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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number _000-23019____
KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,756,744 shares of common
stock, no par value, as of October 31, 2000.
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KENDLE INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations - Three
Months Ended September 30, 2000 and 1999; Nine Months
Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended September 30, 2000 and 1999; Nine
Months Ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
</TABLE>
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) September 30, December 31,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,905 $ 5,720
Available for sale securities 17,685 19,524
Accounts receivable 37,418 51,186
Unreimbursed investigator and project costs 5,403 9,117
Other current assets 6,985 5,101
------------ ------------
Total current assets 73,396 90,648
------------ ------------
Property and equipment, net 15,053 14,683
Excess of purchase price over net assets acquired, net 70,341 71,075
Other assets 9,962 7,976
------------ ------------
Total assets $ 168,752 $ 184,382
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 758 $ 725
Amounts outstanding under credit facility 4,400 8,700
Trade payables 4,118 5,619
Advances against investigator and project costs 1,832 2,624
Advance billings 10,161 14,539
Other accrued liabilities 9,764 13,603
------------ ------------
Total current liabilities 31,033 45,810
------------ ------------
Obligations under capital leases, less current portion 583 763
Other noncurrent liabilities 5,042 4,163
------------ ------------
Total liabilities 36,658 50,736
------------ ------------
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 45,000,000 shares authorized; 11,753,112 and
11,489,318 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 75 75
Additional paid in capital 122,683 120,544
Retained earnings 13,482 15,246
Accumulated other comprehensive income:
Net unrealized holdings losses on available for sale securities (280) (434)
Foreign currency translation adjustment (3,866) (1,785)
------------ ------------
Total accumulated other comprehensive income (4,146) (2,219)
------------ ------------
Total shareholders' equity 132,094 133,646
------------ ------------
Total liabilities and shareholders' equity $ 168,752 $ 184,382
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 27,153 $ 29,942 $ 91,453 $ 83,560
--------------- --------------- --------------- ---------------
Costs and expenses:
Direct costs 16,851 15,406 55,540 43,220
Selling, general and
administrative expenses 9,536 10,144 30,378 27,078
Depreciation and amortization 2,158 1,760 5,749 4,777
Employee severance and other costs 2,980
--------------- --------------- --------------- ---------------
28,545 27,310 94,647 75,075
--------------- --------------- --------------- ---------------
Income (loss) from operations (1,392) 2,632 (3,194) 8,485
Other income (expense):
Interest income 275 115 748 834
Interest expense (179) (54) (476) (184)
Other (88) 55 (14) (59)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes (1,384) 2,748 (2,936) 9,076
Income tax expense (benefit) (540) 1,063 (1,172) 3,496
--------------- --------------- --------------- ---------------
Net income (loss) $ (844) $ 1,685 $ (1,764) $ 5,580
=============== =============== =============== ===============
Income (loss) per share data:
Basic:
Net income (loss) per share $ (0.07) $ 0.15 $ (0.15) $ 0.50
=============== =============== =============== ===============
Weighted average shares 11,751 11,356 11,691 11,173
Diluted:
Net income (loss) per share $ (0.07) $ 0.14 $ (0.15) $ 0.48
=============== =============== =============== ===============
Weighted average shares 11,751 11,821 11,691 11,701
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ (844) $ 1,685 $ (1,764) $ 5,580
--------------- --------------- --------------- ---------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,147) 617 (2,081) (1,390)
Net unrealized holding gains (losses)
on available for sale securities arising
during the period, net of tax 84 31 121 (486)
Reclassification adjustment for holding
losses included in net income, net of tax 33 171 33 218
--------------- --------------- --------------- ---------------
Net change in unrealized holding gains
(losses) on available for sale securities 117 202 154 (268)
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ (1,874) $ 2,504 $ (3,691) $ 3,922
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) For the Nine Months Ended
September 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 15,188 $ (5,328)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 2,100 40,510
Purchases of available for sale securities (19,907)
Acquisitions of property and equipment (3,715) (4,907)
