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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
Commission file number 000-23019
--------------
KENDLE INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1274091
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
----------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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: 12,941,673 shares of Common
Stock, no par value, as of July 31, 2003.
1
KENDLE INTERNATIONAL INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 2003 and 2002; Six Months Ended
June 30, 2003 and 2002 4
Condensed Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended June 30, 2003 and 2002; Six Months
Ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 29
Item 4. Controls and Procedures 29
Part II. Other Information 30
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 32
Exhibit Index 33
2
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) June 30, December 31,
2003 2002
--------- ---------
(unaudited) (note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 6,001 $ 12,671
Available for sale securities 13,929 17,304
Accounts receivable 49,276 47,050
Other current assets 9,081 7,343
--------- ---------
Total current assets 78,287 84,368
--------- ---------
Property and equipment, net 18,822 19,028
Goodwill, net 22,758 22,033
Other indefinite-lived intangible assets 15,000 15,000
Other assets 13,283 14,968
--------- ---------
Total assets $ 148,150 $ 155,397
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 827 $ 843
Current portion of amounts outstanding under credit facilities 3,000 3,000
Trade payables 5,719 5,883
Advance billings 17,332 22,313
Other accrued liabilities 13,603 10,878
--------- ---------
Total current liabilities 40,481 42,917
--------- ---------
Obligations under capital leases, less current portion 1,163 1,643
Convertible note 4,000 6,000
Long-term debt 8,250 9,750
Other noncurrent liabilities 807 727
--------- ---------
Total liabilities 54,701 61,037
--------- ---------
Commitments and contingencies
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; 12,959,263 and
12,861,510 shares issued and 12,939,366 and 12,841,613
outstanding at June 30, 2003 and December 31, 2002, respectively 75 75
Additional paid in capital 134,491 134,266
Accumulated deficit (40,025) (37,478)
Accumulated other comprehensive loss:
Net unrealized holding loss on available for sale securities (2) (6)
Unrealized loss on interest rate swap (574) (566)
Foreign currency translation adjustment (123) (1,538)
--------- ---------
Total accumulated other comprehensive loss (699) (2,110)
Less: Cost of common stock held in treasury, 19,897 shares at
June 30, 2003 and December 31, 2002, respectively (393) (393)
--------- ---------
Total shareholders' equity 93,449 94,360
--------- ---------
Total liabilities and shareholders' equity $ 148,150 $ 155,397
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data) For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net service revenues $ 38,497 $ 43,694 $ 75,677 $ 87,615
Reimbursable out-of-pocket revenues 14,381 14,500 25,926 24,529
--------- --------- --------- ---------
Total revenues 52,878 58,194 101,603 112,144
--------- --------- --------- ---------
Costs and expenses:
Direct costs 23,480 26,506 46,169 52,538
Reimbursable out-of-pocket costs 14,381 14,500 25,926 24,529
Selling, general and
administrative expenses 12,347 12,428 25,489 24,711
Depreciation and amortization 2,227 2,081 4,412 4,055
Severance and office consolidation costs (106) - 576 -
--------- --------- --------- ---------
52,329 55,515 102,572 105,833
--------- --------- --------- ---------
Income (loss) from operations 549 2,679 (969) 6,311
Other income (expense):
Interest income 96 148 199 301
Interest expense (276) (281) (548) (546)
Other 14 92 (424) 58
Investment impairment (405) (1,938) (405) (1,938)
Gain on debt extinguishment 558 - 558 -
--------- --------- --------- ---------
Income (loss) before income taxes 536 700 (1,589) 4,186
Income tax expense 959 1,067 958 2,436
--------- --------- --------- ---------
Net income (loss) $ (423) $ (367) $ (2,547) $ 1,750
========= ========= ========= =========
Income (loss) per share data:
Basic:
Net income (loss) per share $ (0.03) $ (0.03) $ (0.20) $ 0.14
========= ========= ========= =========
Weighted average shares 12,938 12,731 12,908 12,671
Diluted:
Net income (loss) per share $ (0.03) $ (0.03) $ (0.20) $ 0.13
========= ========= ========= =========
Weighted average shares 12,938 12,731 12,908 13,455
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands) For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ (423) $ (367) $(2,547) $ 1,750
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustment 737 1,755 1,415 1,474
Net unrealized holding gains (losses) on
available for sale securities arising
during the period, net of tax 4 11 4 (25)
Net unrealized holding losses on
interest rate swap agreement (23) - (8) -
------- ------- ------- -------
Comprehensive income (loss) $ 295 $ 1,399 $(1,136) $ 3,199
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) For the Six Months Ended
June 30,
-------------------------
2003 2002
-------- --------
Net cash (used in) provided by operating activities $ (4,188) $ 9,419
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 49,908 13,957
Purchases of available for sale securities (46,541) (16,849)
Acquisitions of property and equipment (2,712) (2,387)
Additions to software costs (1,032) (1,245)
Acquisition of businesses, less cash acquired - (7,942)
Other 8 -
-------- --------
Net cash used in investing activities (369) (14,466)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) under credit facilities (1,500) 5,000
Net proceeds (repayments) - book overdraft 1,005 (451)
Repayment of convertible note (1,442) -
Proceeds from exercise of stock options 117 279
Payments on capital lease obligations (421) (393)
Other (55) (15)
-------- --------
Net cash (used in) provided by financing activities (2,296) 4,420
-------- --------
Effects of exchange rates on cash and cash equivalents 183 224
Net decrease in cash and cash equivalents (6,670) (403)
Cash and cash equivalents:
Beginning of period 12,671 6,016
-------- --------
End of period $ 6,001 $ 5,613
======== ========
Supplemental schedule of noncash investing and financing activities:
- --------------------------------------------------------------------
Acquisition of Businesses:
Fair value of assets acquired (net of cash acquired) $ - $ 19,165
Fair value of liabilities assumed - (1,131)
Common stock issued - (4,092)
Convertible debt issued - (6,000)
-------- --------
Net cash payments $ - $ 7,942
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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 accounting principles
generally accepted in the United States of America 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 and six months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the consolidated
financial statements and notes thereto included in the Form 10-K for the year
ended December 31, 2002 filed by Kendle International Inc. ("the Company") with
the Securities and Exchange Commission.
The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date but does not include
all of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Net Income (Loss) Per Share Data
- --------------------------------
Net income (loss) per basic share is computed using the weighted
average common shares outstanding. Net income (loss) per diluted share is
computed using the weighted average common shares and potential common shares
outstanding.
The net income (loss) used in computing net income (loss) per diluted
share has been calculated as follows:
(in thousands) Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------ ------------------
Net loss per Statements of Operations $(423) $(367)
Add: after-tax interest expense on
convertible note - -
----- -----
Net loss for diluted earnings per share $(423) $(367)
calculation
7
(in thousands) Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------- ----------------
Net income (loss) per Statements of Operations $(2,547) $ 1,750
Add: after-tax interest expense on
convertible note -- 58
------- -------
Net income (loss) for diluted earnings per $(2,547) $ 1,808
share calculation
The weighted average shares used in computing net income (loss) per diluted
share have been calculated as follows:
(in thousands) Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------ ------------------
Weighted average common shares
outstanding 12,938 12,731
Stock options -- --
Convertible note -- --
------- -------
Weighted average shares 12,938 12,731
------- -------
(in thousands) Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------- ----------------
Weighted average common shares
outstanding 12,908 12,671
Stock options -- 518
Convertible note -- 266
------- -------
Weighted average shares 12,908 13,455
------- -------
Options to purchase approximately 2,400,000 shares of common stock were
outstanding during the three and six months ended June 30, 2003 but were not
included in the computation of earnings per diluted share because the effect
would be antidilutive.
