SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Year Ended December 31, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 000-23019
KENDLE INTERNATIONAL INC.
Ohio IRS Employer ID
(State or other jurisdiction No. 31-1274091
of incorporation or organization)
441 Vine Street, 1200 Carew Tower
Cincinnati, Ohio 45202
513-381-5550
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's Common Stock at June 30, 2004
held by non-affiliates was $71,501,140 (based on the closing price of the
Company's Common Stock on The Nasdaq National Market on June 30, 2004 of $7.61).
Shares of Common Stock held by each Executive Officer and Director and by any
person who owns 10% or more of the outstanding Common Stock have been excluded
in that such person might be deemed to be an affiliate.
As of February 28, 2005, 13,304,672 shares of no par value Common Stock were
issued and 13,284,775 shares of no par value Common Stock were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the Commission for
its 2005 Annual Meeting of Shareholders to be held May 5, 2005 are incorporated
by reference into Part III.
See Exhibit Index on page 20.
KENDLE INTERNATIONAL INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
-----
Part I
Item 1 - Business.................................................................................................. 3
Item 2 - Properties................................................................................................ 4
Item 3 - Legal Proceedings......................................................................................... 4
Item 4 - Submission of Matters to a Vote of Security Holders....................................................... 4
Part II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters........... ......................... 4
Item 6 - Selected Financial Data................................. ................................................. 5
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 6
Item 7A - Quantitative and Qualitative Disclosures about Market Risk............................................... 15
Item 8 - Financial Statements and Supplementary Data............................................................... 15
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 16
Item 9A - Controls and Procedures.................................................................................. 16
Item 9B - Other Information........................................................................................ 17
Part III
Item 10 - Directors and Executive Officers of the Registrant....................................................... 17
Item 11 - Executive Compensation............................... ................................................... 18
Item 12 - Security Ownership of Certain Beneficial Owners and Management........................................... 19
Item 13 - Certain Relationships and Related Transactions........................................................... 19
Item 14 - Principal Accounting Fees and Services................................................................... 19
Part IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 20
Signatures
2
PART I
ITEM 1.
BUSINESS
Kendle International Inc. (the "Company") , an Ohio corporation established in
1989, is a contract research organization (CRO) that provides a broad range of
Phase I through IV clinical research and drug development services to the
pharmaceutical and biotechnology industries. The Company augments the research
and development activities of pharmaceutical and biotechnology companies by
offering high quality, value added clinical research services and proprietary
information technology designed to reduce drug development time and expense. The
Company is managed in one reportable segment encompassing contract services
related to Phase I through IV clinical trials.
The Company believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as these companies strive to increase revenues through faster drug
development while also dealing with cost containment pressures. The CRO
industry, by specializing in clinical trial management, is often able to perform
the needed services with a higher level of expertise or specialization, more
quickly and at a lower cost than a customer could perform the services
internally.
The Company's strategy is to continue to enhance its reputation as a
high-quality provider of a full range of CRO services. The Company's strategy
consists of the following key elements: (i) continue to expand its broad range
of therapeutic expertise; (ii) offer its customers a full range of services that
encompass the clinical research process and complement the research and
development departments of its customers; (iii) expedite the drug development
process through a variety of innovative information technology platforms such as
the Company's proprietary TrialWare(R) software including TrialWeb(TM), its
clinical trial information web service; (iv) continue to build a brand presence
that portrays high-quality work; and (v) supplement internal growth through
strategic acquisitions that expand the Company's geographic presence and add to
the Company's clinical development capabilities in existing or new therapeutic
areas or service offerings.
In October 2003, the Company acquired Estadisticos y Clinicos Asociados, S.A.
(ECA). ECA is a Phase I-IV contract research organization located in Mexico
City, Mexico. The Company acquired substantially all the assets and assumed
certain liabilities of ECA for a purchase price of approximately $3.6 million in
cash, including acquisition costs.
Revenues from the top five customers accounted for approximately 39% of the
Company's total net service revenues for the year ended December 31, 2004. The
Company's net service revenues from Pfizer Inc. accounted for approximately 20%
of the Company's net service revenues for the year ended December 31, 2004. No
other customer accounted for more than 10% of the Company's net service revenues
for the year.
Segment and geographic information of the Company is contained in Note 16 to the
Consolidated Financial Statements.
