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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For The Quarterly Period Ended June 30, 2001
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
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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
of incorporation or organization) Identification No.)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,346,610 shares of Common
Stock, no par value, as of July 31, 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 - June 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 2001 and 2000; Six Months
Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended June 30, 2001 and 2000; Six
Months Ended June 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data) June 30, December 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 14,368 $ 6,709
Available for sale securities 11,494 17,851
Accounts receivable 48,424 40,817
Unreimbursed investigator and project costs 5,283 5,426
Other current assets 5,505 7,052
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Total current assets 85,074 77,855
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Property and equipment, net 15,460 15,103
Goodwill, net 84,438 73,077
Other assets 11,007 10,484
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Total assets $ 195,979 $ 176,519
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 617 $ 674
Amounts outstanding under credit facilities 15,035 1,600
Trade payables 5,173 5,268
Advances against investigator and project costs 3,484 1,736
Advance billings 16,951 16,342
Other accrued liabilities 10,442 12,839
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Total current liabilities 51,702 38,459
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Obligations under capital leases, less current portion 881 472
Other noncurrent liabilities 5,635 4,718
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Total liabilities 58,218 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; 12,275,566 and
11,763,307 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively 75 75
Additional paid in capital 127,828 122,725
Retained earnings 14,256 13,116
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities 29 (117)
Foreign currency translation adjustment (4,427) (2,929)
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Total accumulated other comprehensive loss (4,398) (3,046)
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Total shareholders' equity 137,761 132,870
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Total liabilities and shareholders' equity $ 195,979 $ 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 OPERATIONS
(UNAUDITED)
(in thousands, except per share data) For the Three Months Ended For the Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
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Net revenues $ 38,661 $ 30,002 $ 70,914 $ 64,300
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Costs and expenses:
Direct costs 23,895 19,252 43,643 38,689
Selling, general and
administrative expenses 10,722 10,179 20,658 20,842
Depreciation and amortization 2,488 1,972 4,800 3,591
Employee severance and other costs -- 2,980 -- 2,980
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37,105 34,383 69,101 66,102
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Income (loss) from operations 1,556 (4,381) 1,813 (1,802)
Other income (expense):
Interest income 263 230 504 473
Interest expense (261) (138) (379) (297)
Other (42) 33 38 74
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Income (loss) before income taxes 1,516 (4,256) 1,976 (1,552)
Income tax expense (benefit) 638 (1,680) 836 (632)
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Net income (loss) $ 878 $ (2,576) $ 1,140 $ (920)
======== ======== ======== ========
Income (loss) per share data:
Basic:
Net income (loss) per share $ 0.07 $ (0.22) $ 0.09 $ (0.08)
======== ======== ======== ========
Weighted average shares 12,267 11,699 12,138 11,660
Diluted:
Net income (loss) per share $ 0.07 $ (0.22) $ 0.09 $ (0.08)
======== ======== ======== ========
Weighted average shares 12,855 11,699 12,682 11,660
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 For the Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
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Net income (loss) $ 878 $(2,576) $ 1,140 $ (920)
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Other comprehensive income:
Foreign currency translation adjustment (402) (140) (1,498) (934)
Net unrealized holding gains on
available for sale securities arising
during the period, net of tax 8 53 120 37
Reclassification adjustment for holding
losses included in net income, net of tax 26
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Net change in unrealized holding gains
on available for sale securities 8 53 146 37
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Comprehensive income (loss) $ 484 $(2,663) $ (212) $(1,817)
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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 Six Months Ended
June 30,
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2001 2000
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Net cash provided by operating activities $ 4,278 $ 11,638
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Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 23,472
Purchases of available for sale securities (16,949)
Acquisitions of property and equipment (2,017) (2,629)
Additions to software costs (1,636) (999)
Other investments (5) (697)
Acquisition of business, less cash acquired (10,789) (1,757)
Contingent purchase price paid in connection with prior acquisition (2,144) (2,680)
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Net cash used in investing activities (10,068) (8,762)
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Cash flows from financing activities:
Net proceeds (repayments) under credit facilities 13,606 (2,200)
Net proceeds (repayments) - book overdraft 380 (1,636)
Proceeds from exercise of stock options 235 18
Payments on capital lease obligations (450) (340)
