:
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
Options outstanding at 1/1/97 667,768 $ 1.12
Granted 512,408 8.37
Canceled (218,869) 1.93
Exercised (47,325) 0.91
- --------------------------------------------------------------------------------
Options outstanding at 12/31/97 913,982 5.00
Granted 361,520 23.01
Canceled (90,486) 16.33
Exercised (69,783) 1.77
- --------------------------------------------------------------------------------
Options outstanding at 12/31/98 1,115,233 10.06
Granted 372,800 12.37
Canceled (70,668) 20.75
Exercised (61,647) 1.40
- --------------------------------------------------------------------------------
Options outstanding at 12/31/99 1,355,718 $ 10.50
- --------------------------------------------------------------------------------
KENDLE INTERNATIONAL INC.
38
<PAGE> 21
The weighted average fair value of the options granted in 1999, 1998, and 1997
was estimated as $9.30, $15.35, and $5.37, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield: zero; risk-free interest rate: 6.4% in 1999, 5.0% in
1998 and a range from 5.6% to 7.69% in 1997; expected volatility: 75.6% for
grants made during 1999, 63.5% for grants made during 1998, 58.3% for grants
made between August 22 and December 31, 1997 and zero for grants made prior to
August 22, 1997; and an expected holding period of seven years. A summary of
options outstanding and exercisable at December 31, 1999 is as follows:
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED
RANGE OF AT REMAINING AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE
PRICE 1999 LIFE PRICE
- --------------------------------------------------------------------------------
$0.91 - $2.01 531,298 6.5 $ 1.52
$8.00 - $10.53 284,800 9.5 10.14
$13.78 - $15.31 218,600 7.7 14.37
$15.91 - $20.00 55,580 8.0 17.38
$22.25 - $31.00 265,440 8.5 24.21
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPTIONS EXERCISABLE
RANGE OF OPTIONS WEIGHTED
EXERCISE EXERCISABLE AT AVERAGE
PRICE DECEMBER 31,1999 EXERCISE PRICE
- --------------------------------------------------------------------------------
$0.91 - $2.01 244,453 $ 1.27
$8.00 - $10.53 18,440 9.63
$13.78 - $15.31 79,830 14.26
$15.91 - $20.00 1,500 19.61
$22.25 - $31.00 56,184 23.99
- --------------------------------------------------------------------------------
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 1999, 1998, and 1997 would have been $2.0 million, $1.1
million, and $0.2 million respectively. The Company's pro forma net income and
pro forma net income per diluted share for 1999, 1998, and 1997 would have been
reduced to the following amounts:
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
Pro forma net income
As reported $7,729 $7,165 $1,914
Pro forma 6,159 6,434 1,751
Pro forma net income per diluted share
As reported 0.65 0.70 0.33
Pro forma 0.52 0.63 0.30
- --------------------------------------------------------------------------------
Protective Compensation and Benefit Agreements
The Company has entered into Protective Compensation and Benefit Agreements with
certain associates, including all Executive Officers of the Company. These
Agreements, subject to annual review by the Company's Board of Directors, expire
on December 31, 2000, 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, 1999, the maximum amount which could be required to be paid under these
Agreements, if such events occur, is approximately $8.3 million.
9. LEASES:
The Company leases facilities, office equipment, and computers under agree-
ments which are classified as capital and operating leases. The leases have
initial terms which range from two to seven years, with nine facility leases
that have provisions to extend the leases for an additional three to five years.
KENDLE INTERNATIONAL INC.
39
<PAGE> 22
Future minimum payments, by year and in the aggregate, under non-cancelable
capital and operating leases with initial or remaining terms of one year or
more, are as follows at December 31, 1999:
- --------------------------------------------------------------------------------
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
- --------------------------------------------------------------------------------
2000 $ 847 $ 5,463
2001 607 4,949
2002 127 4,338
2003 12 3,364
2004 2,634
thereafter 2,944
- --------------------------------------------------------------------------------
Total minimum lease payments 1,593 $23,692
Amounts representing interest (105)
- --------------------------------------------------------------------------------
Present value of net minimum
lease payments 1,488
Current portion (725)
- --------------------------------------------------------------------------------
Obligations under capital leases,
less current portion $ 763
- --------------------------------------------------------------------------------
Rental expense under operating leases for 1999, 1998, and 1997 was $4.9 million,
$3.2 million, and $1.8 million, respectively.
10. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1999, 1998, and
1997 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Current:
Federal, state and local $ 2,016 $ 4,485 $ 861
Foreign 219 (655) 345
- -------------------------------------------------------------------------------------------
Subtotal 2,235 3,830 1,206
Deferred:
Federal and state 2,293 826 91
Effect of termination of S corporation status 145
Foreign 62 (107) 9
- -------------------------------------------------------------------------------------------
Subtotal 2,355 719 245
Benefit applied to reduce goodwill 378 344
- -------------------------------------------------------------------------------------------
Total provision $ 4,968 $ 4,893 $ 1,451
- -------------------------------------------------------------------------------------------
</TABLE>
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate of 35% in 1999 and 1998 and 34% in 1997 as set
forth below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at the
U.S. federal statutory rate 35.0% 35.0% 34.0%
Effects of foreign taxes 3.9 2.4 3.2
State and local income taxes,
net of federal benefit 3.5 5.3 1.6
Tax-exempt interest income (3.2) (1.3) (.1)
S corporation income for which no current
income taxes were provided (14.4)
Effect of termination of S corporation status 2.8
Other (.1) (.8) 1.3
- ------------------------------------------------------------------------------------------
Total 39.1% 40.6% 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.
KENDLE INTERNATIONAL INC.
40
<PAGE> 23
Components of the Company's net deferred tax asset and liability included in the
consolidated balance sheet at December 31, 1999 and 1998 are as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets:
Compensation and employee benefits $ 92 $ 116
Accrued expenses and other future deductible items 326 199
Operating loss carryforward 170 152
Tax benefit of unrealized losses 289
Deferred state income taxes 224 70
- -------------------------------------------------------------------------------
Total deferred tax assets 1,101 537
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Software costs 2,348 954
Depreciation 496 154
Intangible assets 1,171 306
Other 98 61
- -------------------------------------------------------------------------------
Total deferred tax liability 4,113 1,475
- -------------------------------------------------------------------------------
Total net deferred tax liability $3,012 $ 938
- -------------------------------------------------------------------------------
The operating loss carryforward of approximately $0.5 million can be carried
forward indefinitely.
11. SHAREHOLDERS' EQUITY:
In June, 1998, the Company completed its follow-on offering of 2,415,000 shares
of Common Stock at a price to the public of $23.50 per share. Of the 2,415,000
shares sold, 2,315,000 were sold by the Company and 100,000 shares were sold by
selling shareholders. Proceeds to the Company approximated $51.4 million, net of
underwriting commissions and discounts and offering expenses of $3.0 million.
In August, 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 $45.2 million, net of underwriting commissions and
discounts and offering expenses of $4.4 million.
12. ACQUISITIONS:
Details of the Company's acquisitions since 1997 are listed below. The acquisi-
tions have been accounted for using the purchase method of accounting. The
escrow accounts referred to have been established at acquisition date to provide
indemnification of sellers' representations and warranties.
Valuation of the Common Stock issued in the 1999 and 1998 acquisitions was based
on an appraisal obtained by the Company which provided for a discount of the
shares due to lock-up restrictions and the lack of registration of the shares.
1999
In August, 1999, the Company acquired Specialist Monitoring Services Limited
(SMS), 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 $0.1 million in cash and 97,066 shares were placed in an escrow
account pursuant to the SMS Purchase Agreement, 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 approximately $5.7 million in cash and 174,559 shares of the
Company's Common Stock. Of the total purchase price, $0.5 million in cash and
31,943 shares were placed in an escrow account pursuant to the HCC Purchase
Agreement, 50% to be released in July, 2000 and the remainder 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 $4.0 million has been accrued in other accrued
liabilities in the Company's December 31, 1999 consolidated balance sheet.
In June, 1999, the Company acquired ESCLI S.A., a contract research organization
located in Paris, France, for approximately $2.7 million in cash.
KENDLE INTERNATIONAL INC.
