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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 MARCH 31, 2004
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
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(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: 13,121,779 shares of Common
Stock, no par value, as of April 30, 2004.
1
KENDLE INTERNATIONAL INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 3
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Comprehensive Income (Loss)-
Three Months Ended March 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(in thousands, except share data) ----------- ------------
- ------------------------------------------------------------------------------- (unaudited) (note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 12,770 $ 21,750
Restricted cash 1,715 1,777
Available for sale securities 8,664 8,881
Accounts receivable 48,613 41,573
Other current assets 10,824 9,947
----------- ------------
Total current assets 82,586 83,928
----------- ------------
Property and equipment, net 16,766 17,607
Goodwill 25,102 25,404
Other finite-lived intangible assets 781 821
Other indefinite-lived intangible assets 15,000 15,000
Other assets 11,194 11,655
----------- ------------
Total assets $ 151,429 $ 154,415
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 810 $ 827
Current portion of amounts outstanding under credit facilities 3,000 3,000
Convertible note 3,000 -
Trade payables 6,800 5,601
Advance billings 18,482 21,243
Other accrued liabilities 14,857 14,734
----------- ------------
Total current liabilities 46,949 45,405
----------- ------------
Obligations under capital leases, less current portion 812 926
Convertible note - 4,000
Long-term debt 6,000 6,750
Other noncurrent liabilities 942 965
----------- ------------
Total liabilities 54,703 58,046
----------- ------------
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; 13,109,701 and
13,079,912 shares issued and 13,089,804 and 13,060,015
outstanding at March 31, 2004 and December 31, 2003, respectively 75 75
Additional paid in capital 135,287 135,034
Accumulated deficit (38,495) (39,168)
Accumulated other comprehensive loss:
Net unrealized holding gain on available for sale securities 7 1
Unrealized loss on interest rate swap (355) (350)
Foreign currency translation adjustment 600 1,170
----------- ------------
Total accumulated other comprehensive income 252 821
Less: Cost of common stock held in treasury, 19,897 shares at
March 31, 2004 and December 31, 2003, respectively (393) (393)
----------- ------------
Total shareholders' equity 96,726 96,369
----------- ------------
Total liabilities and shareholders' equity $ 151,429 $ 154,415
=========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------
(in thousands, except per share data) 2004 2003
- --------------------------------------------- ----------- -----------
Net service revenues $ 40,786 $ 37,180
Reimbursable out-of-pocket revenues 11,000 11,545
----------- -----------
Total revenues 51,786 48,725
----------- -----------
Costs and expenses:
Direct costs 23,261 22,689
Reimbursable out-of-pocket costs 11,000 11,545
Selling, general and
administrative expenses 14,276 13,142
Depreciation and amortization 2,299 2,185
Severance and office consolidation costs 254 682
----------- -----------
Total costs and expenses 51,090 50,243
----------- -----------
Income (loss) from operations 696 (1,518)
Other income (expense):
Interest income 80 103
Interest expense (214) (272)
Other 463 (438)
Gain on debt extinguishment 254 -
----------- -----------
Income (loss) before income taxes 1,279 (2,125)
Income tax expense 606 (1)
----------- -----------
Net income (loss) $ 673 $ (2,124)
=========== ===========
Income (loss) per share data:
Basic:
Net income (loss) per share $ 0.05 $ (0.16)
=========== ===========
Weighted average shares 13,073 12,877
Diluted:
Net income (loss) per share $ 0.05 $ (0.16)
=========== ===========
Weighted average shares 13,356 12,877
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)
For the Three Months Ended
March 31,
--------------------------
(in thousands) 2004 2003
- --------------------------------------------- ----------- -----------
Net income (loss) $ 673 $ (2,124)
----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustment (570) 678
Net unrealized holding gains on
available for sale securities arising
during the period, net of tax 6 -
Net unrealized holding gains (losses) on
interest rate swap agreement (5) 15
----------- -----------
Comprehensive income (loss) $ 104 $ (1,431)
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three Months Ended
March 31,
--------------------------
(in thousands) 2004 2003
- ------------------------------------------------------------------------ ----------- -----------
Net cash (used in) provided by operating activities $ (6,575) $ 944
----------- -----------
Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 3,609 18,500
Purchases of available for sale securities (3,386) (23,488)
Acquisitions of property and equipment (522) (1,397)
Additions to software costs (535) (593)
Other 7 4
----------- -----------
Net cash used in investing activities (827) (6,974)
----------- -----------
Cash flows from financing activities:
Net repayments under credit facilities (750) (750)
Net repayments - book overdraft (45) (32)
Repayment of convertible note (747) -
Proceeds from exercise of stock options 68 111
Payments on capital lease obligations (227) (210)
----------- -----------
Net cash used in financing activities (1,701) (881)
----------- -----------
Effects of exchange rates on cash and cash equivalents 123 51
Net decrease in cash and cash equivalents (8,980) (6,860)
Cash and cash equivalents:
Beginning of period 21,750 12,671
----------- -----------
End of period $ 12,770 $ 5,811
=========== ===========
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 months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. For further information, refer to the consolidated financial statements
and notes thereto included in the Form 10-K for the year ended December 31, 2003
filed by Kendle International Inc. ("the Company") with the Securities and
Exchange Commission.