Other (15)
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Net cash provided by (used in) financing activities 13,756 (4,158)
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Effects of exchange rates on cash and cash equivalents (307) (132)
Net increase (decrease) in cash and cash equivalents 7,659 (1,414)
Cash and cash equivalents:
Beginning of period 6,709 5,720
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End of period $ 14,368 $ 4,306
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Supplemental schedule of noncash investing and financing activities:
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Issuance of Common Stock in connection with contingent
purchase price relating to prior acquisition $ 796 $ 1,040
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Acquisition of Businesses:
Fair value of assets acquired $ 16,474 $ 3,117
Fair value of liabilities assumed (1,812) (618)
Stock issued (3,873) (742)
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Net cash payments $ 10,789 $ 1,757
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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 and six months ended June
30, 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
June 30, 2001 June 30, 2000
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Weighted average common shares
outstanding 12,267 11,699
Stock options 588 --
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Weighted average shares 12,855 11,699
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(in thousands) Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
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Weighted average common shares
outstanding 12,138 11,660
Stock options 544 --
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Weighted average shares 12,682 11,660
Options to purchase approximately 280,000 and 410,000 shares of
common stock were outstanding during the three and six months ended June
30, 2001 respectively, but were not included in the computation of earnings
per diluted share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would
be antidilutive.
Options to purchase approximately 1,300,000 shares of common stock
(approximately 400,000 shares of common stock equivalents) were outstanding
during the three and six months ended June 30, 2000 but were not included
in the computation of earnings per diluted share because 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 $10.9 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% of which were released in May 2001 and the
remainder to be released in April 2002.
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of 2000:
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(in thousands) Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
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Net revenues $ 72,794 $ 69,417
Net income (loss) $ 1,267 $ (479)
Net income (loss) per diluted share $ 0.10 $ (0.04)
Weighted average shares 12,802 12,077
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.
4. EMPLOYEE SEVERANCE AND OTHER COSTS:
In order to bring its cost structure more in line with revenue
projections, in the second quarter of 2000 the Company announced a plan to
eliminate approximately 125 full-time positions globally. Through June 30,
2001, the Company has eliminated approximately 120 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 June 30,
2001, $1.2 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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Liability at December 31, 2000 $443 $627 $404 $1,474
Payments/Write-Offs 47 141 75 263
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Liability at June 30, 2001 $396 $486 $329 $1,211
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.
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(in thousands) Contract
Research Medical
Services Communications Total
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Three Months Ended June 30, 2001
Net revenues $ 36,934 $ 1,727 $ 38,661
Net income 321 557 878
Three Months Ended June 30, 2000
Net revenues $ 28,696 $ 1,306 $ 30,002
Net income (loss) (2,926) 350 (2,576)
Six Months Ended June 30, 2001
Net revenues $ 67,589 $ 3,325 $ 70,914
Net income 366 774 1,140
Six Months Ended June 30, 2000
Net revenues $ 61,598 $ 2,702 $ 64,300
Net income (loss) (1,658) 738 (920)
June 30, 2001
Identifiable Assets $ 174,107 $21,872 $ 195,979
6. DEBT:
The Company has two Senior Credit Facilities (the Credit
Facilities). The Credit Facilities are composed of a $35 million revolving
credit loan and a $5 million Multicurrency Facility that is 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 is composed of a euro overdraft facility up to the equivalent of
$3 million and a Sterling overdraft facility up to the equivalent of $2
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). 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 June 30, 2001, $10.0 million was outstanding
under the Company's $35 million revolving credit loan and $5.0 million was
outstanding under the $5 million Multicurrency Facility. Interest is
payable on the $10.0 million outstanding at an average rate of 5.4% and on
the $5.0 million at a weighted average rate of 6.0%.
7. NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" that
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requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. The Company has adopted SFAS No.
141, and the adoption did not have an impact on the Company's results of
operations or its financial position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that all intangible assets determined to
have an indefinite useful life no longer be amortized, but instead be
reviewed at least annually for impairment. The Company will adopt SFAS No.
142 as of January 1, 2002, as required. The adoption of SFAS No. 142 is
expected to reduce goodwill amortization expense by approximately $3.2
million annually ($2.5 million on an after-tax basis), and result in
additional earnings per share of approximately $0.20. The Company has not
assessed the impact of any impairment under the new tests prescribed by the
standard.