41
<PAGE> 24
In January, 1999, the Company acquired Research Consultants (International)
Holdings Limited (IRC), a U.K.-based regulatory affairs company. Total acquisi-
tion costs consisted of approximately $4.4 million in cash and 87,558 shares of
the Company's Common Stock. The shares have been placed in an escrow account
pursuant to the IRC Share Purchase Agreement, 50% released in January, 2000 and
the remainder to be released in January, 2001.
1998
In February, 1998, the Company completed its acquisition of ACER/EXCEL Inc.
(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 Common
Stock. A general escrow currently consisting of 186,336 shares of the Company's
Common Stock was scheduled to be released to the sellers, 50% in February, 1999
and the remainder in February, 2000. The scheduled releases of the escrow are
pending resolution of ongoing discussions between the parties.
1997
In September, 1997, the Company acquired GMI Gesellschaft fur Angewandte
Mathematik und Informatik mbH (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 Research B.V. (U-Gene) in June, 1997 for
approximately $15.9 million in cash. Approximately $1.6 million of the purchase
price was payable to the U-Gene shareholders and was deposited in an escrow
account pursuant to the U-Gene Purchase Agreement, of which $1.1 million was
paid to the U-Gene shareholders in 1999, with the remainder returned to the
Company resulting in a purchase price reduction.
The following unaudited pro forma results of operations assume the 1999 and 1998
acquisitions occurred at the beginning of 1998:
- ----------------------------------------------------------------------
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------
Net revenues $124,735 $ 107,053
Net income $ 7,766 $ 7,062
Net income per diluted share $ 0.65 $ 0.65
Weighted average shares 11,950 10,868
- ----------------------------------------------------------------------
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been consummated
at January 1, 1999 and 1998, nor are they necessarily indicative of future
operating results.
13. INVESTMENT:
In January, 1999, the Company acquired a minority interest in Digineer, Inc.
(Digineer, formerly Component Software International, Inc.), an Internet
healthcare consulting and development company, for approximately $1.6 million in
cash and 19,995 shares of the Company's Common Stock. The Company's investment
in Digineer is being accounted for using the cost method of accounting for
investments. Additionally, the Company entered into a Multi-Year Strategic
Service Agreement with Digineer whereby the Company will pay Digineer $7.0
million over a four year period in exchange for strategic software consulting
and development services from Digineer. The Company has paid approximately $3.3
million relating to this agreement.
14. RELATED PARTY TRANSACTION:
The Company made payments in 1999, 1998, and 1997 totaling approximately $0.5
million, $0.4 million, and $0.4 million, respectively, to a construction company
owned by a relative of the Company's primary shareholder, for construction and
renovations at various Company locations.
KENDLE INTERNATIONAL INC.
42
<PAGE> 25
15. EXTRAORDINARY ITEM:
In 1997, the Company recorded an extraordinary item for the early extinguish-
ment of indebtedness of $1.1 million, net of tax benefits of approximately $0.4
million. The extraordinary item resulted from the write-off of the debt dis-
count 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.
16. SEGMENT INFORMATION:
With its July, 1999 acquisition of HCC, the Company now manages through two
reportable segments, namely, the contract research services group and the
medical communications group. The contract research services group constitutes
the Company's core business and 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. Corporate
overhead costs are included in the contract research services group and have not
been allocated. Information is not presented for the year ended December 31,
1998 because the Company had not yet acquired HCC, and therefore managed its
business in one segment.
CONTRACT
RESEARCH MEDICAL
(IN THOUSANDS) SERVICES COMMUNICATIONS TOTAL
- --------------------------------------------------------------------------------
Net revenues $114,492 $ 2,659 $117,151
Depreciation and amortization 6,587 144 6,731
Income tax expense 4,428 540 4,968
Net income 6,952 777 7,729
Identifiable assets 172,542 11,840 184,382
- --------------------------------------------------------------------------------
Financial information by geographic area is as follows:
- --------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------
Net Revenues
North America $ 81,883 $ 67,168 $ 33,850
Foreign 35,268 22,348 10,383
- --------------------------------------------------------------
$117,151 $ 89,516 $ 44,233
Identifiable Assets
North America $123,935 $113,126 $ 40,894
Foreign 60,447 40,114 38,731
- --------------------------------------------------------------
$184,382 $153,240 $ 79,625
- --------------------------------------------------------------
Net revenues from G.D. Searle and Co. accounted for approximately 24%, 38%, and
54% of net revenues in 1999, 1998, and 1997, respectively. Net revenues from
Centocor Inc. accounted for approximately 18%, 6%, and 1% of net revenues in
1999, 1998, and 1997, respectively.