The condensed consolidated balance sheet at December 31, 2003 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:
Three Months Ended Three Months Ended
(in thousands) March 31, 2004 March 31, 2003
- -------------------------------------- ------------------ ------------------
Net income (loss) per Statements of
Operations $673 $(2,124)
------------------ ------------------
Net income (loss) for diluted earnings
per share calculation $673 $(2,124)
7
The weighted average shares used in computing net income (loss) per diluted
share have been calculated as follows:
Three Months Ended Three Months Ended
(in thousands) March 31, 2004 March 31, 2003
- -------------------------------------- ------------------ ------------------
Weighted average common shares
Outstanding 13,073 12,877
Dilutive effect of assumed exercise of
Certain options 283 --
------ ------
Weighted average shares 13,356 12,877
------ ------
Options to purchase approximately 2,000,000 shares of common stock outstanding
during the three months ended March 31, 2004, 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.
Options to purchase approximately 2,300,000 shares of common stock outstanding
during the three months ended March 31, 2003, were not included in the
computation of earnings per diluted share because 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 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
three months of 2004 and 2003 would have been approximately $1.0 million and
$1.3 million, respectively. The Company's pro-forma net income (loss) per
diluted share would have been adjusted to the amounts below:
Three Months Ended Three Months Ended
(in thousands, except per share data) March 31, 2004 March 31, 2003
- -------------------------------------------- ------------------ ------------------
PRO FORMA NET INCOME (LOSS):
As reported $ 673 $ (2,124)
Less: pro forma adjustment for stock-
based compensation, net of tax (773) (1,014)
------------------ ------------------
Pro-forma net loss $ (100) $ (3,138)
PRO-FORMA NET INCOME (LOSS) PER BASIC SHARE:
8
As reported $ 0.05 $ (0.16)
Effect of pro forma expense $ (0.06) $ (0.08)
Pro-forma $ (0.01) $ (0.24)
PRO-FORMA NET INCOME (LOSS) PER DILUTED SHARE:
As reported $ 0.05 $ (0.16)
Effect of pro forma expense $ (0.06) $ (0.08)
Pro-forma $ (0.01) $ (0.24)
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 will require the consolidation of a variable
interest entity whereby an enterprise will absorb a majority of the entity's
expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. In December 2003, the FASB issued FIN
46R, Consolidation of Variable Interest Entities, an interpretation of ARB 51
(as revised December 2003). The primary objectives of FIN 46R are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (Variable Interest Entities) and how to
determine when and which business enterprise should consolidate the Variable
Interest Entity (the Primary Beneficiary). The disclosure requirements of FIN
46R are required in all financial statements issued after March 15, 2004, if
certain conditions are met. The Company does not have any variable interest
entities and therefore, FIN 46R did not impact its financial statements.
2. ACQUISITION:
On October 1, 2003, the Company completed its acquisition of Mexican CRO
Estadisticos y Clinicos Asociados, S.A. (ECA). ECA is a Phase I-IV contract
research organization located in Mexico City, Mexico. With the acquisition, the
Company has expanded its capability to conduct clinical trials in Latin America.
The Company acquired substantially all the assets and assumed certain
liabilities of ECA for a purchase price of approximately $3.6 million in cash,
including acquisition costs. The purchase price allocation is preliminary and
based on certain estimates and is subject to revision.