Options to purchase approximately 1,970,000 shares of common stock were
outstanding during the three months ended June 30, 2002 but were not included in
the computation of earnings per diluted share because the effect would be
antidilutive. Options to purchase approximately 871,000 shares of common stock
were outstanding during the six months ended June 30 2002 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.
Stock-Based Compensation
- ------------------------
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. The Company has adopted the
disclosure requirements of Statement of Financial
8
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of grant.
Had the Company adopted SFAS No. 123 for expense recognition purposes,
the amount of compensation expense that would have been recognized in the first
six months of 2003 and 2002 would have been approximately $2.5 million and $2.4
million, respectively. The Company's pro-forma net income (loss) per diluted
share would have been adjusted to the amounts below:
- ------------------------------------------------------- ----------------------- ------------------
(in thousands, except per share data) Three Months Ended Three Months
June 30, Ended June 30,
2003 2002
- ------------------------------------------------------- ----------------------- ------------------
- ------------------------------------------------------- ----------------------- ------------------
PRO FORMA NET LOSS:
- ------------------------------------------------------- ----------------------- ------------------
As reported $(423) $(367)
- ------------------------------------------------------- ----------------------- ------------------
Less: pro forma adjustment for stock-
based compensation, net of tax (988) (985)
----------- -------------
- ------------------------------------------------------- ----------------------- ------------------
Pro-forma net loss $(1,411) $(1,352)
- ------------------------------------------------------- ----------------------- ------------------
- ------------------------------------------------------- ----------------------- ------------------
PRO-FORMA NET LOSS PER BASIC SHARE:
- ------------------------------------------------------- ----------------------- ------------------
As reported $(0.03) $(0.03)
- ------------------------------------------------------- ----------------------- ------------------
Effect of pro forma expense $(0.08) $(0.08)
- ------------------------------------------------------- ----------------------- ------------------
Pro-forma $(0.11) $(0.11)
- ------------------------------------------------------- ----------------------- ------------------
PRO-FORMA NET LOSS PER DILUTED SHARE:
- ------------------------------------------------------- ----------------------- ------------------
As reported $(0.03) $(0.03)
- ------------------------------------------------------- ----------------------- ------------------
Effect of pro forma expense $(0.08) $(0.08)
- ------------------------------------------------------- ----------------------- ------------------
Pro-forma $(0.11) $(0.11)
- ------------------------------------------------------- ----------------------- ------------------
- ------------------------------------------------------- --------------------- ---------------------
(in thousands, except per share data) Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
- ------------------------------------------------------- --------------------- ---------------------
- ------------------------------------------------------- --------------------- ---------------------
PRO FORMA NET INCOME (LOSS):
- ------------------------------------------------------- --------------------- ---------------------
As reported $(2,547) $1,750
- ------------------------------------------------------- --------------------- ---------------------
Less: pro forma adjustment for stock-
based compensation, net of tax (2,002) (1,931)
------------- -------------
- ------------------------------------------------------- --------------------- ---------------------
Pro-forma net income (loss) $(4,549) $(181)
- ------------------------------------------------------- --------------------- ---------------------
- ------------------------------------------------------- --------------------- ---------------------
PRO-FORMA NET INCOME (LOSS) PER BASIC SHARE:
- ------------------------------------------------------- --------------------- ---------------------
As reported $(0.20) $0.14
- ------------------------------------------------------- --------------------- ---------------------
Effect of pro-forma expense $(0.15) $(0.15)
- ------------------------------------------------------- --------------------- ---------------------
Pro-forma $(0.35) $(0.01)
- ------------------------------------------------------- --------------------- ---------------------
PRO-FORMA NET INCOME (LOSS) PER DILUTED SHARE:
- ------------------------------------------------------- --------------------- ---------------------
9
- ------------------------------------------------------- --------------------- ---------------------
As reported $(0.20) $0.13
- ------------------------------------------------------- --------------------- ---------------------
Effect of pro-forma expense $(0.15) $(0.14)
- ------------------------------------------------------- --------------------- ---------------------
Pro-forma $(0.35) $(0.01)
- ------------------------------------------------------- --------------------- ---------------------
New Accounting Pronouncements
- -----------------------------
In January 2003, the Emerging Issues Task Force (EITF) issued EITF
Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which requires
companies to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. In applying EITF Issue 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in research and
development or other activities on behalf of another company. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No.
123." SFAS No. 148 provides transition guidance for those companies that elect
to voluntarily adopt the accounting provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 148 also mandates certain new disclosures
that are incremental to those required by SFAS No. 123. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements of SFAS No. 148. At this time the Company
does not plan to adopt the accounting provisions of SFAS No. 123 and will
continue to account for stock options in accordance with APB No. 25, "Accounting
for Stock Issued to Employees."
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146
supersedes
10
EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS No. 146 is required for exit or
disposal activities of the Company initiated after December 31, 2002, with
earlier adoption encouraged. The Company has adopted SFAS No. 146.
2. ACQUISITION:
On January 29, 2002, the Company acquired substantially all of the
assets of Clinical and Pharmacologic Research, Inc. (CPR) located in Morgantown,
West Virginia. CPR specializes in Phase I studies for the generic drug industry,
enabling the Company to expand into the generic drug market. Results of CPR are
included in the Company's consolidated results from the date of acquisition.
The aggregate purchase price was approximately $18.2 million, including
approximately $8.1 million in cash (including acquisition costs), 314,243 shares
of Common Stock valued at $4.1 million and a $6.0 million convertible
subordinated note. The note is convertible at the holders' option into 314,243
shares of the Company's Common Stock at any time before January 29, 2005, the
Maturity Date. In June of 2003, the Company and the shareholders of CPR entered
into Note Prepayment Agreements at the request of the CPR shareholders. See Note
5, Debt for further discussion regarding these agreements.
Valuation of Common Stock issued in the acquisition was based on an
appraisal obtained by the Company on previously similarly structured
acquisitions, which provided for a discount of the shares due to lock-up
restrictions and the lack of registration of the shares.
The goodwill and the intangible asset acquired in the acquisition are
deductible for income tax purposes over a 15-year period.
The following unaudited pro forma results of operations assume the
acquisition occurred at the beginning of 2002:
(in thousands) Six Months Ended
June 30, 2002
---------------------
Net service revenues $88,416
Net income $ 1,888
Net income per diluted share $ 0.14
Weighted average shares 13,553
Pro-forma net income per above $ 1,888
Add: after-tax interest expense on convertible
note 68
Pro-forma net income for diluted EPS $ 1,956
11
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisition been
consummated as of January 1, 2002, nor are they necessarily indicative of future
operating results.