Additions to software costs (1,567) (2,536)
Other investments (732) (1,304)
Acquisitions of businesses, less cash acquired (1,812) (18,934)
Contingent purchase price paid in connection with prior acquisition (2,680)
Funding of note payable in connection with business acquisition (1,590)
--------------- ---------------
Net cash used in investing activities (8,406) (8,668)
--------------- ---------------
Cash flows from financing activities:
Net proceeds (repayments) under credit facility (4,300) 6,600
Amounts payable - book overdraft (1,420)
Proceeds from exercise of stock options 20 79
Payments on capital lease obligations (561) (734)
Other (75)
--------------- ---------------
Net cash provided by (used in) financing activities (6,261) 5,870
--------------- ---------------
Effects of exchange rates on cash and cash equivalents (336) (296)
Net increase (decrease) in cash and cash equivalents 185 (8,422)
Cash and cash equivalents:
Beginning of period 5,720 13,980
--------------- ---------------
End of period $ 5,905 $ 5,558
=============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock in connection with contingent
purchase price relating to prior acquisition $ 1,040
===============
Issuance of Common Stock in connection with investment in
Digineer, Inc. $ 371
===============
Issuance of Common Stock in connection with Employee
Stock Purchase Plan $ 313 $ 502
=============== ===============
Acquisitions of Businesses:
Fair value of assets acquired $ 3,172 $ 29,559
Fair value of liabilities assumed (618) (5,721)
Stock issued (742) (4,904)
--------------- ---------------
Net cash payments $ 1,812 $ 18,934
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and notes thereto
included in the Form 10-K for the year ended December 31, 1999 filed by Kendle
International Inc. ("the Company") with the Securities and Exchange Commission.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
2. NET INCOME (LOSS) PER SHARE DATA:
Net income (loss) per basic share is computed using the weighted
average common shares outstanding. Net income per diluted share is computed
using the weighted average common shares and potential common shares
outstanding.
The weighted average shares used in computing net income per diluted
share have been calculated as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
---------------------------- --------------------------
<S> <C> <C>
Weighted average common shares
outstanding 11,751 11,356
Stock options -- 465
---------------------------- --------------------------
Weighted average shares 11,751 11,821
</TABLE>
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<TABLE>
<CAPTION>
(in thousands) Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
---------------------------- --------------------------
<S> <C> <C>
Weighted average common shares
outstanding 11,691 11,173
Stock options -- 528
---------------------------- --------------------------
Weighted average shares 11,691 11,701
</TABLE>
Options to purchase approximately 1,700,000 shares of common stock
(approximately 400,000 shares of common stock equivalents) were outstanding
during the three and nine months ended September 30, 2000 but were not included
in the computation of earnings per diluted share because the effect would be
antidilutive.
Options to purchase approximately 550,000 and 300,000 shares of common
stock were outstanding during the three and nine months ended September 30, 1999
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.
3. ACQUISITIONS:
Details of the Company's acquisitions since 1999 are listed below. The
acquisitions have been accounted for using the purchase method of accounting,
with goodwill as a result of the transactions being amortized over 30 years. The
escrow accounts referred to have been established at acquisition date to provide
indemnification of sellers' representations and warranties.
Valuation of Common Stock issued in the acquisitions was based on the
market price of the shares discounted for lock-up restrictions and lack of
registration of the shares. The results of operations are included in the
Company's results from the respective dates of acquisition.
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $2.2 million in cash and 78,500
shares of the Company's Common Stock. The shares were placed in an escrow
account, 67% to be released in April, 2001 and the remainder in April, 2002.
In August, 1999, the Company acquired Specialist Monitoring Services, a
contract research organization located in Crowthorne, United Kingdom. Total
acquisition costs consisted of approximately $7.5 million in cash and 141,680
shares of the Company's Common Stock. Of the total purchase price, approximately
$100,000 in cash and 97,066 shares were placed in an escrow account, 50% of
which were released in August, 2000 and the remainder to be released in August,
2001.