The following unaudited pro forma results of operations assume the acquisition
occurred at the beginning of 2003:
Three Months Ended
(in thousands, except per share data) March 31, 2003
- ------------------------------------- ------------------
Net service revenues $ 39,013
Net loss $ (1,659)
9
Net loss per diluted share $ (0.13)
Weighted average shares 12,877
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, 2003, nor are they necessarily indicative of future operating
results.
3. OFFICE CONSOLIDATION AND EMPLOYEE SEVERANCE:
In the first quarter of 2004, in order to align its resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan which resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. This workforce realignment plan impacted
approximately 3 percent of the Company's North American workforce. No amounts
related to this plan were paid in the first quarter of 2004 as the entire
balance is expected to be paid in the second and third quarters of 2004.
In August, 2003, the Company initiated a workforce realignment plan which
immediately eliminated approximately 65 positions from its global workforce. In
the third quarter of 2003, the Company recorded a pre-tax charge of
approximately $897,000 for severance and outplacement benefits relating to this
workforce realignment. Approximately $882,000 was paid during the third and
fourth quarters of 2003 and at March 31, 2004, approximately $15,000 remains
accrued and is reflected in Other Accrued Liabilities on the Company's Condensed
Consolidated Balance Sheet. The remaining accrual of $15,000 is expected to be
paid out in 2004.
In order to bring its cost structure more in line with the then 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. 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. No amounts remain accrued at March 31, 2004. 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.
The amounts accrued for the workforce reduction and office consolidation costs
are detailed as follows:
Employee
Severance
---------
Liability at December $ 15
31, 2003
Amounts accrued 254
Liability at March 31, $ 269
2004
10
4. GOODWILL AND OTHER INTANGIBLE ASSETS:
Non-amortizable intangible assets at March 31, 2004 and December 31, 2003 are
composed of:
Indefinite-lived
(in thousands) Goodwill Intangible
- ---------------------------------- -------- ----------------
Balance at 12/31/03 $ 25,404 $ 15,000
Foreign currency fluctuations (196) --
Tax benefit to reduce goodwill (97) --
Purchase accounting
adjustment for 2003
acquisition (9) --
-------- ----------------
Balance at 3/31/04 $ 25,102 $ 15,000
Amortizable intangible assets at March 31, 2004 and December 31, 2003 are
composed of:
Customer Non-Compete
(in thousands) Relationships Agreements
- --------------------- ------------- -----------
Balance at 12/31/03 $ 389 $ 432
2004 amortization (11) (29)
------------- -----------
Balance at 3/31/04 $ 378 $ 403
Amortization expense for the next five years relating to these amortizable
intangible assets is estimated to be as follows:
2004 $156
2005 $153
2006 $149
2007 $117
2008 $ 28
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. Certain provisions of this Facility have been
subsequently amended. 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.
11
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. The Company is in compliance with the financial
covenants contained in the Facility (as amended) as of March 31, 2004.
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 March 31, 2004, no amounts were outstanding under the Company's revolving
credit loan, $9.0 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 6.57%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
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 the applicable margin
(currently 2.25%). 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 March 31, 2004, approximately $355,000 has been recorded in
Accumulated Other Comprehensive Loss to reflect a decrease in the fair market
value of the swap compared to approximately $350,000 at December 31, 2003.
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 would 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. In the first quarter
of 2004, the CPR shareholders again exercised their put option and the Company
paid approximately $750,000 to settle $1.0 million of the then remaining $4.0
million of the convertible note that was outstanding at December 31, 2003. A
gain of $254,000
12
has been recorded in the first quarter of 2004 in the Company's Condensed
Consolidated Statements of Operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 months ended March
31, 2004, 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 consulting and organizational meeting
management and publications services on a contract basis to the pharmaceutical
and biotechnology industries. The Company is managed in one reportable segment
encompassing Phase I through IV contract services.
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 is entered into and the balance is received in installments over the
contract's duration, in most cases on a milestone achievement basis. Net service
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. When estimates
indicate a loss, such loss is provided in the current period in its entirety.
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 expenses 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 an allocation
of indirect costs including facilities, information systems and other costs.
Selling, general and administrative expenses consist of compensation and related
fringe benefits for sales and administrative associates and professional
services, as well as unallocated costs related to facilities, information
systems and other costs.
