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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission file number 000-23019
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KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,700,470 shares of common
stock, no par value, as of April 30, 2000.
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KENDLE INTERNATIONAL INC.
INDEX
PAGE
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
Part II. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) March 31, December 31,
2000 1999
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,892 $ 5,720
Available for sale securities 19,600 19,524
Accounts receivable 45,993 51,186
Unreimbursed investigator and project costs 7,042 9,117
Other current assets 4,186 5,101
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Total current assets 81,713 90,648
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Property and equipment, net 15,022 14,683
Excess of purchase price over net assets acquired, net 69,597 71,075
Other assets 8,774 7,976
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Total assets $ 175,106 $ 184,382
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 741 $ 725
Amounts outstanding under credit facility 8,700
Trade payables 8,081 5,619
Advances against investigator and project costs 2,126 2,624
Advance billings 13,036 14,539
Other accrued liabilities 11,478 13,603
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Total current liabilities 35,462 45,810
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Obligations under capital leases, less current portion 677 763
Other noncurrent liabilities 4,443 4,163
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Total liabilities 40,582 50,736
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Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 45,000,000 shares authorized; 11,500,651 and
11,489,318 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 75 75
Additional paid in capital 120,576 120,544
Retained earnings 16,902 15,246
Accumulated other comprehensive income:
Net unrealized holding losses on available for sale securities (450) (434)
Foreign currency translation adjustment (2,579) (1,785)
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Total accumulated other comprehensive income (3,029) (2,219)
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Total shareholders' equity 134,524 133,646
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Total liabilities and shareholders' equity $ 175,106 $ 184,382
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data) For the Three Months Ended
March 31,
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2000 1999
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Net revenues $34,298 $25,764
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Costs and expenses:
Direct costs 19,437 12,928
Selling, general and administrative
expenses 10,663 8,013
Depreciation and amortization 1,619 1,488
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31,719 22,429
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Income from operations 2,579 3,335
Other income (expense):
Interest income 243 406
Interest expense (159) (79)
Other 41 64
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Income before income taxes 2,704 3,726
Income tax expense 1,048 1,432
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Net income $ 1,656 $ 2,294
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Income per share data:
Basic:
Net income per share $ 0.14 $ 0.21
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Weighted average shares 11,622 11,060
Diluted:
Net income per share $ 0.14 $ 0.20
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Weighted average shares 12,090 11,659
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands) For the Three Months Ended
March 31,
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2000 1999
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Net income $ 1,656 $ 2,294
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Other comprehensive income:
Foreign currency translation adjustment (794) (1,415)
Net unrealized holding (losses) on
available for sale securities arising
during the period, net of tax (16) (155)
Reclassification adjustment for holding
losses included in net income, net of tax (2)
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Net change in unrealized holding (losses)
on available for sale securities (16) (157)
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Comprehensive income $ 846 $ 722
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) For the Three Months Ended
March 31,
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2000 1999
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Net cash provided by (used in) operating activities $ 11,999 $ (5,675)
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Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 1,553 7,515
Purchases of available for sale securities (1,646) (700)
Acquisitions of property and equipment (1,426) (1,610)
Additions to software costs (456) (719)
Other investments (25) (1,304)
Acquisition of business, less cash acquired (4,091)
Funding of note payable in connection with business acquisition (1,590)
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Net cash used in investing activities (2,000) (2,499)
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Cash flows from financing activities:
Borrowings under credit facility 7,500
Repayments under credit facility (16,200)
Amounts payable - book overdraft (1,760)
Proceeds from exercise of stock options 18 28
Payments on capital lease obligations (193) (299)
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Net cash used in financing activities (10,635) (271)
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Effects of exchange rates on cash and cash equivalents (192) (255)
Net decrease in cash and cash equivalents (828) (8,700)
Cash and cash equivalents:
Beginning of period 5,720 13,980
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End of period $ 4,892 $ 5,280
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Supplemental schedule of noncash investing and financing activities:
Issuance of Common Stock in connection with investment in
Digineer, Inc. $ 371
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Acquisition of Businesses:
Fair value of assets acquired $ 6,270
Fair value of liabilities assumed (575)
Stock issued (1,604)
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Net cash payments $ 4,091
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the
consolidated financial statements and notes thereto included in the Form
10-K for the year ended December 31, 1999 filed by Kendle International
Inc. ("the Company") with the Securities and Exchange Commission.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements.