3. OFFICE CONSOLIDATION AND EMPLOYEE SEVERANCE:
In order to bring its cost structure more in line with current revenue
projections, in the first quarter of 2003, the Company recorded a pre-tax charge
of approximately $690,000 for severance and outplacement benefits relating to a
workforce reduction program which impacted approximately 17 employees, or 1
percent of its total workforce. In the second quarter of 2003, the Company
recorded an adjustment to reduce this charge by $106,000 as a result of lower
than expected severance costs related to the workforce reduction. Approximately
$390,000 was paid during the second quarter of 2003 pertaining to this workforce
reduction, and at June 30, 2003 approximately $85,000 remains accrued and is
reflected in Other Accrued Liabilities on the Company's Condensed Consolidated
Balance Sheet. The remaining $85,000 will be paid over the remaining quarters of
2003. Costs relating to this program are reflected in the line item entitled
"Severance and Office Consolidation Costs" in the Company's Condensed
Consolidated Statements of Operations.
On August 29, 2002, the Company committed to a plan that consolidated
its three New Jersey offices into one central office, located in Cranford, New
Jersey. At that time, the Company maintained separate offices in Princeton,
Cranford and Ft. Lee, New Jersey. The leases in the Ft. Lee and Princeton
offices expired during the fourth quarter of 2002 and the first quarter of 2003,
respectively. The Company vacated these offices in the fourth quarter in advance
of the expiration of each of the respective office leases. As part of this plan,
the Company eliminated approximately 22 full-time positions.
In connection with the office consolidation, the Company recorded a
pre-tax charge of $321,000 in the third quarter of 2002, consisting primarily of
facility lease costs and severance and outplacement costs. As of June 30, 2003,
$31,000 remains accrued and is reflected in Other Accrued Liabilities in the
Company's Condensed Consolidated Balance Sheet.
The amounts accrued for the workforce reduction and office
consolidation costs are detailed as follows:
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Employee Facilities Other Total
Severance
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Liability at December 31, 2002 $73 $44 $40 $157
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Amounts accrued 742 -- -- 742
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Amounts paid (588) (25) -- (613)
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Non-Cash charge -- (4) -- (4)
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Adjustment to liability (142) (4) (20) (166)
- ------------------------------- ----------------- ------------------ -------------------- -------------------
Liability at June 30, 2003 $85 $11 $20 $116
- ------------------------------- ----------------- ------------------ -------------------- -------------------
12
4. GOODWILL AND OTHER INTANGIBLE ASSETS:
Identifiable intangible assets as of December 31, 2002 and June 30,
2003 are composed of:
(in thousands)
Goodwill Indefinite-lived
Intangible
Asset
- ---------------------------------------------- ------------- ----------------------
Balance at 12/31/02 $22,033 $15,000
- ---------------------------------------------- ------------- ----------------------
Less: Tax benefit to reduce goodwill (194) --
- ---------------------------------------------- ------------- ----------------------
Add: Exchange rate fluctuations 919 --
- ---------------------------------------------- ------------- ----------------------
Balance at 6/30/03 $22,758 $15,000
- ---------------------------------------------- ------------- ----------------------
5. DEBT:
In June 2002, the Company entered into an Amended and Restated Credit
Agreement (the "Facility") that replaced the previous credit facility that would
have expired in October 2003. The Facility is composed of a revolving credit
loan that expires in three years and a $15.0 million term loan that matures in
five years. The Facility is in addition to an existing $5.0 million
Multicurrency Facility that is renewable annually and is used in connection with
the Company's European operations. The revolving credit loan bears interest at a
rate equal to either (a) The Eurodollar Rate plus the Applicable Percentage (as
defined) or (b) the higher of the Federal Fund's Rate plus 0.5% or the Bank's
Prime Rate. The $15.0 million term loan bears interest at a rate equal to the
higher of the Federal Funds Rate plus 0.5% and the Prime Rate or an Adjusted
Eurodollar Rate.
Under terms of the Facility, revolving loans are convertible into term
loans within the Facility if used for acquisitions. The Facility contains
various restrictive financial covenants, including the maintenance of certain
fixed coverage and leverage ratios.
At March 31, 2003 the Company fell below the minimum permitted Fixed
Charge coverage ratio. The Company and the banks amended the minimum permitted
Fixed Charge coverage ratio for the first quarter of 2003 and future periods. In
addition, as part of the amendment:
- The amount available under the revolving credit loan is reduced
from $23 million to the lesser of $10 million or 50% of the
Company's Eligible Receivables, as defined.
- Until the Company's Fixed Charge Coverage Ratio returns to levels
specified in the original agreement, the applicable percentage
applied to the interest rate on the Company's borrowing under the
Facility is increased by 0.75%.
- The term loan is collateralized by a pledge of the Company's
domestic cash and cash equivalents and any amounts outstanding
under the revolving credit loan are collateralized by the
Company's Eligible Receivables, as defined, and any
13
remaining domestic cash and cash equivalents above the amounts
pledged as security under the term loan.
- The Company must maintain a ratio of cash and cash equivalents
held in the United States to principal amounts outstanding under
the Company's term loan of at least 1.1 to 1.0.
The $5.0 million Multicurrency Facility is composed of a euro overdraft
facility up to the equivalent of $3.0 million and a pound sterling overdraft
facility up to the equivalent of $2.0 million. This Multicurrency Facility bears
interest at a rate equal to either (a) the rate published by the European
Central Bank plus a margin (as defined) or (b) the Bank's Base Rate (as
determined by the bank having regard to prevailing market rates) plus a margin
(as defined).
At June 30, 2003, no amounts were outstanding under the Company's
revolving credit loan, $11.3 million was outstanding under the term loan, and no
amounts were outstanding under the $5.0 million Multicurrency Facility. Interest
is payable on the term loan at a rate of 5.82%. Principal payments of $750,000
are due on the term loan on the last business day of each quarter through March
of 2007.
With the acquisition of CPR the Company entered into a $6.0 million
convertible note payable to the shareholders of CPR. The principal balance is
convertible at the holders' option into 314,243 shares of the Company's Common
Stock at any time through January 29, 2005 (the Maturity Date). If the note has
not been converted at the Maturity Date, the Company has the option to extend
the Maturity Date of the note for another three years. The note bears interest
at an annual rate of 3.80% from January 29, 2002 through the Maturity Date.
Interest is payable semi-annually. If the Maturity Date is extended, the
interest rate will be reset on January 29, 2005 at an annual rate of interest
equal to the yield of a three-year United States Treasury Note.
In June of 2003, the Company and the shareholders of CPR entered into
Note Prepayment Agreements. Under the Note Prepayment Agreements, the Company
agreed to satisfy its payment obligations under the $6.0 million convertible
note by making a series of four payments between June 30, 2003 and January 10,
2005. The four payments are to be initiated either by the Company through the
exercise of a "call" option or the CPR shareholders through the exercise of a
"put" option. If the four put or call options are exercised, the Company will
pay $4.5 million to fully settle the $6.0 million note. Gains resulting from
this early extinguishment of debt will be recorded when paid as a gain in the
Company's Consolidated Statements of Operations. At June 30, 2003 the CPR
shareholders exercised their put option and the Company paid $1.4 million to
settle $2.0 million of the $6.0 million convertible note. A gain of
approximately $558,000 has been recorded in the second quarter of 2003 in the
Company's Condensed Consolidated Statements of Operations.