Depreciation and amortization expenses consist of depreciation and amortization
costs recorded on a straight-line method over the useful life of the property or
equipment and internally developed software.
14
The CRO industry in general continues to be dependent on the research and
development efforts 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
effect on the Company.
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 short-term
adverse affects 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 MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Service Revenues
Net service revenues increased approximately $3.6 million, or 10%, to $40.8
million in the first quarter of 2004 from $37.2 million in the first quarter of
2003. The 10% increase in net service revenues was composed of growth from
acquisitions of 3% and an increase in organic net service revenues of 7%.
Foreign currency exchange rate fluctuations accounted for a 7% increase in net
service revenues in the first quarter of 2004 compared to 2003. In the first
quarter of 2004, net service revenues in the European and Asia-Pacific regions
increased by approximately $4.1 million or 40.7% and $620,000 or 52.2%,
respectively, from the same period of the prior year. Net service revenues in
North America declined by approximately $1.1 million, or 4.2%, from the first
quarter of 2003 to the corresponding period in 2004 due to an overall slowdown
in new business in North America and in particular, a slowdown in new business
from two of the Company's largest customers which completed a merger in 2003.
Approximately 39% of the Company's net service revenues were derived from
operations outside of North America in the first quarter of 2004 compared to 30%
in the corresponding period in 2003. The top five customers based on net service
revenues contributed approximately 45% of net service revenues during the first
quarter of 2004 compared to approximately 49% of net service revenues during the
first quarter of 2003. Net service revenues from Pfizer Inc. (including the
former Pharmacia Inc.) accounted for approximately 23% of total first quarter
2004 net service revenues compared to approximately 31% of total first quarter
2003 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. No other customer accounted for more than 10% of the net service
revenues for the quarter in either period presented.
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 4.5% to $11.0 million in the first quarter of
2004 from $11.5 million in the corresponding period of 2003.
15
Operating Expenses
Direct costs increased approximately $600,000, or 3%, to $23.3 million in the
first quarter of 2004 from $22.7 million in the first quarter 2003. The 3%
increase in direct costs was composed of growth from acquisitions of 3% and no
organic growth. Foreign currency exchange rate fluctuations accounted for a 7%
increase in direct costs in the first quarter of 2004 compared to 2003. Direct
costs expressed as a percentage of net service revenues were 57.0% for the three
months ended March 31, 2004 compared to 61.0% for the three months ended March
31, 2003. The decline in direct costs as a percentage of net service revenues is
primarily attributable to the mix of direct labor involved in contracts as well
as the overall mix of contracts and an increase in net service revenues in the
first quarter of 2004 compared to the first quarter of 2003. In addition, the
first quarter of 2003 suffered from lower utilization of resources due to
temporary delays in certain projects.
Reimbursable out-of-pocket costs decreased 4.5% to $11.0 million in the first
quarter of 2004 from $11.5 million in the corresponding period of 2003.
Selling, general and administrative expenses increased $1.2 million, or 9%, from
$13.1 million in the first quarter of 2003 to $14.3 million in the same quarter
of 2004. The 9% increase in SG&A was composed of growth from acquisitions of 3%
and organic growth of 6%. Foreign currency exchange rate fluctuations accounted
for the majority of the 6% organic increase in selling, general and
administrative expenses in the first quarter of 2004 compared to the comparable
period of 2003. Selling, general and administrative expenses expressed as a
percentage of net service revenues were 35.0% for the three months ended March
31, 2004 compared to 35.3% for the corresponding 2003 period.
Depreciation and amortization expense increased by $114,000 or, 5.2%, in the
first quarter of 2004 compared to the first quarter of 2003. The increase is
primarily due to increased depreciation and amortization relating to the
Company's capital expenditures.
In the first quarter of 2004, in order to align its resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan which resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. This workforce realignment plan impacted
approximately 3 percent of the Company's North American workforce. No amounts
related to this plan were paid in the first quarter of 2004 as the entire
balance is expected to be paid in the second and third quarters of 2004.