Net revenues of the Company's wholly-owned subsidiaries have been included in
the consolidated statements of income from the respective dates of acquisition.
KENDLE INTERNATIONAL INC.
43
<PAGE> 26
MANAGEMENT TEAM
EXECUTIVE OFFICERS
Candace Kendle, PharmD(*)
Chairman & CEO
Christopher C. Bergen(*)
President & COO
Timothy M. Mooney(*)
Executive Vice President & CFO
Thomas E. Stilgenbauer(*)
Executive Vice President, Operations
CLINICAL OPERATIONS
Jere M. Hardy
Vice President, Clinical Data Management
Bruce Kreter, PharmD(*)
Vice President, Clinical Development
Nigel G. Page(*)
Vice President, European Operations
Lois B. Rosenberger, PhD
Vice President, Regulatory Affairs/Quality
Assurance
Frank L. Santoro, MD(*)
Vice President, North American Operations
Marc L. Hoffman, MD
Senior Director, Global Safety and Internal
Medicine Clinical Research
William K. Sietsema, PhD
Senior Director, Skeletal Disease and
Inflammation Clinical Research
Mandyam K. Srirama, PhD
Senior Director, Biostatistics
Paul Ambrose, PharmD
Director, Anti-Infectives Clinical Research
Michael F. Bayer
Managing Director, Chicago
Paul Bellenoit
Managing Director, Old Lyme
Herve Blanchard, MD
Managing Director, Paris
Dagmar M. Chase, PhD
Managing Director, Munich
Lawrence J. Cohen, PharmD
Director, CNS Clinical Research
Alan Davies, MRCP, MD
Director, Internal Medicine Clinical
Research
Philip J.W. Davies
Director, Clinical Pharmacology Unit
Gregg T. Dearhammer
Director, Global Clinical Data
Management Operations
Peter E. Djuric, PharmD
Director, Cardiovascular Clinical Research
Caroline Fenning
Director, Clinical Data Management Europe
John Glasby, PhD
Co-Director, Regulatory Affairs Europe
Gillian Gregory
Co-Director, Regulatory Affairs Europe
Brenda J. Hoeper
Director, Clinical Data Management
Joanna Kolbiarz
Global Director, Clinical Quality Assurance
Ronald P. Koning, MD
Managing Director, Utrecht
John H. Lasley
Managing Director, Cincinnati
Kathleen A. Lukacs
Managing Director, Cranford
Paul Martin
Managing Director, United Kingdom
John McCormick
Managing Director, Princeton
Derenda J. Nichols-Sakal
Director, Clinical Monitoring North America
Susan E. Oakley
Director, Clinical Monitoring Europe
Stephen L. Powell
Managing Director, Los Angeles
Andrea Spannheimer
Director, Health Economics
Catherine A. Stott
Director, Project Management Europe
Carl R. Torchio
Director, Project Management
North America
ADMINISTRATION
Peter G. Amatulli(*)
Senior Vice President, Global New
Business Development
Henry N. Thoman(*)
Vice President, Organizational Development
Gary M. Wedig(*)
Vice President & CIO
Anthony L. Forcellini
Executive Director, Mergers & Acquisitions
Douglas G. Moehring
Senior Director, Client Services
Paul F. Ritter, Esq.(*)
Secretary and General Counsel
Stephen G. Scheurer
Senior Director, Human Resources
Kevin M. Schwarz
Senior Director & Corporate Controller
Dieter Seitz-Tutter, PhD
Senior Director, Strategic Account
Development Europe
Mukhtar Ahmed
Director, Information Technology Europe
Kevin L. Brandenburg
Director, Corporate Services
Sherry L. Gevedon
Director, Global Training & Development
Jeffrey A. Glancy
Director, Taxation
Paul Harrop
Director, Human Resources Europe
Dale W. Jackson
Director, Strategic Accounts
Cynthia J. Kimchi
Director, Strategic Accounts
Mary W. Kuramoto
Director, Marketing and Corporate
Communications
Michael E. Laird
Director, Strategic Accounts
Julie G. Lerner
Director, Investor Relations
James C. Linde
Director, Target Excellence
Joseph D. Loudon
Director, Integration
Rafael J. Mancera
Director, Mergers & Acquisitions
Ann Nightingale
Director, Strategic Accounts
Carole O. Smith
Director, Strategic Accounts
Cathlene J. Thompson
Director, Strategic Accounts
Health Care Communications Inc.