6. SUBSEQUENT EVENTS:
On August 13, 2003 the Company entered into an agreement to acquire
substantially all of the assets and assume certain liabilities of the Mexican
CRO group ECA, consisting of Estadisticos y Clinicos Asociados, S.A.;
Information Clinica, S.C.; and USA ECA, Inc. (collectively, "ECA"). ECA is a
Phase I-IV contract research organization located in Mexico City, Mexico. The
transaction is subject to customary closing conditions and is expected to close
later in the third quarter. The purchase price of this acquisition will be
funded entirely with cash, is subject to certain adjustments at closing, and as
such, has not been finalized at this time.
14
On August 14, 2003, the Company announced to its employees a workforce
realignment plan which will immediately eliminate approximately 65 positions
from its global workforce. Costs associated with the plan, which include
severance, outplacement and other employee related costs, will be recorded in
the third quarter and are expected to approximate $850,000, on a pre-tax basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The information discussed below is derived from the Condensed
Consolidated Financial Statements included in this Form 10-Q for the three and
six months ended June 30, 2003 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 clinical trial management, clinical data management, statistical
analysis, medical writing, regulatory consultation and organizational meeting
management and publications services on a contract basis to the pharmaceutical
and biotechnology industries
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A contract
typically requires a portion of the contract fee to be paid at the time the
contract becomes effective 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. The Company also
performs work under time-and-materials contracts, recognizing revenue as hours
are worked based on the hourly billing rates for each contract. Additionally,
the Company recognizes revenue under units-based contracts as units are
completed multiplied by the contract per-unit price.
The Company incurs costs in excess of contract amounts in
subcontracting with third-party investigators as well as other out-of-pocket
costs. These out-of-pocket costs are reimbursable by the Company's customers.
The Company includes amounts paid to investigators and other out-of-pocket costs
as reimbursable out-of-pocket revenues and reimbursable out-of-pocket costs in
the Condensed Consolidated Statements of Operations. In certain contracts, these
costs are fixed by the contract terms, so the Company recognizes these costs as
part of net service revenues and direct costs.
Direct costs consist of compensation and related fringe benefits for
project-related associates, 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 associates and professional services, as
well as unallocated costs related to facilities, information systems and other
costs.
The CRO industry in general continues to be dependent on the research
and development activities of the principal pharmaceutical and biotechnology
companies as major customers, and the Company believes this dependence will
continue. The loss of business from any of the major customers could have a
material adverse affect on the Company.
15
The Company's results are subject to volatility due to a variety of
factors. The cancellation or delay of contracts and cost overruns could have
immediate adverse effects on the consolidated financial statements. Fluctuations
in the Company's sales cycle and the ability to maintain large customer
contracts or to enter into new contracts could hinder the Company's long-term
growth. In addition, the Company's aggregate backlog, consisting of signed
contracts and letters of intent, 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 service revenues included in the backlog.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Service Revenues
--------------------
Net service revenues decreased 12% to $38.5 million in the second
quarter of 2003 from $43.7 million in the second quarter of 2002. Foreign
currency exchange rate fluctuations accounted for a 5% increase in net service
revenues in the second quarter of 2003 compared to 2002. The decline in net
service revenues is due to contract delays and cancellations affecting net
service revenues in the second quarter of 2003 compared to the corresponding
period in 2002 as well as an overall slowdown in new business for the Company.
Additionally, in 2003 net service revenue recorded on contracts where costs paid
to investigators and other out-of-pocket costs are fixed by the contract terms
and recorded as direct costs and net service revenues decreased by approximately
$1.5 million. Net service revenues in North America dropped by approximately
$6.9 million from the second quarter of 2002 to the corresponding period in
2003, due to the reasons previously cited as well as a slowdown in new business
from two of the Company's largest customers which recently merged. Approximately
33% of the Company's net service revenues were derived from operations outside
the United States in the second quarter of 2003 compared to 25% in the
corresponding period in 2002. The top five customers based on net service
revenues contributed approximately 47% of net service revenues during the second
quarter of 2003 compared to 45% of net service revenues during the second
quarter of 2002. Net service revenues from Pfizer Inc. (including the former
Pharmacia Inc.) accounted for approximately 26% of total second quarter 2003 net
service revenues compared to approximately 28% of total second quarter 2002 net
service revenues. The Company's net service revenues from Pfizer Inc. are
derived from numerous projects that vary in size, duration and therapeutic
indication.
Reimbursable Out-of-Pocket Revenues
-----------------------------------
Reimbursable out-of-pocket revenues fluctuate from period to period,
primarily due to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues decreased 1% to $14.4 million in the second
quarter of 2003 from $14.5 million in the corresponding period of 2002.
Operating Expenses
------------------
Direct costs decreased by 11% from $26.5 million in the second quarter
2002 to $23.5 million in the second quarter 2003. The decline in direct costs is
related to the decline in net service revenues for the period. As a result of
the decrease in net service revenues, the Company
16
has decreased the use of outside contractors working on Company projects. In
addition, the decrease in direct costs is a result of lower investigator and
out-of-pocket costs of approximately $1.5 million on contracts where these costs
are fixed by the contract terms. Direct costs expressed as a percentage of net
service revenues were 61.0% for the three months ended June 30, 2003 compared to
60.7% for the three months ended June 30, 2002. The increase in direct costs as
a percentage of net service revenue in the second quarter of 2003 is due to
lower utilization of resources in the second quarter of 2003 resulting from
temporary delays in certain projects and the overall drop in business activity.
Reimbursable out-of-pocket costs decreased 1% to $14.4 million in the
second quarter of 2003 from $14.5 million in the corresponding period of 2002.
Selling, general and administrative expenses decreased from $12.4
million in the second quarter of 2002 to $12.3 million in the same quarter of
2003. Foreign currency exchange rate fluctuations accounted for a 5% increase in
selling, general and administrative expenses in the second quarter of 2003
compared to the comparable period of 2002. This increase was more than offset by
savings realized from the Company's workforce reduction completed in the first
quarter of 2003 and its office consolidation completed in the third quarter of
2002. Selling, general and administrative expenses expressed as a percentage of
net service revenues were 32.1% for the three months ended June 30, 2003
compared to 28.4% for the corresponding 2002 period. The increase in SG&A costs
as a percentage of net service revenues is due to the decrease in net service
revenues resulting from temporary delays in certain projects and the overall
drop in business activity.
Depreciation and amortization expense increased by 7% in the second
quarter of 2003 compared to the second quarter of 2002. The increase is
primarily due to increased depreciation and amortization relating to the
Company's capital expenditures.