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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,
$500,000 in cash and 31,943 shares were placed in an escrow account, of which
$131,690 and 17,541 shares were released in July, 2000 and the remainder to be
released in July, 2001.
The purchase price of HCC may be increased dependent upon the
achievement of certain operating results from acquisition date through December
31, 2001. Total additional consideration could reach $10.9 million, payable 67%
in cash and 33% in shares of the Company's Common Stock, if HCC meets the
targeted operating results. For the period from acquisition date through
December 31, 1999, HCC reached its operating target, and in April, 2000 the
Company paid $2.7 million in cash and issued 124,473 shares of the Company's
Common Stock to the former shareholders of HCC. The purchase price has been
increased by $3.7 million.
In June, 1999, the Company acquired ESCLI S.A., a contract research
organization located in Paris, France, for approximately $2.7 million in cash.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Limited (IRC), a U.K.-based regulatory affairs company.
Total acquisition costs consisted of approximately $4.4 million in cash and
87,558 shares of the Company's Common Stock. The shares were placed in an escrow
account, 50% of which were released in January, 2000 and the remainder to be
released in January, 2001.
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of each year:
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
-------------------------- ------------------------
<S> <C> <C>
Net revenues $92,148 $92,542
Net income (loss) $(1,692) $ 5,646
Net income (loss) per diluted share $ (0.14) $ 0.47
Weighted average shares 11,719 12,029
</TABLE>
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisitions been
consummated as of January 1, 1999, nor are they necessarily indicative of future
operating results.
4. EMPLOYEE SEVERANCE AND OTHER COSTS:
In order to bring its cost structure more in line with current revenue
projections, in the second quarter of 2000 the Company announced a plan to
eliminate approximately 125 full-time positions globally. Through September 30,
2000, the Company has eliminated approximately 110 of these positions. In
connection with the workforce reduction, the Company recorded a
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pre-tax charge of approximately $3.0 million ($1.8 million net of tax) in the
second quarter of 2000, consisting primarily of severance, outplacement, other
employee benefit costs, and facility related charges. As of September 30, 2000,
$1.5 million remains accrued and is reflected in Other Accrued Liabilities in
the Company's Balance Sheet. The amounts accrued as employee severance and other
costs are detailed as follows:
<TABLE>
<CAPTION>
(in thousands) Employee
Severance and
Outplacement Facilities Other Total
-------------------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Amount accrued $1,270 $1,140 $570 $2,980
Amount paid 799 328 19 1,146
Non-cash charges 245 41 286
------------------- -------------- ---------- -------------
Liability at September 30, 2000 $ 471 $ 567 $510 $1,548
</TABLE>
5. SEGMENT INFORMATION:
With its July, 1999 acquisition of HCC, the Company is now managed
through two reportable segments, the contract research services group and the
medical communications group. The contract research services group includes
clinical trial management, clinical data management, statistical analysis,
medical writing, and regulatory consultation and representation. The medical
communications group, which includes only HCC, provides organizational, meeting
management and publication services to professional organizations and
pharmaceutical companies. Overhead costs are included in the contract research
services group and have not been allocated.