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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 three and
six months ended June 30, 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. 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. 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. In certain contracts,
however, these costs are fixed by the contract terms. In these instances, the
Company recognizes these costs as direct costs with corresponding net revenues.
Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and indirect
costs including facilities, information systems and other costs. Selling,
general and administrative expenses consist of compensation and related fringe
benefits for sales and administrative associates and professional services, as
well as unallocated costs related to facilities, information systems and other
costs.
The 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 $10.9 million in cash and 374,665 shares of the
Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net revenues increased to $38.7 million for the three months ended June
30, 2001 from $30.0 million for the three months ended June 30, 2000. The 29%
increase in net revenues was composed of growth from acquisitions of 13% and
growth in organic revenues of 16%. The growth in organic revenues is primarily
attributable to the increased level of clinical development activity in the
second quarter of 2001. Revenue in the second quarter of 2001 was negatively
impacted by approximately $1.0 million due to the effect of foreign currency
fluctuations related to the strengthening of the US dollar. In the second
quarter of 2001, approximately 68% of the Company's net revenues were derived
from North American operations, 30% from European operations, and 2% from
Asian-Pacific operations, compared to 60%, 38%, and 2%, respectively, in the
second quarter of 2000. The top five customers based on revenues accounted for
approximately 46% of total second quarter 2001 net revenues. Net revenues from
Pfizer Inc. and GlaxoSmithKline plc accounted for approximately 12% and 10%,
respectively, of total second quarter 2001 net revenues.
Direct costs increased by $4.6 million, or 24%, from $19.3 million for
the three months ended June 30, 2000 to $23.9 million for the three months ended
June 30, 2001. The 24% increase in direct costs is composed of a 17% increase in
organic direct costs and a 7% increase in direct costs due to the impact of
acquisitions. The increase in organic direct costs is primarily a result of an
increase in project-related costs that are fixed by contract terms and have
therefore been recorded as direct costs. These amounts were also recorded as net
revenues, producing a zero profit margin. Direct costs expressed as a percentage
of net revenues were 61.8% for the three months ended June 30, 2001 compared to
64.2% for the three months ended June 30, 2000. The decrease in these costs as a
percentage of revenue in the second quarter of 2001 is due to a higher revenue
base in the second quarter of 2001 to absorb direct costs.
Selling, general and administrative expenses increased by $0.5 million,
or 5%, from $10.2 million for the three months ended June 30, 2000 to $10.7
million for the three months ended June 30, 2001. The 5% increase in selling,
general and administrative expenses is composed of a 1% decline in organic SG&A
costs offset by a 6% increase in SG&A costs due to the impact of acquisitions.
Selling, general and administrative expenses expressed as a percentage of net
revenues were 28% for the three months ended June 30, 2001 compared to 34% for
the corresponding 2000 period. The decrease in these costs, both in total
dollars and as a percentage of net revenues, is primarily due to cost savings
and efficiencies realized from the workforce reduction program that was
implemented in the second quarter of 2000.
Depreciation and amortization expense increased $0.5 million or 26%,
from $2.0 million for the three months ended June 30, 2000 to $2.5 million for
the three months ended June 30,
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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.
In the second quarter of 2000, the Company recorded a pre-tax charge of
approximately $3.0 million ($1.8 million net of tax) for employee severance and
other costs associated with the workforce reduction program. Inclusive of the
$1.8 million after tax charge relating to the workforce reduction program, the
net loss for the second quarter of 2000 was $2.6 million compared to net income
of $878,000 for the corresponding period of 2001. Excluding the effect of this
charge, the net loss would have been $800,000 for the second quarter of 2000.