In the second quarter of 2003, the Company recorded an adjustment of
approximately $106,000 to reduce the severance costs related to the workforce
reduction charge recorded in the first quarter of 2003. This adjustment is the
result of lower than expected severance costs associated with the workforce
reduction.
Other Income (Expense)
----------------------
Other Income (Expense) was an expense of approximately $13,000 in the
second quarter of 2003 compared to an expense of approximately $2.0 million in
the second quarter of 2002. In the second quarter of 2003, the Company made a
partial early repayment on its $6 million convertible note and recorded a gain
from this early partial debt extinguishment of approximately $558,000.
Additionally, during the quarter the Company determined that its investment in
KendleWits, its 50 percent-owned joint venture in the People's Republic of
China, was permanently impaired and accordingly recorded a $405,000 non-cash
impairment charge to reduce the carrying value of this investment to zero. In
the second quarter of 2002, the Company recorded a $1.9 million non-cash charge
to write-off its investment in Digineer, Inc. (Digineer), a healthcare
consulting and software development company that during the quarter adopted a
plan to cease operations.
17
Income Taxes
------------
The Company reported tax expense at an effective rate of 178.9% in the
quarter ended June 30, 2003 compared to tax expense at an effective rate of
152.4% in the quarter ended June 30, 2002. In 2003, the Company recorded a full
valuation allowance against net operating losses incurred in certain European
subsidiaries of the Company. Since Kendle operates on a global basis, the
effective tax rate varies from year to year based on the locations that generate
the pre-tax earnings or losses. The write-off of the Digineer investment in 2002
is a capital loss for income tax purposes and is deductible only to the extent
the Company generates capital gains in the future to offset this loss. The
Company recorded a valuation allowance against the deferred tax asset relating
to the Digineer loss and no income tax benefit was recorded.
Net Income (Loss)
-----------------
Including the effects of the adjustment to reduce severance costs, the
write-off of the investments in KendleWits and the gain from debt extinguishment
(items totaling income of $35,000) the net loss for the quarter ended June 30,
2003 was approximately $423,000, or $0.03 per share. Including the effect of the
write-off of the investment in Digineer in the second quarter of 2002 (of $1.9
million, or $0.15 per share) the net loss for the second quarter of 2002 was
approximately $367,000 or $0.03 per share.
18
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net Service Revenues
--------------------
Net service revenues decreased 14% to $75.7 million in the first six
months of 2003 from $87.6 million in the first six months of 2002. Foreign
currency exchange rate fluctuations accounted for a 4% increase in net service
revenues in the first six months of 2003 compared to the comparable period of
2002. The 14% decrease in net service revenues was composed of growth from
acquisitions of 1% and a decline in organic net service revenues of 15%. The
decline in net service revenues is due to contract delays and cancellations
affecting net service revenues in the first half of 2003 compared to the
corresponding period in 2002 as well as an overall slowdown in new business for
the Company. In addition, in 2003 net service revenue recorded on contracts
where costs paid to investigators and other out-of-pocket costs are fixed by the
contract terms and recorded as direct costs and net service revenues decreased
by approximately $3.2 million. Approximately 31% of the Company's net service
revenues were derived from operations outside the United States in the first six
months of 2003 compared to 27% in the corresponding period in 2002. The top five
customers based on net service revenues contributed approximately 49% of net
service revenues during the first six months of 2003 compared to 46% of net
service revenues during the first six months of 2002. Net service revenues from
Pfizer Inc. (including the former Pharmacia Inc.) accounted for approximately
28% of total first half of 2003 net service revenues compared to approximately
27% of total first half 2002 net service revenues. The Company's net service
revenues from Pfizer Inc. are derived from numerous projects that vary in size,
duration and therapeutic indication.
Reimbursable Out-of-Pocket Revenues
-----------------------------------
Reimbursable out-of-pocket revenues fluctuate from period to period,
primarily due to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues increased 5.7% to $25.9 million in the six
months ended June 30, 2003 from $24.5 million in the corresponding period of
2002.
Operating Expenses
------------------
Direct costs decreased by 12% from $52.5 million in the first six
months of 2002 to $46.2 million in the first six months of 2003. The 12%
decrease in direct costs is composed of a 13% decrease in organic direct costs
and a 1% increase in direct costs due to the impact of acquisitions. The decline
in organic direct costs is related to the decline in net service revenues for
the period. As a result of the decrease in net service revenues, the Company has
decreased the use of outside contractors working on Company projects. In
addition, the decrease in organic direct costs is a result of lower investigator
and out-of-pocket costs of approximately $3.2 million on contracts where these
costs are fixed by the contract terms. Direct costs expressed as a percentage of
net service revenues were 61.0% for the six months ended June 30, 2003 compared
to 60.0% for the six months ended June 30, 2002. The increase in direct costs as
a percentage of net service revenue in the first half of 2003 is due to lower
utilization of resources in the first half of 2003 resulting from temporary
delays in certain projects and an overall decline in business activity.
Reimbursable out-of-pocket costs increased 5.7% to $25.9 million in the
first six months of 2003 from $24.5 million in the corresponding period of 2002.
19
Selling, general and administrative expenses increased from $24.7
million in the first half of 2002 to $25.5 million in the first half of 2003.
The change in selling, general and administrative expenses is principally the
result of a 3% increase in organic SG&A costs. Acquisitions did not have a
material impact on SG&A costs in the period. Foreign currency exchange rate
fluctuations accounted for a 5% increase in selling, general and administrative
expenses in the first six months of 2003 compared to the comparable period of
2002. During the first six months of 2003, the Company realized savings from its
workforce reduction completed in the first quarter of 2003 and its office
consolidation completed in the third quarter of 2002. Selling, general and
administrative expenses expressed as a percentage of net service revenues were
33.7% for the six months ended June 30, 2003 compared to 28.2% for the
corresponding 2002 period. The increase in SG&A costs as a percentage of net
service revenues is due to the decrease in net service revenues resulting from
temporary delays in certain projects and the overall drop in business activity.
Depreciation and amortization expense increased by 9% in the six months
ending June 30, 2003 compared to the corresponding period of 2002. The increase
is primarily due to increased depreciation and amortization relating to the
Company's capital expenditures.
In the first quarter of 2003, in order to bring its cost structure more
in line with current revenue projections, the Company recorded a charge of
approximately $690,000 for severance and outplacement benefits relating to a
workforce reduction program which impacted approximately 1 percent of its total
workforce. In the second quarter of 2003, the Company recorded an adjustment to
reduce this charge by approximately $106,000 as a result of lower than expected
severance costs related to the workforce reduction. At June 30, 2003,
approximately $85,000 remains accrued and is reflected in Other Accrued
Liabilities on the Company's Condensed Consolidated Balance Sheet. The remaining
$85,000 will be paid over the remaining quarters of 2003.
Other Income (Expense)
----------------------
Other Income (Expense) was an expense of approximately $620,000 in the
first six months of 2003 compared to an expense of approximately $2.1 million in
the first six months of 2002. In the second quarter of 2003, the Company made a
partial early repayment on its $6 million convertible note and recorded a gain
from this early partial debt extinguishment of approximately $558,000.