<TABLE>
<CAPTION>
(in thousands) Contract
Research Medical
Services Communications Total
-------------------- --------------------- ----------------
<S> <C> <C> <C>
Three Months Ended September 30, 2000
Net revenues $25,517 $1,636 $27,153
Net income (loss) (1,346) 502 (844)
Three Months Ended September 30, 1999
Net revenues $28,717 $1,225 $29,942
Net income 1,265 420 1,685
Nine Months Ended September 30, 2000
Net revenues $87,115 $4,338 $91,453
Net income (loss) (3,004) 1,240 (1,764)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nine Months Ended September 30, 1999
Net revenues $ 82,335 $ 1,225 $ 83,560
Net income 5,160 420 5,580
September 30, 2000:
Identifiable assets $151,461 $17,291 $168,752
</TABLE>
6. DEBT:
At September 30, 2000, $4.4 million was outstanding under the Company's
bank credit facility. In October, 2000, the Company entered into two new Senior
Credit Facilities (the "Credit Facilities") totaling $40 million, that replaced
the previous credit facility. The Credit Facilities are comprised of a $35
million revolving credit loan with an initial term of three years and a $5
million Multicurrency Facility with an initial term of one year which will be
used in connection with the Company's European operations. The $35 million
facility bears interest at either LIBOR plus the Applicable Percentage (as
defined) or the higher of the Federal Funds Rate plus 0.5% or the bank's prime
rate. The $5 million facility bears interest at a rate linked to LIBOR. The
facilities contain various restrictive financial covenants, including the
maintenance of certain fixed coverage and leverage ratios and minimum net worth
levels.
7. NEW ACCOUNTING PRONOUNCEMENT:
In June, 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments." SFAS No. 138 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). SFAS No. 138 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Since the Company's
only derivative transaction has historically been the use of foreign currency
exchange rate hedge instruments from time to time within a year, management of
the Company anticipates that the adoption of SFAS No. 138 will not have a
significant effect on the Company's results of operations or its financial
position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information set forth and discussed below for the three and nine
months ended September 30, 2000 is derived from the Condensed Consolidated
Financial Statements included herein and should be read in conjunction
therewith. The Company's results of operations for a particular quarter may not
be indicative of results expected during subsequent quarters or for the entire
year.
COMPANY OVERVIEW
Kendle International Inc. ("the Company") is an international contract
research organization (CRO) that provides integrated clinical research services
including Phase I through IV drug development, on a contract basis to the
pharmaceutical and biotechnology industries. Kendle also provides
organizational, meeting management, and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications Inc. (HCC). The Company is managed through two reportable
segments, the contract research services group and the medical communications
group. The medical communications group includes only HCC.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A portion
of the contract fee is typically required to be paid at the time the contract is
entered into and the balance is received in installments over the contract's
duration, in most cases on a milestone achievement basis. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured principally by the total costs incurred as a percentage of estimated
total costs for each contract. The estimated total costs of contracts are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. Additionally,
the Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators. Such costs, which are reimbursable by its customers,
are generally excluded from direct costs and net revenues.
Direct costs consist of compensation and related fringe benefits for
project-related employees, unreimbursed project-related costs and indirect costs
including facilities, information systems and other costs. Selling, general and
administrative expenses consist of compensation and related fringe benefits for
sales and administrative employees, professional services and advertising costs,
as well as unallocated costs related to facilities, information systems and
other costs.
The Company's results are subject to volatility due to such factors as
the commencement, completion, cancellation or delay of contracts; the progress
of ongoing projects; cost overruns; the Company's sales cycle; or the ability to
maintain large customer contracts or to enter into new contracts. In addition,
the Company's aggregate backlog is not necessarily a meaningful indicator of
future results. Accordingly, no assurance can be given that the Company will be
able to realize the net revenues included in the backlog. In the first nine
months of 2000, the Company was negatively impacted by contract delays and
slower than anticipated start-ups on new projects. Delays of projects are often
the result of decisions made by the Company's customers or regulatory
authorities, and are typically not controllable by the Company.
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As a high percentage of the Company's operating costs are relatively fixed,
these factors can cause significant variations in quarterly results.
In the second quarter of 2000, the Company announced a global workforce
reduction program in order to bring its cost structure more in line with current
revenue projections. In connection with this workforce reduction, the Company
recorded a pre-tax charge of approximately $3.0 million ($1.8 million, net of
tax) consisting of severance, outplacement, related facilities costs, and other
charges. The Company expects to realize annualized savings of approximately $4.0
million from this initiative.