The Company's effective tax rate was 42.1% for the three months ended
June 30, 2001 as compared to 39.5% for the three months ended June 30, 2000. The
increase in the effective tax rate is primarily due to the larger impact of
non-deductible goodwill amortization in 2001 and increased investment in taxable
rather than tax-exempt securities in 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net revenues increased to $70.9 million for the six months ended June
30, 2001 from $64.3 million for the six months ended June 30, 2000. The 10%
increase in net revenues was composed of organic growth of 3% and growth from
acquisitions of 7%. Revenue in the first six months of 2001 was negatively
impacted by approximately $2.1 million due to the effect of foreign currency
fluctuations related to the strengthening of the US dollar. Approximately 67% of
the Company's six months ended June 30, 2001 net revenues were derived from
North American operations, 31% from European operations, and 2% from
Asian-Pacific operations, compared to 63%, 36%, and 1%, respectively, in the
first six months of 2000. The top five customers based on revenues accounted for
approximately 44% of total six month 2001 net revenues. Net revenues from Pfizer
Inc. accounted for approximately 13% of total six month 2001 net revenues.
Direct costs increased by $4.9 million, or 13%, from $38.7 million for
the six months ended June 30, 2000 to $43.6 million for the six months ended
June 30, 2001. The 13% increase in direct costs is composed of a 7% increase in
organic direct costs and a 6% increase in direct costs due to the impact of
acquisitions. The increase in organic direct costs is primarily a result of an
increase in project-related costs that are fixed by contract terms and have
therefore been recorded as direct costs. These amounts were also recorded as net
revenues, producing a zero profit margin. Direct costs expressed as a percentage
of net revenues were 61.5% for the six months ended June 30, 2001 compared to
60.2% for the six months ended June 30, 2000.
Selling, general and administrative expenses decreased by $0.1 million,
or 1%, from $20.8 million for the six months ended June 30, 2000 to $20.7
million for the six months ended June 30, 2001. The 1% decrease in selling,
general and administrative expenses is composed of a 6% decline in organic SG&A
costs offset by a 5% increase in SG&A costs due to the impact of acquisitions.
Selling, general and administrative expenses expressed as a percentage of net
revenues decreased to 29% for the six months ended June 30, 2001 from 32% for
the six months ended June 30, 2000. The decrease in these costs, both in total
dollars and as a percentage of net revenues, is primarily due to cost savings
and efficiencies realized from the workforce reduction program that was
implemented in the second quarter of 2000.
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Depreciation and amortization expense increased $1.2 million, or 34%,
from $3.6 million for the six months ended June 30, 2000 to $4.8 million for the
six months ended June 30, 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.
Net income for the six months ended June 30, 2001 was $1.1 million
compared to a net loss for the six months ended June 30, 2000 of $920,000,
inclusive of the $1.8 million after tax charge relating to the workforce
reduction program. Excluding the effect of this charge, net income would have
been $900,000 for the six months of 2000.
The Company's effective tax rate was 42.3% for the six months ended
June 30, 2001 as compared to 40.7% for the six months ended June 30, 2000. The
increase in the effective tax rate is primarily due to the larger impact of
non-deductible goodwill amortization in 2001 and increased investment in taxable
rather than tax-exempt securities in 2001.
SEGMENT INFORMATION
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. Overhead costs are included in the
contract research services group and have not been allocated. Net revenues from
the contract research services group increased to $36.9 million for the second
quarter of 2001 from $28.7 million for the second quarter of 2000. Net revenues
from the medical communications group increased to $1.7 million for the second
quarter of 2001 compared to $1.3 million for the second quarter of 2000. Net
income from the contract research services group was $0.3 million for the second
quarter of 2001 compared to a net loss of $2.9 million for the second quarter of
2000. Net income from the medical communications group increased to $0.6 million
in the quarter ended June 30, 2001 compared to $0.4 million for the
corresponding period of 2000.
Net revenues from the contract research services group and medical
communications group were $67.6 million and $3.3 million, respectively, for the
six months ended June 30, 2001 compared to $61.6 million and $2.7 million,
respectively, for the six months ended June 30, 2000. Net income from the
contract research services group and the medical communications group was $0.4
million and $0.8 million, respectively, for the six months ended June 30, 2001
compared to a net loss of $1.7 million and net income of $0.7 million,
respectively, for the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $7.7 million for the six months
ended June 30, 2001 primarily as a result of cash provided by operating and
financing activities of $4.3 million and $13.8 million, respectively, offset
by cash used in investing activities of $10.1 million. Net cash provided by
operating activities primarily resulted from net income adjusted for non-cash
activity and an increase in advances of investigator and projects costs offset
by an increase in accounts receivable. 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.
