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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, 2001
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: 12,260,876 shares of common
stock, no par value, as of April 30, 2001.
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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, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2001 and 2000 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
(UNAUDITED)
(in thousands, except share data) March 31, December 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 17,560 $ 6,709
Available for sale securities 11,447 17,851
Accounts receivable 40,450 40,817
Unreimbursed investigator and project costs 5,857 5,426
Other current assets 5,574 7,052
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Total current assets 80,888 77,855
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Property and equipment, net 15,796 15,103
Goodwill, net 85,482 73,077
Other assets 10,805 10,484
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Total assets $ 192,971 $ 176,519
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 726 $ 674
Amounts outstanding under credit facility 14,289 1,600
Trade payables 5,057 5,268
Advances against investigator and project costs 2,616 1,736
Advance billings 14,640 16,342
Other accrued liabilities 13,095 12,839
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Total current liabilities 50,423 38,459
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Obligations under capital leases, less current portion 873 472
Other noncurrent liabilities 5,428 4,718
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Total liabilities 56,724 43,649
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Commitments and contingencies
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 45,000,000 shares authorized; 12,174,246 and
11,763,307 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 75 75
Additional paid in capital 126,798 122,725
Retained earnings 13,378 13,116
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities 21 (117)
Foreign currency translation adjustment (4,025) (2,929)
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Total accumulated other comprehensive loss (4,004) (3,046)
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Total shareholders' equity 136,247 132,870
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Total liabilities and shareholders' equity $ 192,971 $ 176,519
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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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2001 2000
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Net revenues $ 32,253 $ 34,298
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Costs and expenses:
Direct costs 19,748 19,437
Selling, general and administrative
expenses 9,936 10,663
Depreciation and amortization 2,312 1,619
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31,996 31,719
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Income from operations 257 2,579
Other income (expense):
Interest income 241 243
Interest expense (118) (159)
Other 80 41
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Income before income taxes 460 2,704
Income tax expense 198 1,048
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Net income $ 262 $ 1,656
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Income per share data:
Basic:
Net income per share $ 0.02 $ 0.14
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Weighted average shares 12,008 11,622
Diluted:
Net income per share $ 0.02 $ 0.14
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Weighted average shares 12,519 12,090
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands) For the Three Months Ended
March 31,
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2001 2000
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Net income $ 262 $ 1,656
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Other comprehensive income:
Foreign currency translation adjustment (1,096) (794)
Net unrealized holding gains (losses) on
available for sale securities arising
during the period, net of tax 112 (16)
Reclassification adjustment for holding
losses included in net income, net of tax 26
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Net change in unrealized holding gains (losses)
on available for sale securities 138 (16)
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Comprehensive income (loss) $ (696) $ 846
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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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2001 2000
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Net cash provided by operating activities $ 4,685 $ 11,999
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Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 14,883 1,553
Purchases of available for sale securities (8,360) (1,646)
Acquisitions of property and equipment (1,164) (1,426)
Additions to software costs (930) (456)
Other investments (5) (25)
Acquisition of business, less cash acquired (10,697)
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Net cash used in investing activities (6,273) (2,000)
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Cash flows from financing activities:
Net proceeds (repayments) under credit facility 12,854 (8,700)
Amounts payable - book overdraft (46) (1,760)
Proceeds from exercise of stock options 65 18
Payments on capital lease obligations (206) (193)
Other (13)
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Net cash provided by (used in) financing activities 12,654 (10,635)
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Effects of exchange rates on cash and cash equivalents (215) (192)
Net increase (decrease) in cash and cash equivalents 10,851 (828)
Cash and cash equivalents:
Beginning of period 6,709 5,720
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End of period $ 17,560 $ 4,892
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of Businesses:
Fair value of assets acquired $ 16,429
Fair value of liabilities assumed (1,859)
Stock issued (3,873)
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Net cash payments $ 10,697
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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, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the
consolidated financial statements and notes thereto included in the Form
10-K for the year ended December 31, 2000 filed by Kendle International
Inc. ("the Company") with the Securities and Exchange Commission.