ACQUISITIONS
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $2.2 million in cash and 78,500
shares of the Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net revenues decreased to $27.2 million for the three months ended
September 30, 2000 from $29.9 million for the three months ended September 30,
1999. The 9% decrease in net revenues was comprised of growth from acquisitions
of 8% offset by a decline in organic revenues of 17%. Approximately 37% of the
Company's net revenues for the three months ended September 30, 2000 were
derived from operations outside of the United States compared to 31% for the
three months ended September 30, 1999. Unfavorable foreign currency exchange
rates negatively impacted revenues in the third quarter 2000. Using the exchange
rates in effect in the third quarter of 1999, revenues in the third quarter of
2000 would have been $28.8 million, a 4% decrease in net revenues. The decrease
in organic revenues is primarily attributable to the continuing slowdown in
clinical development activities, including project delays and cancellations,
resulting, in part, from mergers and consolidations within the pharmaceutical
industry. The top five customers based on revenues accounted for approximately
46% of total third quarter 2000 net revenues.
Direct costs increased by $1.5 million, or 9%, from $15.4 million for
the three months ended September 30, 1999 to $16.9 million for the three months
ended September 30, 2000. This increase is primarily comprised of increases in
direct salaries and fringe benefits. Direct costs expressed as a percentage of
net revenues were 62% for the three months ended September 30, 2000 compared to
51% for the three months ended September 30, 1999. The increase in these costs
as a percentage of net revenues is due to project delays and cancellations that
caused a lower than anticipated revenue base to absorb direct costs as well as
the varying levels of profitability within the mix of contracts in the third
quarter of 2000 compared to the third quarter of 1999.
Selling, general and administrative expenses decreased by $0.6 million,
or 6%, from $10.1 million for the three months ended September 30, 1999 to $9.5
million for the three months ended September 30, 2000. This decrease is
primarily due to cost savings realized from
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<PAGE> 14
the workforce reduction program that was implemented in the second quarter of
2000. Selling, general and administrative expenses expressed as a percentage of
net revenues were 35% for the three months ended September 30, 2000 compared to
34% for the corresponding 1999 period.
Depreciation and amortization expense increased $400,000, or 23%, from
$1.8 million for the three months ended September 30, 1999 to $2.2 million for
the three months ended September 30, 2000. The increase was due primarily to
increased depreciation and amortization expense relating to the Company's
capital expenditures.
As previously mentioned, in the second quarter of 2000, the Company
recorded a pre-tax charge of approximately $3.0 million ($1.8 million net of
tax) for employee severance and other costs associated with the workforce
reduction program. As of September 30, 2000, $1.5 million was charged against
the accrual and approximately $1.5 million remains accrued in Other Accrued
Liabilities in the Company's Balance Sheet.
The Company's effective tax rate was 39.0% for the three months ended
September 30, 2000 as compared to 38.7% for the three months ended September 30,
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net revenues increased to $91.5 million for the nine months ended
September 30, 2000 from $83.6 million for the nine months ended September 30,
1999. The 9% increase in net revenues was comprised of growth from acquisitions
of 15% offset by a decline in organic revenues of 6%. Approximately 37% of the
Company's net revenues for the nine months ended September 30, 2000 were derived
from operations outside of the United States compared to 28% for the nine months
ended September 30, 1999. Unfavorable foreign currency exchange rates negatively
impacted revenues for the nine months ended September 30, 2000. Using the
exchange rates in effect for the first nine months of 1999, revenues for the
first nine months of 2000 would have been $95.8 million, a 15% increase in net
revenues. The decrease in organic revenues is primarily attributable to the
negative impact of foreign currency exchange rates and the continuing slowdown
in clinical development activities, including project delays and cancellations,
resulting, in part, from mergers and consolidations within the pharmaceutical
industry. The top five customers based on revenues accounted for approximately
51% of total net revenues for the nine months ended September 30, 2000.