Additionally, during the quarter the Company determined that its investment in
KendleWits, its 50 percent-owned joint venture in the People's Republic of
China, was permanently impaired and accordingly recorded a $405,000 non-cash
impairment charge to reduce the carrying value of this investment to zero. In
addition, in the first six months of 2003 the Company incurred foreign currency
transaction losses of approximately $300,000 primarily as a result of the
British pound weakening against the euro. In the second quarter of 2002, the
Company recorded a $1.9 million non-cash charge to write-off its investment in
Digineer, Inc., a healthcare consulting and software development company that
during the quarter adopted a plan to cease operations.
Income Taxes
------------
The Company reported tax expense at an effective rate of 60.3% in the
six months ended June 30, 2003 compared to tax expense at an effective rate of
58.2% in the six months ended June 30, 2002. In 2003, the Company recorded a
full valuation allowance against net operating losses incurred in certain
European subsidiaries of the Company. Since Kendle operates on a
20
global basis, the effective tax rate varies from year to year based on the
locations that generate the pre-tax earnings or losses. The write-off of the
Digineer investment in 2002 is a capital loss for income tax purposes and is
deductible only to the extent the Company generates capital gains in the future
to offset this loss. The Company recorded a valuation allowance against the
deferred tax asset relating to the Digineer loss and no income tax benefit was
recorded.
Net Income (Loss)
-----------------
Including the effect of the severance charge and office consolidation
costs, the write-off of the investment in KendleWits and the gain from debt
extinguishment (items totaling $513,000 or $0.04 per share), the net loss for
the six months in 2003 was $2.5 million, or $0.20 per share compared with net
income of $1.8 million, or $0.13 per diluted share including the write-off of
the Digineer investment (totaling $1.9 million or $0.14 per share) during the
same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $6.7 million for the six months
ended June 30, 2003 primarily as a result of cash used in operating activities
of $4.2 million, cash used in investing activities of approximately $370,000 and
cash used in financing activities of $2.3 million. Net cash used by operating
activities primarily resulted from an increase in accounts receivable and a
decrease in advance billings.
Fluctuations in accounts receivable and advance billings occur on a
regular basis as services are performed, milestones or other billing criteria
are achieved, invoices are sent to customers, and payments for outstanding
accounts receivable are collected from customers. Such activity varies by
individual customer and contract. Accounts receivable, net of advance billings
was approximately $31.9 million at June 30, 2003 and $24.7 million at December
31, 2002.
Financing activities for the six months ended June 30, 2003 consisted
primarily of scheduled repayments amounting to $1.5 million relating to the
Company's Facility (defined below) and a partial early repayment of $1.4 million
relating to the Company's convertible debt (see below).
Investing activities for the six months ended June 30, 2003 consisted
primarily of net proceeds from the sale and maturity of available for sale
securities of $3.4 million offset by capital expenditures of approximately $3.7
million.
The Company had available for sale securities totaling $13.9 million at
June 30, 2003.
In June 2002, the Company entered into an Amended and Restated Credit
Agreement (the "Facility") that replaced the previous credit facility that would
have expired in October 2003. The Facility is composed of a revolving credit
loan that expires in three years and a $15.0 million term loan that matures in
five years. The Facility is in addition to an existing $5.0 million
Multicurrency Facility that is renewable annually and is used in connection with
the Company's European operations. The revolving credit loan bears interest at a
rate equal to either (a) The Eurodollar Rate plus the Applicable Percentage (as
defined) or (b) the higher of the Federal Fund's Rate plus 0.5% or the Bank's
Prime Rate. The $15.0 million term loan bears
21
interest at a rate equal to the higher of the Federal Funds Rate plus 0.5% and
the Prime Rate or an Adjusted Eurodollar Rate.
Under terms of the Facility, revolving loans are convertible into term
loans within the Facility if used for acquisitions. The Facility contains
various restrictive financial covenants, including the maintenance of certain
fixed coverage and leverage ratios.
At March 31, 2003 the Company fell below the minimum permitted Fixed
Charge coverage ratio. The Company and the banks amended the minimum permitted
Fixed Charge coverage ratio for the first quarter of 2003 and future periods. In
addition, changes as part of the amendment include but are not limited to the
following:
- The amount available under the revolving credit loan is reduced
from $23 million to the lesser of $10 million or 50% of the
Company's Eligible Receivables, as defined.
- Until the Company's Fixed Charge Coverage Ratio returns to levels
specified in the original agreement, the applicable percentage
applied to the interest rate on the Company's borrowing under the
Facility is increased by 0.75%.
- The term loan is collateralized by a pledge of the Company's
domestic cash and cash equivalents and any amounts outstanding
under the revolving credit loan are collateralized by the
Company's Eligible Receivables, as defined, and any remaining
domestic cash and cash equivalents above the amounts pledged as
security under the term loan.
- The Company must maintain a ratio of cash and cash equivalents
held in the United States to principal amounts outstanding under
the Company's term loan of at least 1.1 to 1.0.
The $5.0 million Multicurrency Facility is composed of a euro overdraft
facility up to the equivalent of $3.0 million and a pound sterling overdraft
facility up to the equivalent of $2.0 million. This Multicurrency Facility bears
interest at a rate equal to either (a) the rate published by the European
Central Bank plus a margin (as defined) or (b) the Bank's Base Rate (as
determined by the bank having regard to prevailing market rates) plus a margin
(as defined).
At June 30, 2003, no amounts were outstanding under the Company's
revolving credit loan, $11.3 million was outstanding under the term loan, and no
amounts were outstanding under the $5.0 million Multicurrency Facility. Interest
is payable on the term loan at a rate of 5.82%. Principal payments of $750,000
are due on the term loan on the last business day of each quarter through March
of 2007.
Effective July 1, 2002 the Company entered into an interest rate swap
agreement to fix the interest rate on the $15.0 million term loan. The swap is
designated as a cash flow hedge under the guidelines of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Under the swap
agreement the interest rate on the term loan is fixed at 4.32% plus a margin of
1.5%. The swap is in place through the life of the term loan, ending on March
31, 2007. Changes in fair market value of the swap are recorded in Accumulated
Other Comprehensive Loss on the Condensed Consolidated Balance Sheet. At June
30, 2003 approximately $574,000 has been recorded in Accumulated Other
Comprehensive Loss to reflect a decrease in the fair market value of the swap.
22
With the acquisition of CPR the Company entered into a $6.0 million
convertible note payable to the shareholders of CPR. The principal balance is
convertible at the holders' option into 314,243 shares of the Company's Common
Stock at any time through January 29, 2005 (the Maturity Date). If the note has
not been converted at the Maturity Date, the Company has the option to extend
the Maturity Date of the note for another three years. The note bears interest
at an annual rate of 3.80% from January 29, 2002 through the Maturity Date.
Interest is payable semi-annually. If the Maturity Date is extended, the
interest rate will be reset on January 29, 2005 at an annual rate of interest
equal to the yield of a three-year United States Treasury Note.