Backlog
Backlog is based on signed contracts and letters of intent. Backlog at December
31, 2004 was approximately $149 million compared to approximately $119 million
at December 31, 2003. Total backlog plus verbally awarded business at December
31, 2004 was approximately $240 million compared to approximately $186 million
at December 31, 2003. No assurance can be given that the Company will be able to
realize the net service revenues that are included in the backlog and verbal
awards. Backlog and verbal awards are not necessarily meaningful indicators of
future results for a variety of reasons, including, but not limited to, the
following: (i) contracts vary in size and duration, with revenue from some
studies realized over a number of years; (ii) the scope of contracts may change,
either increasing or decreasing the value of the contract; and (iii) studies may
be terminated or delayed by the sponsor or by regulatory authorities.
Competition
The Company competes primarily against in-house research and development
departments of pharmaceutical and biotechnology companies, universities,
teaching hospitals and other full-service CROs, some of which possess
substantially greater capital, technical and other resources than the Company.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, the quality of services
provided, the ability to manage large-scale trials on a global basis, medical
database management capabilities, the ability to provide statistical and
regulatory services, the ability to recruit investigators, the ability to
recruit patients into studies, the ability to integrate information technology
with systems to improve the efficiency of contract research, an international
presence with strategically located facilities, financial viability and price.
3
The CRO industry is highly fragmented with several hundred CROs ranging from
small, limited-service providers to full-service, global drug development
corporations. Some of the full-service CROs competing with the Company include
Covance, Inc., PAREXEL International Corporation, Pharmaceutical Product
Development, Inc., ICON plc, Inveresk, and Quintiles Transnational Corporation.
Employees
As of February 28, 2005, the Company had approximately 1,765 employees. None of
the Company's employees are covered by a collective bargaining agreement.
Available Information
The Company maintains a website at the address www.kendle.com. The Company is
not including the information contained on its website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. The Company
makes available free of charge through its website its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission.
Required filings by the Company's officers and directors with respect to the
Company furnished in electronic form are also made available on our website as
are the Company's proxy statements for its meetings of shareholders. These
filings also my be read or copied at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 70549. The SEC also maintains an Internet
site (http://www.SEC.gov) that contains reports, proxy and other information
statements and other information regarding issuers that file electronically with
the SEC.
ITEM 2.
PROPERTIES
The Company leases all of its facilities with the exception of the Company-owned
facility in Ely, United Kingdom. The Company's principal executive offices are
located in Cincinnati, Ohio, where it leases approximately 111,000 square feet
under a lease expiring in 2009. The Company also maintains offices in various
other North American, European and Australian locations, as well as in Central
America and South Africa.
Management believes that such offices are sufficient to meet its present needs
and does not anticipate any difficulty in securing additional space, as needed,
on terms acceptable to the Company.
ITEM 3.
LEGAL PROCEEDINGS
The Company currently is not a party to any pending material litigation, nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2004.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the Company's Common Stock are listed on the Nasdaq Stock Market(R)
and are traded under the symbol "KNDL". The following table sets forth the high
and low prices for shares of the Company's Common Stock for the periods
indicated.
4
First Second Third Fourth
-------- -------- -------- --------
2004 Quarter
Ranges of stock price
High $ 10.39 $ 9.74 $ 7.75 $ 9.29
Low 6.15 7.00 5.29 5.00
2003 Quarter
Ranges of stock price
High 10.10 6.80 7.24 7.50
Low 3.05 3.35 4.43 5.25
The number of holders of record of Kendle International Inc. common stock was
183 as of February 28, 2005. This total excludes shares held under beneficial
ownership in nominee name or within clearinghouse positions of brokerage firms
or banks. The Company has not paid dividends on its Common Stock since its
initial public offering in August 1997. The Company does not currently intend to
pay dividends in the foreseeable future, but instead intends to reinvest
earnings in its business.
Securities Authorized Under Equity Compensation Plans:
The information required for Securities Authorized Under Equity Compensation
Plans can be found in Part III, Item 12, Security Ownership of Certain
Beneficial Owners and Management of this Annual Report on Form 10-K.
ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS (1) 2004 2003 2002 2001 2000
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Net service revenues $ 172,888 $ 156,221 $ 165,173 $ 154,302 $ 120,487
Reimbursable out-of-pocket revenues 42,980 53,436 48,841 40,197 35,651
---------- ---------- ---------- ---------- ----------
Total revenues 215,868 209,657 214,014 194,499 156,138
Costs and expenses:
Direct costs 96,909 91,133 98,438 93,729 74,077
Reimbursable out-of-pocket costs 42,980 53,436 48,841 40,197 35,651
Selling, general and administrative 59,797 52,402 48,646 44,047 39,249
Depreciation and amortization 9,175 9,057 8,347 9,988 7,930
Employee severance and office consolidation costs 302 1,468 408 (766) 2,980
Goodwill impairment -- -- 67,745 -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses 209,163 207,496 272,425 187,195 159,887
Income (loss) from operations 6,705 2,161 (58,411) 7,304 (3,749)
Interest income 400 334 534 903 988
Interest expense (776) (1,039) (1,219) (877) (643)
Other (873) (725) (61) 23 (292)
Investment impairment -- (405) (1,938) -- --
Gain on debt extinguishment 597 558 -- -- --
---------- ---------- ---------- ---------- ----------
Income(loss)before income taxes 6,053 884 (61,095) 7,353 (3,696)
Income taxes 2,481 2,574 (6,295) 3,147 (1,566)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 3,572 $ (1,690) $ (54,800) $ 4,206 $ (2,130)
INCOME (LOSS) PER SHARE DATA
Basic:
Net income (loss) per share $ 0.27 $ (0.13) $ (4.30) $ 0.34 $ (0.18)
Weighted average shares 13,166 12,973 12,734 12,251 11,708
Diluted:
Net income (loss) per share $ 0.27 $ (0.13) $ (4.30) $ 0.33 $ (0.18)
Weighted average shares 13,391 12,973 12,734 12,858 11,708
CONSOLIDATED BALANCE SHEET DATA 1
Working capital $ 40,714 $ 38,523 $ 41,451 $ 36,664 $ 39,396
5
Total assets 162,680 154,415 155,397 204,051 176,519
Total short and long-term debt 9,853 15,503 21,236 16,217 2,746
Total shareholders' equity 102,775 96,369 94,360 142,307 132,870
1 From 2000 to 2004, the Company made four acquisitions. See Note 13 to the
Consolidated Financial Statements.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information set forth and discussed below is derived from the Company's
Consolidated Financial Statements and the related notes thereto, which are
included herein, and should be read in conjunction therewith.
COMPANY OVERVIEW
Kendle International Inc. (the Company) is a global clinical research
organization (CRO) that delivers integrated clinical research services,
including clinical trial management, clinical data management, statistical
analysis, medical writing, regulatory consulting and organizational meeting
management and publications services on a contract basis to the pharmaceutical
and biotechnology industries. The Company has operations in North America, Latin
America, Europe, Asia, Africa and Australia. The Company is managed in one
reportable segment encompassing contract services related to Phase I through IV
clinical trials.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A contract
typically requires a portion of the contract fee to be paid at the time the
contract is entered into, and the balance is received in installments over the
contract's duration, in most cases on a milestone-achievement basis. Net service
revenues from contracts are generally recognized on the percentage of completion
method, measured principally by the total costs incurred as a percentage of
estimated total costs for each contract. The estimated total costs of contracts
are reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When estimates
indicate a loss, such loss is provided in the current period in its entirety.
The Company also performs work under time-and-materials contracts, recognizing
revenue as hours are worked based on the hourly billing rates for each contract.
Additionally, the Company recognizes revenue under units-based contracts as
units are completed multiplied by the contract per-unit price. Finally, at one
of the Company's subsidiaries, the contracts are of a short-term nature and
revenue is recognized under the completed contract method of accounting.
The Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators as well as other out-of-pocket costs. These
out-of-pocket costs are reimbursable by the Company's customers. The Company
includes amounts paid to investigators and other out-of-pocket costs as
reimbursable out-of-pocket revenues and reimbursable out-of-pocket expenses in
the Consolidated Statements of Operations. In certain contracts, these costs are
fixed by the contract terms, so the Company recognizes these costs as part of
net service revenues and direct costs.
Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and an allocation
of indirect costs including facilities, information systems and other costs.
Selling, general and administrative expenses consist of compensation and related
fringe benefits for sales and administrative associates and professional
services, as well as unallocated costs related to facilities, information
systems and other costs.
Depreciation and amortization expenses consist of depreciation and amortization
costs recorded on a straight-line method over the useful life of the property or
equipment and internally developed software. Intangible assets with indefinite
useful lives are reviewed at least annually for impairment. In 2002, the Company
recorded a goodwill impairment charge of $67.7 million. See Note 6 in Notes to
Consolidated Financial Statements for further detail on the 2002 goodwill
impairment charge.
The CRO industry in general continues to depend on the research and development
efforts of its principal biopharmaceutical customers, and the Company believes
this dependence will continue. The loss of business from any of the major
customers could have a material adverse effect on the Company.