2. NET INCOME PER SHARE DATA:
Net income per basic share is computed using the weighted average
common shares outstanding. Net income per diluted share is computed using
the weighted average common shares and potential common shares outstanding.
The weighted average shares used in computing net income per
diluted share have been calculated as follows:
(in thousands) Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
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Weighted average common shares outstanding 11,622 11,060
Stock options 468 599
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Weighted average shares 12,090 11,659
Options to purchase approximately 520,000 and 100,000 shares of
Common Stock were outstanding during the three months ended March 31, 2000,
and 1999 respectively, but were not included in the computation of earnings
per diluted share because the options'
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exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
3. ACQUISITIONS:
Details of the Company's acquisitions since 1999 are listed below.
The acquisitions have been accounted for using the purchase method of
accounting, with goodwill as a result of the transactions being amortized
over 30 years. The escrow accounts referred to have been established at
acquisition date to provide indemnification of sellers' representations and
warranties.
Valuation of Common Stock issued in the acquisitions was based on
an appraisal obtained by the Company which provided for a discount of the
shares due to lock-up restrictions and lack of registration of the shares.
The results of operations are included in the Company's results from the
respective dates of acquisition.
In August, 1999, the Company acquired Specialist Monitoring
Services Limited, a contract research organization located in Crowthorne,
United Kingdom. Total acquisition costs consisted of approximately $7.5
million in cash and 141,680 shares of the Company's Common Stock. Of the
total purchase price, approximately $0.1 million in cash and 97,066 shares
were placed in an escrow account, 50% to be released in August, 2000 and
the remainder in August, 2001.
In July, 1999, the Company acquired Health Care Communications Inc.
("HCC"), a New Jersey based medical communications company, and HCC Health
Care Communications (1991) Ltd., a Toronto based contract research
organization. Total acquisition costs consisted of approximately $5.7
million in cash and 174,559 shares of the Company's Common Stock. Of the
total purchase price, $0.5 million in cash and 31,943 shares were placed in
an escrow account, 50% to be released in July, 2000 and the remainder in
July, 2001.
The purchase price of HCC may be increased dependent upon the
achievement of certain operating results from acquisition date through
December 31, 2001. For the period from acquisition date through December
31, 1999, HCC reached its operating target and purchase price has been
increased by $3.7 million. Total additional consideration could reach $6.9
million, payable 67% in cash and 33% in shares of the Company's Common
Stock, if HCC meets the targeted operating results.
In June, 1999, the Company acquired ESCLI S.A., a contract research
organization located in Paris, France, for approximately $2.7 million in
cash.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Limited (IRC), a U.K.-based regulatory affairs
company. Total acquisition costs consisted of approximately $4.4 million in
cash and 87,558 shares of the Company's Common Stock. The shares were
placed in an escrow account, 50% of which were released in January, 2000
and the remainder to be released in January, 2001.
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The results of these companies have been included in the condensed
consolidated statements of income for the three months ended March 31,
2000. The following unaudited pro forma results of operations for the three
months ended March 31, 1999 assume the acquisitions occurred at the
beginning of 1999:
(in thousands except per share data) Three Months Ended
March 31, 1999
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Net revenues $29,094
Net income $2,259
Net income per diluted share $0.19
Weighted average shares 11,975
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisitions been
consummated as of January 1, 1999, nor are they necessarily indicative of
future operating results.
4. SEGMENT INFORMATION:
With its July, 1999 acquisition of HCC, the Company is now managed
through two reportable segments, namely, the contract research services
group and the medical communications group. The contract research services
group constitutes the Company's core business and includes clinical trial
management, clinical data management, statistical analysis, medical
writing, and regulatory consultation and representation. The medical
communications group, which includes only HCC, provides organizational,
meeting management and publication services to professional organizations
and pharmaceutical companies. Overhead costs are included in the contract
research services group and have not been allocated. Information is not
presented for the three month period ended March 31, 1999 because the
Company had not yet acquired HCC, and therefore managed its business in the
aggregate.