A Kendle Company
Geoffrey H. Kalish, M.D.
President
Bradley D. Kalish
Vice President
(*)Executive Committee Member
KENDLE INTERNATIONAL INC.
44
<PAGE> 27
CORPORATE INFORMATION
BOARD OF DIRECTORS
Candace Kendle, PharmD
Chairman of the Board & CEO
Christopher C. Bergen
President & COO
Timothy M. Mooney
Executive Vice President & CFO
Philip E. Beekman
Former Chairman of the Board & CEO,
Hook-SupeRx, Inc.
Robert R. Buck
President, Uniform Rental Division
Cintas Corporation
Charles A. Sanders, MD
Former Chairman of the Board & CEO,
Glaxo Inc.
STOCK INFORMATION
The Common Stock of Kendle International Inc. trades on The Nasdaq Stock
Market(R) under the symbol KNDL. The stock was initially offered to the public
on August 22, 1997, at a price of $14.00 per share and commenced trading on that
date.
As of March 8, 2000, there were approximately 3,328 beneficial shareholders. The
Company has not paid dividends on its Common Stock since its inception.
FINANCIAL REPORTS
Copies of the Company's Annual Report on Form 10-K and Quarterly Reports on Form
10-Q filed with the Securities and Exchange Commission, as well as other
investor materials, are available upon request from:
Julie G. Lerner
Investor Relations
Kendle International Inc.
1200 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
or access these reports electronically on the Internet. Kendle's web site
address is: http://www.kendle.com
ANNUAL MEETING
The 2000 Annual Meeting of Shareholders will be
held at 9:30 a.m. on Wednesday, May 17, 2000 at
the Omni Netherlands Plaza, 35 West Fifth Street, Cincinnati, Ohio 45202.
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Shareholder Services
Mail Drop 10AT60
38 Fountain Square Plaza
Cincinnati, Ohio 45263
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Cincinnati, Ohio
OUTSIDE LEGAL COUNSEL
Keating, Muething & Klekamp, P.L.L.
Cincinnati, Ohio
Design: Kendle Communications Photography: Donald Ventre Printer: Arnold
Printing: Clock Pieces: Courtesy of The Verdin Company
Kendle International Inc.
45
<PAGE> 1
Exhibit 21
Kendle International Inc.
Subsidiary List
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
Kendle U.K. Inc. Ohio
Kendle GmbH Germany
Kendle Vermogensverwaltungs GmbH Germany
Kendle International B.V. The Netherlands
U-Gene Clinical Research B.V. The Netherlands
U-Gene Research Biotechnology B.V. The Netherlands
Kendle International Holdings Limited United Kingdom
Kendle Branches Limited United Kingdom
Kendle International Limited United Kingdom
Kendle U.K. Limited United Kingdom
Kendle International SARL France
ACER/EXCEL INC. New Jersey
Health Care Communications Inc. Ohio
Kendle Delaware Inc. Delaware
Kendle Canada Inc. Canada
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPNDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (File Nos. 333-57577 and 333-34261) of Kendle International Inc. of our
report dated February 22, 2000 relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 30, 2000
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,720
<SECURITIES> 19,524
<RECEIVABLES> 51,186
<ALLOWANCES> 0
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<CURRENT-ASSETS> 90,648
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<CURRENT-LIABILITIES> 45,810
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<COMMON> 75
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<CGS> 61,032
<TOTAL-COSTS> 105,079
<OTHER-EXPENSES> (992)
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