The condensed balance sheet at December 31, 2000 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, 2001 March 31, 2000
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Weighted average common shares
outstanding 12,008 11,622
Stock options 511 468
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Weighted average shares 12,519 12,090
Options to purchase approximately 434,000 and 520,000 shares of
Common Stock were outstanding during the three months ended March 31, 2001,
and 2000 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 in 2000 and 2001 are listed
below. The acquisitions have been accounted for using the purchase method
of accounting, with goodwill as a result of the transactions being
amortized over 30 years. The escrow accounts referred to have been
established at acquisition date to provide indemnification of sellers'
representations and warranties.
Valuation of Common Stock issued in the acquisitions was based on
the market price of the shares discounted for lock-up restrictions and lack
of registration of the shares. The results of operations are included in
the Company's results from the respective dates of acquisition.
In February 2001, the Company acquired AAC Consulting Group, Inc.,
a full service regulatory consulting firm with offices in Rockville,
Maryland. Total acquisition costs consisted of approximately $10.8 million
in cash and 374,665 shares of the Company's Common Stock. Of the total
shares, 124,888 shares were placed in an escrow account, 38,899 shares to
be released in August 2001 and the remainder to be released in February
2002.
In April 2000, the Company acquired SYNERmedica Pty Ltd., a
contract research organization with offices in Melbourne and Sydney,
Australia. Total acquisition costs consisted of approximately $2.2 million
in cash and 78,500 shares of the Company's Common Stock. The shares were
placed in an escrow account, 67% to be released in April 2001 and the
remainder in April 2002.
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of each year:
(in thousands) Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
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Net revenues $34,133 $37,256
Net income $389 $1,957
Net income per diluted share
$0.03 $0.16
Weighted average shares 12,760 12,493
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, 2000, nor are they necessarily indicative of
future operating results.
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4. EMPLOYEE SEVERANCE AND OTHER COSTS:
In order to bring its cost structure more in line with current revenue
projections, in the second quarter of 2000 the Company announced a plan to
eliminate approximately 125 full-time positions globally. Through March 31,
2001, the Company has eliminated approximately 110 of these positions. In
connection with the workforce reduction, the Company recorded a pre-tax
charge of approximately $3.0 million ($1.8 million net of tax) in the
second quarter of 2000, consisting primarily of severance, outplacement,
other employee benefit costs, and facility related charges. As of March 31,
2001, $1.4 million remains accrued and is reflected in Other Accrued
Liabilities in the Company's Balance Sheet. The amounts accrued as employee
severance and other costs are detailed as follows:
(in thousands) Employee
Severance and
Outplacement Facilities Other Total
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Amount accrued $1,270 $1,181 $529 $2,980
Amount paid 845 444 52 1,341
Non-cash charges 172 92 264
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Liability at March 31, 2001 $ 425 $ 565 $385 $1,375
5. SEGMENT INFORMATION:
The Company is 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,
including current Good Manufacturing Practice compliance and validation
services. The medical communications group, which includes only Health Care
Communications Inc. (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.
(in thousands) Contract
Research Medical
Services Communications Total
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Three Months Ended March 31, 2001
Net revenues $30,655 $1,598 $32,253
Net income 45 217 262
Three Months Ended March 31, 2000
Net revenues $32,902 $1,396 $34,298
Net income 1,268 388 1,656
March 31, 2001:
Identifiable assets $174,879 $18,092 $192,971
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6. DEBT:
In October 2000, the Company entered into two new Senior Credit
Facilities (the "Credit Facilities") totaling $40 million, that replaced
the previous credit facility. The Credit Facilities are composed of a $35
million revolving credit loan with an initial term of three years and a $5
million Multicurrency Facility with an initial term of one year which will
be used in connection with the Company's European operations. The $35
million facility bears interest at either LIBOR plus the Applicable
Percentage (as defined) or the higher of the Federal Funds Rate plus 0.5%
or the bank's prime rate. The $5 million facility bears interest at a rate
linked to LIBOR. The facilities contain various restrictive financial
covenants, including the maintenance of certain fixed coverage and leverage
ratios and minimum net worth levels. At March 31, 2001, $10.0 million was
outstanding under the Company's $35 million revolving credit loan and $4.3
million was outstanding under the $5 million Multicurrency Facility.
Interest is payable on the $10.0 million outstanding at an average rate of
6.0% and on the $4.3 million at a weighted average rate of 6.2%.
7. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133."
SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (January 1, 2001 for the
Company). SFAS No. 133 and 138 require 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, the adoption of SFAS No. 133 and 138 did 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 is derived from the Condensed
Consolidated Financial Statements included in this Form 10-Q for the quarter
ended March 31, 2001 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, and regulatory consultation, including current Good
Manufacturing Practice compliance and validation services, 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. The
contract typically requires a portion of the contract fee to be paid at the time
the contract is entered into and the balance is received in installments over
the contract's duration, in most cases on a milestone achievement basis. Net
revenues from contracts are generally recognized on the percentage of completion
method, measured principally by the total costs incurred as a percentage of
estimated total costs for each contract. The estimated total costs of contracts
are reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. 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 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 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.
The Company's results are subject to volatility due to such factors as
the commencement, completion, cancellation or delay of contracts; the progress
of ongoing projects; cost overruns; the Company's sales cycle; or the ability to
maintain large customer contracts or to enter into new contracts. In addition,
the Company's aggregate backlog is not necessarily a meaningful indicator of
future results. Accordingly, no assurance can be given that the Company will be
able to realize the net revenues included in the backlog.
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ACQUISITIONS
In February 2001, the Company acquired AAC Consulting Group, Inc., a
regulatory consulting firm based in Rockville, Maryland. Total acquisition costs
consisted of approximately $10.8 million in cash and 374,665 shares of the
Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Net revenues decreased to $32.3 million for the three months ended
March 31, 2001 from $34.3 million for the three months ended March 31, 2000. The
6% decrease in net revenues was composed of growth from acquisitions of 5%
offset by a decline in organic revenues of 11%. The decrease in organic revenues
is primarily attributable to the negative impact of foreign currency exchange
rates and the slowdown in the level of clinical development activities in the
first quarter of 2001 compared to the first quarter of 2000. Using the exchange
rates in effect in the first quarter of 2000, revenues in the first quarter of
2001 would have been $33.3 million, a 3% decline in net revenues. The level of
clinical development activity began to improve in the first quarter of 2001 as
evidenced by the 7% organic growth in revenues in the first quarter of 2001
compared to the fourth quarter of 2000. In the first quarter of 2001,
approximately 66% of the Company's net revenues were derived from North American
operations, 32% from European operations, and 2% from Asian-Pacific operations
compared to 65%, 35%, and 0% respectively in the first quarter of 2000. The top
five customers based on revenues accounted for approximately 44% of total first
quarter 2001 net revenues. Net revenues from Pfizer Inc. and Pharmacia Corp.
accounted for approximately 13% and 11%, respectively, of total first quarter
2001 net revenues.
Direct costs increased by $0.3 million, or 2%, from $19.4 million for
the three months ended March 31, 2000 to $19.7 million for the three months
ended March 31, 2001. The 2% increase in direct costs is composed of a 2%
decline in organic direct costs offset by a 4% increase in direct costs due to
the impact of acquisitions. Direct costs expressed as a percentage of net
revenues were 61.2% for the three months ended March 31, 2001 compared to 56.7%
for the three months ended March 31, 2000. The increase in these costs as a
percentage of net revenues is due to the varying levels of profitability within
the mix of contracts in the first quarter of 2001 compared to the first quarter
of 2000.
Selling, general and administrative expenses decreased by $0.8 million,
or 7%, from $10.7 million for the three months ended March 31, 2000 to $9.9
million for the three months ended March 31, 2001. The 7% decrease in selling,
general and administrative expenses is composed of a 10% decline in organic SG&A
costs offset by a 3% increase in SG&A costs due to the impact of acquisitions.
Organic SG&A costs decreased by $1.1 million, from $10.7 million for the three
months ended March 31, 2000 to $9.6 million for the three months ended March 31,
2001. The decrease is primarily due to cost savings realized from the workforce
reduction program that was implemented in the second quarter of 2000. Selling,
general and administrative expenses expressed as a percentage of net revenues
remained constant at 31% for the three months ended March 31, 2001 and 2000.
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Depreciation and amortization expense increased by $0.7 million, or
43%, from $1.6 million for the three months ended March 31, 2000 to $2.3 million
for the three months ended March 31, 2001. The increase is due to amortization
of goodwill as a result of the Company's acquisitions and increased depreciation
expense as a result of the Company's capital expenditures.