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Investing activities for the six months ended June 30, 2001 consisted
primarily of costs related to the Company's acquisition of $10.8 million,
capital expenditures of approximately $3.7 million, and cash paid for contingent
purchase price 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 six months ended June 30, 2001 consisted
primarily of net borrowings under the Company's credit facilities of $13.6
million.
The Company had available for sale securities totaling $11.5 million at
June 30, 2001.
The Company has two Senior Credit Facilities (the Credit Facilities).
The Credit Facilities are composed of a $35 million revolving credit loan that
expires in October 2003 and a $5 million Multicurrency Facility that is
renewable annually 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 is composed of a euro overdraft facility up to
the equivalent of $3 million and a Sterling overdraft facility up to the
equivalent of $2 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). 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 June 30, 2001, $10.0 million was outstanding under the
Company's $35 million revolving credit loan and $5.0 million was outstanding
under the $5 million Multicurrency Facility. Interest is payable on the $10.0
million outstanding at an average rate of 5.4% and on the $5.0 million at a
weighted average rate of 6.0%.
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.
MARKET RISK
Interest Rates
The Company is exposed to changes in interest rates on its available
for sale securities and amounts outstanding under its Credit Facilities.
Available-for-sale securities are recorded at fair value in the financial
statements. These securities are exposed to market price risk, which also takes
into account interest rate risk. At June 30, 2001, the potential loss in fair
value resulting from a hypothetical decrease of 10% in quoted market price would
be approximately $1.1 million. The Company is also exposed to interest rate
changes on its variable rate borrowings. Based on the Company's June 30, 2001
amounts outstanding under Credit Facilities,
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a one percent change in the weighted average interest rate would change the
Company's annual interest expense by approximately $150,000.
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. 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 $(4.4) million at June 30, 2001 compared
to $(2.9) million at December 31, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" that requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. The Company has adopted SFAS
No. 141, and the adoption did not have an impact on the Company's results of
operations or its financial position.
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In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that all intangible assets determined to have
an indefinite useful life no longer be amortized, but instead be reviewed at
least annually for impairment. The Company will adopt SFAS No. 142 as of January
1, 2002, as required. The adoption of SFAS No. 142 is expected to reduce
goodwill amortization expense by approximately $3.2 million annually ($2.5
million on an after-tax basis), and result in additional earnings per share of
approximately $0.20. The Company has not assessed the impact of any impairment
under the new test prescribed by the standard.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue to attract and
retain qualified personnel, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint venture businesses to be integrated with the Company's
operations, the fixed price nature of contracts or the loss of large contracts,
cancellation or delay of contracts, the progress of ongoing projects, cost
overruns, the Company's sales cycle, the ability to maintain large customer
contracts or to enter into new contracts, the effects of exchange rate
fluctuations, and the other risk factors set forth in the Company's SEC filings,
copies of which are available upon request from the Company's investor relations
department. 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 April 2001 the Company paid $0.8 million in cash and issued 84,450
shares of the Company's Common Stock to the former Shareholders of HCC relating
to the earnout provisions contained in the HCC Asset Purchase Agreement.
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held May 17,
2001. At such meeting, the Shareholders of the Company elected the following as
Directors of the Company: Candace Kendle, Philip E. Beekman, Christopher C.
Bergen, Robert Buck, Timothy M. Mooney, and Charles A. Sanders. Shares were
voted as follows: Candace Kendle (FOR: 9,592,573 AGAINST: 668,450), Philip E.
Beekman (FOR: 10,106,383 AGAINST: 154,640), Christopher C. Bergen (FOR:
9,594,798 AGAINST: 666,225), Robert R. Buck (FOR: 10,106,138 AGAINST: 154,885),
Timothy M. Mooney (FOR: 9,594,748 AGAINST: 666,275), and Charles A. Sanders
(FOR: 10,106,583 AGAINST: 154,440).
In addition, the Shareholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the calendar year 2001. In connection with such ratification, 10,254,696 shares
were voted for ratification, 3,627 shares cast against, and 2,700 shares cast to
abstain.
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: August 14, 2001 Candace Kendle
Chairman of the Board and
Chief Executive Officer
By: /s/ Timothy M. Mooney
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Date: August 14, 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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