Other Income (Expense)
Other Income (Expense) was income of approximately $583,000 in the first quarter
of 2004 compared to an expense of approximately $607,000 in the first quarter of
2003. The increase in Other Income is primarily due to foreign exchange rate
gains of approximately $460,000 in the first quarter of 2004 compared to foreign
exchange rate losses of approximately $345,000 in the corresponding period of
2003. In addition, in the first quarter of 2004 the Company made a partial early
repayment on its convertible note and recorded a gain from this early partial
debt extinguishment of approximately $254,000.
16
Income Taxes
The Company reported tax expense at an effective rate of 47% in the quarter
ended March 31, 2004, compared to tax expense at an effective rate of 0% in the
quarter ended March 31, 2003. The Company continues to record full valuation
allowances 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 quarter to quarter based on the locations that
generate the pre-tax earnings or losses.
Net Income
The net income for the quarter ended March 31, 2004, was approximately $673,000
or $0.05 per basic and diluted share. For the quarter ended March 31, 2003,
including the effect of the severance charge and office consolidation costs (of
$548,000 or $0.04 per share), the net loss for the quarter was $2.1 million, or
$0.16 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $9.0 million for the three months ended
March 31, 2004, as a result of cash used in operating, investing and financing
activities of $6.6 million, $800,000 and $1.7 million, respectively. At March
31, 2004, cash and cash equivalents amounted to $12.8 million. In addition, the
Company has $1.7 million in restricted cash that represents cash received from
customers that is segregated in a separate Company bank account and available
for use only for specific project expenses. Net cash used in operating
activities for the period consisted primarily of 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 $30.1 million at
March 31, 2004, and $20.3 million at December 31, 2003.
Investing activities for the three months ended March 31, 2004, consisted
primarily of net proceeds from the sale and maturity of available for sale
securities of approximately $220,000 offset by capital expenditures of
approximately $1.1 million.
Financing activities for the three months ended March 31, 2004, consisted
primarily of scheduled repayments relating to the Company's credit facility of
$750,000 and a partial early repayment of the Company's convertible debt (see
below) of approximately $747,000.
The Company had available for sale securities totaling $8.7 million at March 31,
2004 compared to $8.9 million at December 31, 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. Certain provisions of this Facility have been
subsequently amended. 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
17
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. The Company is in compliance with the financial
covenants contained in the Facility (as amended) as of March 31, 2004.
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 March 31, 2004, no amounts were outstanding under the Company's revolving
credit loan, $9.0 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 6.57%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
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 the applicable margin
(currently 2.25%). 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 March 31, 2004, approximately $355,000 has been recorded in
Accumulated Other Comprehensive Loss to reflect a decrease in the fair market
value of the swap compared to approximately $350,000 at December 31, 2003.
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 would 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. In the first quarter
of 2004, the CPR shareholders again exercised their put option
18
and the Company paid approximately $750,000 to settle $1.0 million of the then
remaining $4.0 million of the convertible note that was outstanding at December
31, 2003. A gain of $254,000 has been recorded in the first quarter of 2004 in
the Company's Condensed Consolidated Statements of Operations.
ADDITIONAL CONSIDERATIONS
On July 15, 2002, two of the Company's major customers, Pharmacia Corp. 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 23% of the Company's net service revenues for the three
months ended March 31, 2004 and approximately 24% of the Company's March 31,
2004, 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 level of awards
received from Pfizer increased during the second half of 2003 and the first
quarter of 2004, the level of awards received has not reached pre-merger levels.
The Company believes that the level of business from Pfizer will continue to
increase in the second quarter and second half of 2004, but there is no
assurance that the level of business received will meet or exceed the business
amounts the Company received from Pharmacia Corp. 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 years.
MARKET RISK
Interest Rates
The Company is exposed to changes in interest rates on its available for sale
securities and amounts outstanding under the Facility and Multicurrency
Facility. Available for sale securities are recorded at fair value in the
condensed consolidated financial statements. These securities are exposed to
market price risk, which also takes into account interest rate risk. At March
31, 2004, the potential loss in fair value resulting from a hypothetical
decrease of 10% in quoted market price would be approximately $866,000.
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 Condition and Results of Operations.
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. From time to time contracts
are denominated in a currency different than the particular 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
19
subsidiary's expenses are incurred. As a result, the subsidiary's net service
revenues and resultant net income can be affected by fluctuations in exchange
rates.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, the Company recognizes a receivable at the
time of invoicing at the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
until the payment from the customer is received will result in the Company
receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by the Company as a
foreign currency transaction gain or loss, as applicable, and is reported in
Other Income (Expense) in the Condensed Consolidated Statements of Operations.