(in thousands) Contract Medical
Research Services Communications Total
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Three months ended March 31, 2000:
Net revenues $32,902 $1,396 $34,298
Net income 1,268 388 1,656
March 31, 2000:
Identifiable assets $162,182 $12,924 $175,106
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5. SUBSEQUENT EVENT:
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a
contract research organization with offices in Melbourne and Sydney,
Australia. Total acquisition costs consisted of approximately $1.9 million
in cash and 78,500 shares of the Company's Common Stock. This acquisition
will be accounted for using the purchase method of accounting.
6. NEW ACCOUNTING PRONOUNCEMENTS:
In March, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25 ("APB 25"). FIN 44 clarifies the application of APB 25 for
certain issues such as the following: the definition of an employee for
purposes of applying APB 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; and the accounting for options that
have been repriced. FIN 44 will be effective in the second quarter of 2000.
The impact of FIN 44 will be dependent on the nature and terms of stock
compensation plans offered by the Company in the future.
In December, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues in financial
statements. Implementation of SAB 101 is required in the second quarter of
2000. The Company is currently evaluating the impact, if any, SAB 101 will
have on its consolidated financial position or results of operations.
In June, 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (January 1, 2001 for the
Company). SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Since the Company's only derivative transaction has historically been the
use of foreign currency exchange rate hedge instruments from time to time
within a year, management of the Company anticipates that the adoption of
SFAS No. 133 will not have a significant effect on the Company's results of
operations or its financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information discussed below should be read in conjunction with the
Condensed Consolidated Financial Statements included in this Form 10-Q for the
quarter ended March 31, 2000. The Company's results of operations for a
particular quarter may not be indicative of results expected during subsequent
quarters or for the entire year.
COMPANY OVERVIEW
Kendle International Inc. ("the Company") is an international contract
research organization (CRO) that provides integrated clinical research services
including Phase I through IV drug development, on a contract basis to the
pharmaceutical and biotechnology industries. Kendle also provides
organizational, meeting management, and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications Inc. (HCC). The Company is managed through two reportable
segments, the contract research services group and the medical communications
group. The medical communications group includes only HCC.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A portion
of the contract fee is typically required to be paid at the time the contract is
entered into and the balance is received in installments over the contract's
duration, in most cases on a milestone achievement basis. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured principally by the total costs incurred as a percentage of estimated
total costs for each contract. The estimated total costs of contracts are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. Additionally,
the Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators. Such costs, which are reimbursable by its customers,
are generally excluded from direct costs and net revenues.
Direct costs consist of compensation and related fringe benefits for
project-related employees, unreimbursed project-related costs and indirect costs
including facilities, information systems and other costs. Selling, general and
administrative expenses consist of compensation and related fringe benefits for
sales and administrative employees, professional services and advertising costs,
as well as unallocated costs related to facilities, information systems and
other costs.
The Company's results are subject to volatility due to such factors as
the commencement, completion, cancellation or delay of contracts; the progress
of ongoing projects; cost overruns; the Company's sales cycle; the ability to
maintain large customer contracts or to enter into new contracts. In addition,
the Company's aggregate backlog is not necessarily a meaningful indicator of
future results. Accordingly, no assurance can be given that the Company will be
able to realize the net revenues included in the backlog. In the first quarter
of 2000, the Company was negatively impacted by contract delays and slower than
anticipated start-ups on new projects. Delays of projects are often the result
of decisions made by the Company's customers or regulatory authorities, and are
typically not controllable by the Company. Although the Company's backlog
continues to grow, the Company expects revenues to be negatively impacted
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over the next few quarters due to several factors, primarily to a shift in
average duration of backlog as a result of newly awarded longer term contracts
as well as contract delays and slower start-ups on new projects. As a high
percentage of the Company's operating costs are relatively fixed, these factors
can cause significant variations in quarterly operating results.
ACQUISITIONS
In April, 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia. Total
acquisition costs consisted of approximately $1.9 million in cash and 78,500
shares of the Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net revenues increased to $34.3 million for the three months ended
March 31, 2000 from $25.8 million for the three months ended March 31, 1999. The
33% increase in net revenues was comprised of organic growth of 14% and growth
from acquisitions of 19%. Approximately 35% of the Company's net revenues for
the three months ended March 31, 2000 were derived from operations outside of
the United States compared to 27% for the three months ended March 31, 1999.