In June of 2003, the Company and the shareholders of CPR entered into
Note Prepayment Agreements. Under the Note Prepayment Agreements, the Company
agreed to satisfy its payment obligations under the $6.0 million convertible
note by making a series of four payments between June 30, 2003 and January 10,
2005. The four payments are to be initiated either by the Company through the
exercise of a "call" option or by the CPR shareholders through the exercise of a
"put" option. If the four put or call options are exercised, the Company will
pay $4.5 million to fully settle the $6.0 million note. Gains resulting from
this early extinguishment of debt will be recorded when paid as a gain in the
Company's Condensed Consolidated Statements of Operations. At June 30, 2003 the
CPR shareholders exercised their put option and the Company paid approximately
$1.4 million to settle $2.0 million of the $6.0 million convertible note. A gain
of $558,000 has been recorded in the second quarter of 2003 in the Company's
Condensed Consolidated Statements of Operations.
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
addition, subject to the terms and conditions under its existing credit
facilities, 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.
ADDITIONAL CONSIDERATIONS
On July 15, 2002 two of the Company's major customers, Pharmacia Inc.
and Pfizer Inc. announced plans to merge in a stock-for-stock transaction. The
merger closed in the second quarter of 2003. Pharmacia and Pfizer combined
represent approximately 26% and 28% of the Company's net service revenues for
the three and six months ended June 30, 2003 and approximately 32% of the
Company's June 30, 2003 backlog. During the second quarter of 2003, the Company
identified a change, coinciding with the completion of the announced merger, in
the levels of business received from the combined Pfizer company. Although the
Company anticipates that business from Pfizer will increase in the third and
fourth quarter of 2003 compared to the first half of 2003, there is no assurance
that the level of business received will meet or exceed the business amounts the
Company received from Pharmacia Inc. and Pfizer Inc. in periods prior to the
merger. If the level of business does not return to levels experienced prior to
the merger, failure to replace this business would have a negative impact on the
Company's results of operations and financial position in future quarters.
23
On August 13, 2003 the Company entered into an agreement to acquire
substantially all of the assets and assume certain liabilities of Mexican CRO
group ECA, consisting of Estadisticos y Clinicos Asociados, S.A; Informatica
Clinica, S.C; USA ECA, Inc. (collectively "ECA"). ECA is a Phase I-IV contract
research organization located in Mexico City, Mexico. The transaction is subject
to customary closing conditions and is expected to close later in the third
quarter. The purchase price of this acquisition will be funded entirely with
cash, is subject to certain adjustments at closing, and as such has not been
finalized at this time.
On August 14, 2003, the Company announced to its employees a workforce
realignment plan which will immediately eliminate approximately 65 full-time
positions from its global workforce. Costs associated with this plan, which
include severance, outplacement and other employee related costs will be
recorded in the third quarter and are expected to be approximately $850,000 on
a pre-tax basis. Annual pre-tax savings as a result of the workforce
realignment are estimated to be approximately $4.4 million. In its Form 8-K
dated July 31, 2003, the Company provided revisions to its revenue and earnings
guidance for the balance of 2003. Contemplated in these revised estimates,
among other things, was an estimate of the savings to be generated by the
workforce realignment plan.
As a result of the costs associated with the above-referenced workforce
realignment plan which will be recorded in the third quarter, the Company
anticipates that it will be in violation of certain financial covenants
contained in its Facility. The Company is currently negotiating with the banks
to obtain a waiver or an amendment relating to the potential violation of these
covenants. Although the Company expects to be able to obtain a waiver or
amendment, there can be no assurance that such waiver or amendment will be
granted by the banks, or if granted will be at terms favorable to the Company.
MARKET RISK
Interest Rates
The Company is exposed to changes in interest rates on its
available-for-sale securities and amounts outstanding under its credit
facilities. Available-for-sale securities are recorded at fair value in the
financial statements. These securities are exposed to market price risk, which
also takes into account interest rate risk. At June 30, 2003, the potential loss
in fair value resulting from a hypothetical decrease of 10% in quoted market
price would be approximately $1.4 million.
In July 2002, the Company entered into an interest rate swap agreement
with the intent of managing the interest rate risk on its five-year term loan.
Interest rate swap agreements are contractual agreements between two parties for
the exchange of interest payment streams on a principal amount and an
agreed-upon fixed or floating rate for a defined period of time. See discussion
of debt in the Liquidity and Capital Resources section of the Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
Foreign Currency
The Company operates on a global basis and therefore is exposed to
various types of currency risks. Two specific transaction risks arise from the
nature of the contracts the Company executes with its customers because 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.
The first risk occurs as revenue recognized for services rendered is denominated
in a currency different from the currency in which the location's expenses are
incurred. As a result, the location's net
24
revenues and resultant net income can be affected by fluctuations in exchange
rates. 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 location'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 Operations.
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 approximately $(123,000) at June 30,
2003 compared to $(1.5 million) at December 31, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported Consolidated Financial Statements for a
particular period. Actual results could differ from those estimates.
The majority of the Company's revenues are based on fixed-price
contracts calculated on a percentage-of-completion basis based on assumptions
regarding the estimated total costs for each contract. Costs are incurred for
each project and compared to the estimated budgeted costs for each contract to
determine a percentage of completion on the project. The percentage of
completion is multiplied by the total contract value to determine the amount of
revenue recognized. Management reviews the budget for each contract to determine
if the budgeted amounts are correct, and budgets are adjusted as needed. As the
work progresses, original estimates might be changed due to changes in the scope
of the work. The Company attempts to negotiate contract amendments with the
sponsor to cover these services provided outside the terms of the original
contract. However, there can be no guarantee that the sponsor will agree to the
proposed amendments, and the Company ultimately bears the risk of cost overruns.
In certain instances, the Company may have to commit additional resources to
existing projects, resulting in lower gross margins. Similar situations may
occur in the future. Historically, the majority of
25
the Company's estimates have been materially correct, but there can be no
guarantee that these estimates will continue to be accurate.
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.
As the Company works on projects, the Company also incurs third-party
and other pass-through costs, which are typically reimbursable by its customers
pursuant to the contract. In certain contracts, however, these costs are fixed
by the contract terms. In these contracts, the Company is at risk for costs
incurred in excess of the amounts fixed by the contract terms. Excess costs
incurred above the contract terms would negatively affect the Company's gross
margin.
The Company accounts for employee stock options under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Under APB 25, no compensation
expense is recognized when the exercise price is equal to the market price of
the stock on the date of the grant. If the Company accounted for stock options
under SFAS 123, the Company would have to record additional compensation expense
relating to stock option grants. If the Company had to account for stock options
under SFAS 123, the Company's financial results would be materially adversely
affected by the additional compensation expense that would have to be
recognized. The compensation expense could vary significantly from period to
period based on a number of factors, including the number of stock options
granted, the expected holding period, the share price and share price volatility
and interest rate fluctuations.
Billed accounts receivable represent amounts for which invoices have
been sent to customers. Unbilled accounts receivable are amounts recognized as
revenue for which bills have not yet been sent to customers. Advance billings
represent amounts billed or payment received for which revenues have not yet
been earned. The Company maintains an allowance for doubtful accounts receivable
based on historical evidence of accounts receivable collections and specific
identification of accounts receivable that might pose collection problems. If
the Company is unable to collect all or part of its outstanding receivables,
there could be a material impact to the Company's consolidated results of
operations or financial position.