Direct costs increased by $12.3 million, or 29%, from $43.2 million for
the nine months ended September 30, 1999 to $55.5 million for the nine months
ended September 30, 2000. This increase is primarily comprised of increases in
direct salaries and fringe benefits to support the increases in net revenues for
the period and increases in direct costs due to the impact of acquisitions.
Direct costs expressed as a percentage of net revenues were 61% for the nine
months ended September 30, 2000 compared to 52% for the nine months ended
September 30, 1999. The increase in these costs as a percentage of net revenues
is due to project delays and cancellations in the nine months ended September
30, 2000 that caused a lower than anticipated revenue base to absorb direct
costs as well as the varying levels of profitability within the mix of contracts
in the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999.
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Selling, general and administrative expenses increased by $3.3 million,
or 12%, from $27.1 million for the nine months ended September 30, 1999 to $30.4
million for the nine months ended September 30, 2000. The increase in these
costs is due to the existence of an infrastructure that was established to
support a higher revenue base. As previously mentioned, in the second quarter of
2000, the Company implemented a workforce reduction program to bring its
infrastructure more in line with current revenue projections. Selling, general
and administrative expenses expressed as a percentage of net revenues increased
from 32% for the nine months ended September 30, 1999 to 33% for the nine months
ended September 30, 2000.
Depreciation and amortization expense increased $900,000 or 20%, from
$4.8 million for the nine months ended September 30, 1999 to $5.7 million for
the nine months ended September 30, 2000. The increase was due to amortization
of goodwill as a result of the Company's acquisitions and increased depreciation
and amortization expense relating to the Company's capital expenditures.
Inclusive of the $1.8 million after tax charge relating to the
workforce reduction program, the net loss for the nine months ended September
30, 2000 was $1.8 million compared to net income of $5.6 million for the
corresponding period of 1999. Excluding the effect of this charge, net income
was approximately $56,000 for the first nine months of 2000.
The Company's effective tax rate was 39.9% for the nine months ended
September 30, 2000 as compared to 38.5% for the nine months ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $200,000 for the nine months
ended September 30, 2000 as a result of cash provided by operating activities of
$15.2 million offset primarily by cash used in investing and financing
activities of $8.4 million and $6.3 million, respectively. Net cash provided by
operating activities primarily resulted from a decrease in accounts receivable
and unreimbursed investigator and project costs offset by a decrease in advance
billings. Fluctuations in accounts receivable and advance billings occur on a
regular basis as services are performed, milestones or other billing criteria
are achieved, invoices are sent to customers, and payments for outstanding
accounts receivable are collected from customers. Such activity varies by
individual customer and contract.
Investing activities for the nine months ended September 30, 2000
consisted of capital expenditures of approximately $5.3 million, cash paid for
contingent purchase price and other investments of $3.4 million, and cash paid
for the acquisition of SYNERmedica of $1.8 million (net of cash acquired) offset
by proceeds from the sale of available for sale securities of $2.1 million.
The Company had available for sale securities totaling $17.7 million at
September 30, 2000.
Financing activities for the nine months ended September 30, 2000
consisted primarily of net repayments under the Company's credit facilities of
$4.3 million.
During the first nine months of 2000, the Company incurred
approximately $1.1 million in cash payments related to the previously mentioned
workforce reduction program. Future cash
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flows under the plan are expected to be approximately $1.5 million, primarily
for ongoing facility lease obligations and employee severance. The Company
expects to fund future payments with cash flows from operations.
At September 30, 2000, $4.4 million was outstanding under the Company's
bank credit facility. In October, 2000, the Company entered into two new Senior
Credit Facilities (the "Credit Facilities") totaling $40 million, that replaced
the previous credit facility. The Credit Facilities are comprised of a $35
million revolving credit loan with an initial term of three years and a $5
million Multicurrency Facility with an initial term of one year which will be
used in connection with the Company's European operations. The $35 million
facility bears interest at either LIBOR plus the Applicable Percentage (as
defined) or the higher of the Federal Funds Rate plus 0.5% or the bank's prime
rate. The $5 million facility bears interest at a rate linked to LIBOR. The
facilities contain various restrictive financial covenants, including the
maintenance of certain fixed coverage and leverage ratios and minimum net worth
levels.