The Company's results are subject to volatility due to a variety of factors. The
cancellation or delay of contracts and cost overruns could have short-term
adverse affects on the Consolidated Financial Statements. Fluctuations in the
Company's sales cycle and the
6
ability to maintain large customer contracts or to enter into new contracts
could hinder the Company's long-term growth. In addition, the Company's
aggregate backlog, consisting of signed contracts and letters of intent, is not
necessarily a meaningful indicator of future results. Accordingly, no assurance
can be given that the Company will be able to realize the net service revenues
included in the backlog.
ACQUISITIONS
On October 1, 2003, the Company completed its acquisition of Mexican CRO
Estadisticos y Clinicos Asociados, S.A. (ECA). ECA is a Phase I-IV contract
research organization located in Mexico City, Mexico. With the acquisition, the
Company expanded its capability to conduct clinical trials in Latin America. The
Company acquired substantially all the assets and assumed certain liabilities of
ECA for a purchase price of approximately $3.6 million in cash, including
acquisition costs.
In 2002, the Company acquired the assets of Clinical and Pharmacologic Research,
Inc. (CPR), located in Morgantown,West Virginia. Further information regarding
the Company's acquisitions is included in Note 13 to the Consolidated Financial
Statements.
The results of operations for these acquisitions are included in the Company's
Consolidated Statements of Operations from the date of acquisition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
Net service revenues increased 11% to $172.9 million for 2004 from $156.2
million in 2003. Excluding the impact of foreign currency exchange rates, net
service revenues increased 6% in 2004. The 11% increase in net service revenues
is composed of growth in organic revenues of 9% and growth of 2% due to the
Company's acquisition. Net service revenues in North America were at similar
levels in 2004 as compared to 2003, with the majority of the Company's resulting
growth coming from its European operations. Revenue from the Company's Phase I
unit in the Netherlands grew by approximately 13% due to increased customer
demand for Phase I services in 2004.
Approximately 41% of the Company's net service revenues in 2004 were derived
from its operations outside of North America as compared to 34% in 2003.
Revenues from the Company's top five customers accounted for approximately 39%
and 47% of net service revenues in 2004 and 2003, respectively. Net service
revenues from Pfizer Inc. (including the former Pharmacia Corp.) accounted for
approximately 20% of the total 2004 net service revenues as compared to 27% for
2003. The Company's net service revenues from Pfizer Inc. are derived from
numerous projects that vary in size, duration and therapeutic indication. No
other customer accounted for more than 10% of the Company's net service revenues
in either 2004 or 2003.
Reimbursable Out-of-Pocket Revenues
Reimbursable out-of-pocket revenues fluctuate from period to period due
primarily to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues decreased 19.6% to $43.0 million in 2004
from $53.4 million in 2003. The decrease is primarily due to a decrease in the
number of contracts in which the Company is paying investigators on behalf of
its customers.
Operating Expenses
Direct costs increased by 6% from $91.1 million in 2003 to $96.9 million in
2004. The 6% increase in direct costs is composed of a 5% increase in organic
direct costs and a 1% increase in direct costs due to the Company's acquisition.
Foreign currency exchange rate fluctuations accounted for the majority of the
increase in direct costs. Direct costs as a percentage of net service revenues
were 56.1% and 58.3% in 2004 and 2003, respectively. The improvement in gross
margin is attributable primarily to increased utilization of billable employees
as well as the overall mix of contracts.
Reimbursable out-of-pocket costs fluctuate from period to period due primarily
to the level of investigator activity in a particular period. Reimbursable
out-of-pocket costs decreased 19.6% to $43.0 million in 2004 from $53.4 million
in 2003. The decrease is primarily due to a decrease in the number of contracts
in which the Company is paying investigators on behalf of its customers.
Selling, general and administrative expenses increased by 14% to $59.8 million
in 2004 from $52.4 million in 2003. The 14% increase in SG&A costs is composed
of a 13% increase in organic SG&A costs and a 1% increase in SG&A costs due to
the Company's acquisition. Foreign currency exchange rate fluctuations accounted
for a 4% increase in selling, general and administrative expenses in 2004 as
compared to 2003. Primary reasons for the increase in SG&A costs included
increased accounting costs related to compliance
7
with the Sarbanes-Oxley Act of 2002, specifically compliance with Section 404;
increased costs relating to the Company's expansion into new geographies; and
increased SG&A costs in Europe to support the growth in the Company's European
business.