The Company analyzes goodwill and other indefinite-lived intangible
assets to determine any potential impairment loss on an annual basis, unless
conditions exist that require an updated analysis on an interim basis. A fair
value approach is used to test goodwill for impairment. An impairment charge is
recognized for the amount, if any, by which the carrying amount of the goodwill
exceeds the fair value. In the fourth quarter of 2002, the Company recorded a
goodwill impairment charge of $67.7 million.
The Company has a 50% owned joint-venture investment in Beijing
KendleWits Medical Consulting Co., Ltd. (KendleWits), a company located in the
People's Republic of China. The Company accounts for this investment under the
equity method. To date, the Company has contributed approximately $750,000 for
the capitalization of KendleWits. In the second quarter of 2003, the Company
determined that its investment in KendleWits was impaired and as a result
recorded a $405,000 non-cash charge to reduce the carrying value of this
investment to zero. Future capital contributions will be dependent upon the
on-going capitalization needs of
26
KendleWits and the Company's willingness to provide additional capital. The
Company is not obligated to make any additional investment in KendleWits and
currently has no plans to do so.
The Company capitalizes costs incurred to internally develop software
used primarily in providing proprietary clinical trial and data management
services, and amortizes these costs over the useful life of the product, not to
exceed five years. Internally developed software represents software in the
application development stage, and there is no assurance that the software
development process will produce a final product for which the fair value
exceeds its carrying value. Internally developed software is an intangible asset
subject to impairment write-downs whenever events indicate that the carrying
value of the software may not be recoverable. Assessing the fair value of the
internally developed software requires estimates and judgment on the part of
management.
The Company estimates its tax liability based on current tax laws in
the statutory jurisdictions in which it operates. Because the Company conducts
business on a global basis, its effective tax rate has, and will continue to
depend upon the geographic distribution of its pre-tax earnings (losses) among
jurisdictions with varying tax rates. These estimates include judgments about
deferred tax assets and liabilities resulting from temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. The Company has assessed the realization of
deferred tax assets and a valuation allowance has been established based upon an
assessment that realization cannot be assured. The ultimate realization of this
tax benefit is dependent upon the generation of sufficient operating income in
the respective tax jurisdictions. If estimates prove inaccurate or if the tax
laws change unfavorably, significant revisions in the valuation allowance may be
required in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force issued EITF Issue
00-21, "Revenue Arrangements with Multiple Deliverables," which requires
companies to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. In applying EITF Issue 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. A variable interest entity often holds financial assets,
including loans or receivables, real estate or other property. A variable
interest entity may be essentially passive or it may engage in research and
development or other activities on behalf of another company. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure
27
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this statement did not have a material impact on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No.
123." SFAS No. 148 provides transition guidance for those companies that elect
to voluntarily adopt the accounting provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 148 also mandates certain new disclosures
that are incremental to those required by SFAS No. 123. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements of SFAS No. 148. At this time the Company
does not plan to adopt the accounting provisions of SFAS No. 123 and will
continue to account for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" and requires liabilities
associated with exit and disposal activities to be expensed as incurred. SFAS
No. 146 is required for exit or disposal activities of the Company initiated
after December 31, 2002, with earlier adoption encouraged. The Company has
adopted SFAS No. 146.
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, changes in the financial conditions of the Company's customers,
potential mergers and acquisitions 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
28
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, fluctuations in the Company's sales cycle, the ability to
maintain large customer contracts or to enter into new contracts, the effects of
exchange rate fluctuations, the carrying value of and impairment of the
Company's investments and the other risk factors set forth in the Company's
filings with the Securities and Exchange Commission, copies of which are
available upon request from the Company's investor relations department. No
assurance can be given that the Company will be able to realize the net service
revenues included in backlog and verbal awards. The Company believes that its
aggregate backlog and verbal awards are not necessarily meaningful indicators of
future results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days
before the filing date of this quarterly report. Based on that evaluation, the
chief executive officer and the chief financial officer have concluded that the
Company's disclosure controls and procedures are effective and designed to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries are made known to them by others within those
entities.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to the date of the evaluation.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -
The Annual Meeting of Shareholders of the Company was held May 9, 2003.
At such meeting, the Shareholders of the Company elected the following as
Directors of the Company: Candace Kendle, Philip E. Beekman, Christopher C.
Bergen, Dr. G. Steven Geis, Timothy E. Johnson, Dr. Donald C. Harrison,
Frederick A. Russ and Robert C. Simpson. Shares were voted as follows: Candace
Kendle (FOR: 8,185,800 WITHHELD: 2,924,143), Philip E. Beekman (FOR: 9,665,185
WITHHELD: 1,444,758), Christopher C. Bergen (FOR: 8,225,504 WITHHELD:
2,884,439), Dr. G. Steven Geis (FOR: 10,240,780 WITHHELD: 869,163), Timothy E.
Johnson (FOR: 10,237,713 WITHHELD: 872,230), Dr. Donald C. Harrison (FOR:
9,748,029 WITHHELD: 1,361,914), Frederick A. Russ (FOR: 10,237,963 WITHHELD:
871,980) and Robert C. Simpson (FOR: 9,747,629 WITHHELD: 1,362,314).
The Shareholders voted on a proposed amendment to the 1997 Stock Option
and Stock Incentive Plan. This proposed amendment would have increased the
number of authorized shares of Common Stock from 3,000,000 shares to 5,000,000
shares. The Shareholders voted against the adoption of this proposed amendment.
Voting results on this proposed amendment were as follows: 4,261,123 shares were
voted for the amendment, 5,743,976 shares voted against, 53,646 shares voted to
abstain, and 1,051,198 shares were broker non-votes.
In addition, the Shareholders voted on the ratification of the
appointment of PricewaterhouseCoopers LLP as the Company's independent public
accountants for the calendar year 2003. The Shareholders ratified this
appointment. Voting results on this ratification were as follows: 9,502,443
shares were voted for ratification, 1,595,088 shares voted against, and 12,412
shares voted to abstain.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K --
(a) Exhibits
2.20 Form of Note Prepayment Agreement
10.20(g) 2003 Directors Compensation Plan
31.1 Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
30
(b) Reports filed on Form 8-K during the quarter:
On May 2, 2003 the Company filed a Form 8-K to disclose the non-GAAP
financial measures included in its press release announcing its first
quarter results of operations and financial condition and the reasons
for including the non-GAAP financial measures.
On June 13, 2003 the Company filed a Form 8-K to announce that
Pricewaterhouse Coopers LLP had been dismissed as the independent
public accountants to audit the Company's consolidated financial
statements and that effective June 9, 2003 Deloitte & Touche LLP had
been engaged as its independent public accountants.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle
------------------------------
Date: August 14, 2003 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Karl Brenkert III
-------------------------------
Date: August 14, 2003 Karl Brenkert III
Senior Vice President - Chief Financial Officer
32
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
2.20 Form of Note Prepayment Agreement
10.20(g) 2003 Directors Compensation Plan
31.1 Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
33