Revenues from G.D. Searle and Co. and Centocor, Inc. accounted for approximately
21% and 13%, respectively, of net revenues for the three months ended March 31,
2000.
Direct costs increased by $6.5 million, or 50%, from $12.9 million for
the three months ended March 31, 1999 to $19.4 million for the three months
ended March 31, 2000. This increase is primarily comprised of increases in
direct salaries and fringe benefits to support the increases in net revenues for
the period. Direct costs expressed as a percentage of net revenues were 56.7%
for the three months ended March 31, 2000 compared to 50.2% for the three months
ended March 31, 1999. The increase in these costs as a percentage of net
revenues is due to project delays in the first quarter 2000 that caused a lower
than anticipated revenue base to absorb direct costs as well as the varying
levels of profitability within the mix of contracts in the first quarter of 2000
compared to first quarter 1999.
Selling, general and administrative expenses increased by $2.7 million,
or 33%, from $8.0 million for the three months ended March 31, 1999 to $10.7
million for the three months ended March 31, 2000. Selling, general and
administrative expenses expressed as a percentage of net revenues remained
constant at 31.1% for the three months ended March 31, 2000 and 1999.
Depreciation and amortization expense increased by $0.1 million, or 9%,
from $1.5 million for the three months ended March 31, 1999 to $1.6 million for
the three months ended March 31, 2000. The increase was due to amortization of
goodwill as a result of the Company's acquisitions.
The Company's effective tax rate was 38.8% for the three months ended
March 31, 2000 as compared to 38.4% for the three months ended March 31, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $0.8 million for the three
months ended March 31, 2000 as a result of cash used in investing and financing
activities of $2.0 million and $10.6 million, respectively offset by cash
provided by operating activities of $12.0 million. Net cash provided by
operating activities primarily resulted from net income and a decrease in
accounts receivable and unreimbursed investigator and project costs offset by a
decrease in advance billings. Fluctuations in accounts receivable and advance
billings occur on a regular basis as services are performed, milestones or other
billing criteria are achieved, invoices are sent to customers, and payments for
outstanding accounts receivable are collected from customers. Such activity
varies by individual customer and contract.
Investing activities for the three months ended March 31, 2000
consisted primarily of capital expenditures of approximately $1.9 million.
Financing activities for the three months ended March 31, 2000
consisted primarily of net repayments under the Company's credit facility of
$8.7 million.
The Company had available for sale securities totaling $19.6 million at
March 31, 2000.
The Company has a $30 million credit facility with certain banks. The
credit facility bears interest at a rate equal to either (a) LIBOR plus the
Applicable Margin (as defined) or (b) the higher of the Bank's prime rate or the
Federal Funds rate plus 0.50%, plus the Applicable Margin. All amounts
outstanding thereunder become due and payable in February, 2001. The facility
includes various restrictive covenants including the maintenance of certain
fixed coverage and leverage ratios as well as minimum net worth levels. At March
31, 2000, there were no amounts outstanding under the credit facility.
The Company's primary cash needs on both a short-term and long-term
basis are for the payment of salaries and fringe benefits, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its credit facility, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and global presence. Any such
acquisitions may require additional external financing and the Company may from
time to time seek to obtain funds from public or private issuance of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
FOREIGN CURRENCY
The Company operates on a global basis and is therefore exposed to
various types of currency risks. Two specific transaction risks arise from the
nature of the contracts the Company executes with its customers since from time
to time contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. The first risk occurs as revenue recognized for services rendered
is denominated in a currency different from the currency in which the
subsidiary's expenses are incurred. As a
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result, the subsidiary's net revenues and resultant net income can be affected
by fluctuations in exchange rates. Although some contracts state that currency
fluctuations from the rates in effect at the time the contract is executed up to
a specified threshold (generally plus or minus a few percentage points) will be
absorbed by the Company, and fluctuations in excess of the threshold are the
customer's responsibility, most contracts do not specifically address
responsibility for currency fluctuations. Historically, fluctuations in exchange
rates from those in effect at the time contracts were executed have not had a
material effect upon the Company's consolidated financial results.