The Company's effective tax rate was 43.0% for the three months ended
March 31, 2001 as compared to 38.8% for the three months ended March 31, 2000.
The increase in the effective tax rate is primarily due to the larger impact of
non-deductible goodwill amortization on a lower pre-tax income amount in 2001
compared to 2000 and increased investment in taxable rather than tax-exempt
securities in 2001.
SEGMENT INFORMATION
Net revenues from the contract research services group were $30.7
million for the first quarter of 2001 compared to $32.9 million for the first
quarter of 2000. Net revenues from the medical communications group were $1.6
million for the first quarter of 2001 compared to $1.4 million for the first
quarter of 2000.
Net income from the contract research services group was approximately
$45,000 for the first quarter of 2001 compared to $1.3 million in the first
quarter of 2000. Net income from the medical communications group was
approximately $0.2 million for the first quarter of 2001 compared to $0.4
million for the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $10.9 million for the three
months ended March 31, 2001 primarily as a result of cash provided by operating
and financing activities of $4.7 million and $12.7 million, respectively offset
by cash used in investing activities of $6.3 million. Net cash provided by
operating activities primarily resulted from net income adjusted for non-cash
activity and a decrease in accounts receivable 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, 2001
consisted primarily of costs related to the Company's acquisition of $10.7
million and capital expenditures of $2.1 million offset by net proceeds from
sales and purchases of available for sale securities of $6.5 million.
Financing activities for the three months ended March 31, 2001
consisted primarily of net borrowings under the Company's credit facilities of
$12.9 million.
The Company had available for sale securities totaling $11.4 million at
March 31, 2001.
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The Company has two Senior Credit Facilities (the Credit Facilities). The
credit facilities are composed of a $35 million revolving credit loan with an
initial term of three years and a $5 million Multicurrency Facility with an
initial term of one year that will be used in connection with the Company's
European operations. The $35 million 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. The $5 million facility bears interest at a rate linked to LIBOR. The
facilities contain various restrictive financial covenants, including the
maintenance of certain fixed coverage and leverage ratios as well as minimum net
worth levels. At March 31, 2001, $10.0 million was outstanding under the
Company's $35 million revolving credit loan and $4.3 million was outstanding
under the $5 million Multicurrency Facility. Interest is payable on the $10.0
million outstanding at an average rate of 6.0% and on the $4.3 million at a
weighted average rate of 6.2%.
The Company's primary cash needs on both a short-term and long-term
basis are for the payment of salaries and fringe benefits, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its credit facilities, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and global presence. Any such
acquisitions may require additional external financing and the Company may from
time to time seek to obtain funds from public or private issuance of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
FOREIGN CURRENCY
The Company operates on a global basis and is therefore exposed to
various types of currency risks. Two specific transaction risks arise from the
nature of the contracts the Company executes with its customers since from time
to time contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. The first risk occurs as revenue recognized for services rendered
is denominated in a currency different from the currency in which the
subsidiary's expenses are incurred. As a result, the subsidiary's net revenues
and resultant net income can be affected by fluctuations in exchange rates.
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.
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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 ($4.0) million at March 31, 2001 compared to ($2.9) million at
December 31, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative and Certain Hedging Instruments - an Amendment of SFAS No. 133." SFAS
No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS No.
133 and SFAS No. 138 require 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, the adoption of
SFAS No. 133 and SFAS No. 138 did 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 that 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, ongoing business
strategies and possible future action that the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue
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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. No assurance can be given that the Company will be able to realize
the net revenues included in backlog and verbal awards. The Company believes
that its aggregate backlog and verbal awards are not necessarily meaningful
indicators of future results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
In February 2001, the Company acquired AAC Consulting Group, Inc., a
regulatory consulting firm based in Rockville, Maryland. Total acquisition costs
consisted of approximately $10.8 million in cash and 374,665 shares of the
Company's Common Stock.
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 -- None
(a) Exhibits
(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
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Date: May 15, 2001 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
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Date: May 15, 2001 Timothy M. Mooney
Executive Vice President - Chief
Financial Officer
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KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
EXHIBITS DESCRIPTION
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