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 facilities, 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 financing and the Company may from
time to time seek to obtain funds from public or private issuance of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
FOREIGN CURRENCY
The Company operates on a global basis and is therefore exposed to
various types of currency risks. Two specific transaction risks arise from the
nature of the contracts the Company executes with its customers since from time
to time contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. The first risk occurs as revenue recognized for services rendered
is denominated in a currency different from the currency in which the
subsidiary's expenses are incurred. As a result, the subsidiary's net revenues
and resultant net income can be affected by fluctuations in exchange rates.
Although some contracts state that currency fluctuations from the rates in
effect at the time the contract is executed up to a specified threshold
(generally plus or minus a few percentage points) will be absorbed by the
Company, and fluctuations in excess of the threshold are the customer's
responsibility, most contracts do not specifically address responsibility for
currency fluctuations. Historically, fluctuations in exchange rates from those
in effect at the time contracts were executed have not had a material effect
upon the Company's consolidated financial results.
The second risk results from the passage of time between the invoicing
of customers under these contracts and the ultimate collection of customer
payments against such invoices. Because the contract is denominated in a
currency other than the subsidiary's local currency, the Company recognizes a
receivable at the time of invoicing at the local currency equivalent of the
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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 $(3.9) million at September 30, 2000
compared to $(1.8) million at December 31, 1999.
IMPACT OF THE YEAR 2000
The Company initiated a program in 1998 to identify and address issues
associated with the ability of its date-sensitive software to recognize the Year
2000 properly. The Company spent approximately $900,000 in order to prepare for
the Year 2000 of which approximately 20% was paid to third party service
providers. The Company has not experienced any significant problems associated
with the date change and does not expect to incur additional expense in 2000 as
it continues to monitor and test ongoing compliance. While the Company does not
anticipate any significant problems regarding the Year 2000, there can be no
assurance that problems will not arise in the future.
NEW ACCOUNTING PRONOUNCEMENT
In June, 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments." SFAS No. 138 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). SFAS No. 138 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Since the Company's
only derivative transaction has historically been the use of foreign currency
exchange rate hedge instruments from time to time within a year, management of
the Company anticipates that the adoption of SFAS No. 138 will not have a
significant effect on the Company's results of operations or its financial
position.
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CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue to attract and
retain qualified personnel, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint venture businesses to be integrated with the Company's
operations, the fixed price nature of contracts or the loss of large contracts,
cancellation or delay of contracts, the progress of ongoing projects, cost
overruns, the Company's sales cycle, the ability to maintain large customer
contracts or to enter into new contracts, the effects of exchange rate
fluctuations, and the other risk factors set forth in the Company's SEC filings,
copies of which are available upon request from the Company's investor relations
department.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
10.22 Credit Agreement Dated as of October 13, 2000 among
the Company, the Several Lenders from Time to Time
Party Hereto and Bank One, NA, as Agent
27.1 Financial Data Schedule For the Nine Months Ended
September 30, 2000
27.2 Financial Data Schedule For the Three Months Ended
September 30, 2000
(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle
--------------------------------------------
Date: November 14, 2000 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
--------------------------------------------
Date: November 14, 2000 Timothy M. Mooney
Executive Vice President - Chief Financial
Officer
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KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
10.22 Credit Agreement Dated as of October 13, 2000 among
the Company, the Several Lenders from Time to Time
Party Hereto and Bank One, NA, as Agent
27.1 Financial Data Schedule For the Nine Months Ended
September 30, 2000
27.2 Financial Data Schedule For the Three Months Ended
September 30, 2000
21