The Company's condensed 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 subsidiaries' U.S. dollar balance sheet and
is necessary to keep the foreign subsidiaries' balance sheet stated in U.S.
dollars in balance. Foreign currency translation adjustments, reported as a
separate component of shareholders' equity were approximately $600,000 at March
31, 2004 compared to $1.2 million at December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make significant
estimates and assumptions that affect the reported condensed consolidated
financial statements for a particular period. Actual results could differ from
those estimates.
Revenue Recognition
The majority of the Company's net service revenues are based on fixed-price
contracts calculated on a percentage-of-completion basis based upon 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 periodically reviews the budget on 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. When estimates indicate a loss, such loss is
provided in the current period in its entirety. The Company attempts to
negotiate contract amendments with the sponsor to cover services provided
outside the terms of the original contract. However, there can be no guarantee
that the sponsor will agree to proposed amendments, and the Company ultimately
bears the risk of cost overruns.
20
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 provides services 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. In
these instances, the Company recognizes these costs as direct costs with
corresponding net service revenues. Excess costs incurred above the contract
terms would negatively affect the Company's gross margin.
Accounts Receivable/Allowance for Doubtful Accounts
Billed accounts receivable represent amounts for which invoices have been sent
to customers. Unbilled accounts receivable are amounts recognized as revenue for
which invoices 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 Condensed Consolidated Results
of Operations or financial position.
Long-Lived Assets
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. The goodwill impairment
testing involves the use of estimates related to the fair market value of the
reporting unit and is inherently subjective. An impairment charge is recognized
for the amount, if any, by which the carrying amount of goodwill exceeds fair
value. At December 31, 2003 the fair value of the Company exceeded the carrying
value, resulting in no goodwill impairment charge. In the first quarter of 2004,
no events arose that indicated a need for an interim impairment analysis. In
addition, the Company has a $15 million indefinite lived intangible asset
representing one customer relationship acquired in the Company's acquisition of
CPR. The intangible asset is evaluated each reporting period to determine
whether events or circumstances continue to support an indefinite useful life.
Internally Developed Software
The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, 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. As with other long-lived assets,
this asset is reviewed at least annually to determine the
21
appropriateness of the carrying value of the asset. Assessing the fair value of
the internally developed software requires estimates and judgment on the part of
management.
Tax Valuation Allowance
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 our 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 on an
assessment that it is more likely than not 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 Financial Accounting Standards Board (FASB) issued FIN 46,
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 will require the consolidation of a variable
interest entity whereby an enterprise will absorb a majority of the entity's
expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. In December 2003, the FASB issued FIN
46R, Consolidation of Variable Interest Entities, an interpretation of ARB 51
(as revised December 2003). The primary objectives of FIN 46R are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (Variable Interest Entities) and how to
determine when and which business enterprise should consolidate the Variable
Interest Entity (the Primary Beneficiary). The disclosure requirements of FIN
46R are required in all financial statements issued after March 15, 2004, if
certain conditions are met. The Company does not have any variable interest
entities and therefore, FIN 46R did not impact its financial statements.
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.
22
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 and
biotechnology industries, changes in the financial conditions of the Company's
customers, potential mergers and acquisitions in the pharmaceutical and
biotechnology industries, the Company's ability to manage growth, 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, 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 or from
the SEC. The Company's growth and ability to achieve operational and financial
goals is dependent upon its ability to attract and retain qualified personnel.
If the Company fails to hire, retain and integrate qualified personnel, it will
be difficult for the Company to achieve its financial and operational goals. 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 Condition 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.
23
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 - None
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K --
(a) Exhibits
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
(b) Reports filed on Form 8-K during the quarter:
On February 16, 2004 the Company filed a Form 8-K to disclose the non-GAAP
financial measures included in its press release announcing its fourth
quarter and year end 2003 results of operations and financial condition
and the reasons for including the non-GAAP financial measures.
24
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: May 10, 2004 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Karl Brenkert III
---------------------------------
Date: May 10, 2004 Karl Brenkert III
Senior Vice President - Chief
Financial Officer
25
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
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
26