The second risk results from the passage of time between the invoicing
of customers under these contracts and the ultimate collection of customer
payments against such invoices. Because the contract is denominated in a
currency other than the subsidiary's local currency, the Company recognizes a
receivable at the time of invoicing at the local currency equivalent of the
foreign currency invoice amount. Changes in exchange rates from the time the
invoice is prepared until the payment from the customer is received will result
in the Company receiving either more or less in local currency than the local
currency equivalent of the invoice amount at the time the invoice was prepared
and the receivable established. This difference is recognized by the Company as
a foreign currency transaction gain or loss, as applicable, and is reported in
other income (expense) in the consolidated statements of income.
The Company's consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
consolidated financial statements. The Company's foreign subsidiaries translate
their financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account, referred to as the foreign currency translation adjustment account.
This account exists only in the foreign subsidiary's U.S. dollar balance sheet
and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. Foreign currency translation adjustments, reported as a separate
component of shareholders' equity were ($2.6) million at March 31, 2000 compared
to ($1.8) million at December 31, 1999.
IMPACT OF THE YEAR 2000
The Company initiated a program in 1998 to identify and address issues
associated with the ability of its date-sensitive software to recognize the Year
2000 properly. The Company spent approximately $950,000 to prepare for the Year
2000 of which approximately 20% was paid to third party service providers. The
Company has not experienced any significant problems associated with the date
change and does not expect to incur significant expense related to the date
change in the remainder of 2000. While the Company does not anticipate any
significant problems regarding the Year 2000, there can be no assurance that
problems will not arise in the future.
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NEW ACCOUNTING PRONOUNCEMENTS
In March, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25 ("APB 25"). FIN 44 clarifies the application of APB 25 for certain issues
such as the following: the definition of an employee for purposes of applying
APB 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; and the accounting for options that have been repriced.
FIN 44 will be effective in the second quarter of 2000. The impact of FIN 44
will be dependent on the nature and terms of stock compensation plans offered by
the Company in the future.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101 is required in the second quarter of 2000. The Company
is currently evaluating the impact, if any, SAB 101 will have on its
consolidated financial position or results of operations.
In June, 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Since the Company's only derivative transaction has
historically been the use of foreign currency exchange rate hedge instruments
from time to time within a year, management of the Company anticipates that the
adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
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-
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looking statement, changes in general economic conditions, competitive factors,
outsourcing trends in the pharmaceutical industry, the Company's ability to
manage growth and to continue to attract and retain qualified personnel, the
Company's ability to complete additional acquisitions and to integrate newly
acquired businesses, the Company's ability to penetrate new markets, competition
and consolidation within the industry, the ability of joint venture businesses
to be integrated with the Company's operations, the fixed price nature of
contracts or the loss of large contracts, cancellation or delay of contracts,
the progress of ongoing projects, cost overruns, the Company's sales cycle, the
ability to maintain large customer contracts or to enter into new contracts, the
effects of exchange rate fluctuations, and the other risk factors set forth in
the Company's SEC filings, copies of which are available upon request from the
Company's investor relations department.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
2.18 Units Purchase Agreement dated April 7, 2000 by and
among the Company and the Shareholders of SYNERmedica
PTY Limited and SYNERmedica Unit Trust
2.19 Escrow Agreement dated April 7, 2000 by and among the
Company, J&M Psycharis PTY Limited, Lampam PTY Limited,
Waide PTY Limited, Susan Clara Anne Blashki, Stuart
Cameron Hall, and Fifth Third Bank
27.1 Financial Data Schedule For the Three Months Ended
March 31, 2000
(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle
---------------------------
Date: May 15, 2000 Candace Kendle
Chairman of the Board and
Chief Executive Officer
By: /s/ Timothy M. Mooney
---------------------------
Date: May 15, 2000 Timothy M. Mooney
Executive Vice President -
Chief Financial Officer
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KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
2.18 Units Purchase Agreement dated April 7, 2000 by and
among the Company and the Shareholders of SYNERmedica
PTY Limited and SYNERmedica Unit Trust
2.19 Escrow Agreement dated April 7, 2000 by and among the
Company, J&M Psycharis PTY Limited, Lampam PTY Limited,
Waide PTY Limited, Susan Clara Anne Blashki, Stuart
Cameron Hall, and Fifth Third Bank
27.1 Financial Data Schedule For the Three Months Ended
March 31, 2000
19