Depreciation and amortization increased by $0.1 million in 2004, or 1% over
2003.
In the first quarter of 2004, to align its resources to meet customer need and
demand projections, the Company implemented a workforce realignment plan, which
resulted in a pre-tax charge of approximately $254,000 for severance and
outplacement benefits. In the second quarter of 2004, the Company incurred an
additional $48,000 in costs related to this workforce realignment plan. This
workforce realignment plan affected approximately 3 percent of the Company's
North American workforce. All amounts related to this plan were paid in the
second quarter of 2004 and no amounts remain accrued at December 31, 2004. In
the first quarter of 2003, the Company recorded a charge of approximately
$680,000 for severance and outplacement benefits related to a workforce
reduction program which affected approximately 1 percent of its total workforce.
In the second quarter of 2003, the Company recorded an adjustment to reduce this
charge by approximately $106,000 as a result of lower-than-expected severance
costs related to the workforce reduction. In the third quarter of 2003, the
Company recorded a charge of approximately $897,000 for severance and
outplacement costs in connection with a workforce realignment plan implemented
in August. Approximately $15,000 remains accrued at December 31, 2004, related
to this plan.
Other Income
Total other income (expense) was expense of $0.7 million in 2004 compared to an
expense of approximately $1.3 million in 2003. In 2004 the Company recorded
foreign currency transaction losses of approximately $591,000 as a result of
fluctuations between the British Pound and the Euro and between the U.S. dollar
and either the Euro or the British Pound compared to foreign currency
transaction losses of approximately $449,000 in 2003. In 2004, the Company made
partial early repayments on its convertible note and recorded gains from these
repayments of approximately $597,000. In 2003, the Company recorded a similar
gain on partial early retirement of convertible debt of $558,000. In the second
quarter of 2003, the Company determined that its investment in KendleWits, its
50% owned joint-venture in the People's Republic of China was permanently
impaired and recorded a $405,000 non-cash charge to reduce the carrying value of
its investment to zero.
Income Taxes
The Company recorded a tax expense at an effective rate of 41% in 2004 compared
to tax expense at an effective rate in excess of 100% in 2003. The improvement
in the effective rate in 2004 is primarily due to the improvement in operating
results at the Company's European subsidiaries that have valuation allowances
against net operating loss carryforwards. Valuation allowances in 2003 against
these net operating loss carryforwards amounted to approximately $1.4 million.
Because Kendle operates on a global basis, the effective tax rate may vary from
year to year based on the locations that generate the pre-tax earnings.
Net Income
The net income for 2004, including the effects of the severance charge and gain
from debt extinguishment (of approximately $177,000 or $0.02 per share), was
approximately $3.6 million or $0.27 per basic and diluted share. Inclusive of
the severance and outplacement charges, the write-off of the KendleWits
investment and the gain on early partial extinguishment of debt (items with an
aggregate after-tax impact of approximately $1.1 million, or $0.08 per share),
the net loss for 2003 was $1.7 million or $0.13 per basic and diluted share.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Net service revenues decreased 5% to $156.2 million for 2003 from $165.2 million
in 2002. Excluding the impact of foreign currency exchange rates, net service
revenues decreased 10% in 2003. The 5% decrease in net service revenues consists
of a decline in organic revenues of 6% offset by growth due to the Company's
acquisitions of 1%. Net service revenues in North America declined by
approximately $18.1 million in 2003 compared to 2002. The decline in North
American net service revenues was partially offset by an increase in net service
revenues in both the European and Asia-Pacific regions, which increased by
approximately $7.5 million and $1.7 million, respectively. The decline in North
American net service revenues is due to an overall slowdown in new business in
the first half of 2003 and, in particular, a slowdown in new business from two
of the Company's largest customers, which completed a merger in 2003. In
addition, project delays and cancellations adversely impacted net service
revenues in the first half of 2003 compared to 2002. Finally, in 2003 net
service revenue recorded on contracts in which costs paid to investigators and
other out-of-pocket costs are fixed by the contract terms and recorded as direct
costs and net service revenues decreased by approximately $3.6 million.
8
Approximately 34% of the Company's net service revenues in 2003 were derived
from the Company's operations outside the United States as compared to 27% in
2002. Revenues from the top five customers accounted for approximately 47% and
46% of net service revenues in 2003 and 2002, respectively. Net service revenues
from Pfizer Inc. (including the former Pharmacia Corp.) accounted for
approximately 27% of the total 2003 net service revenues as compared to 29% for
Pfizer and Pharmacia combined in 2002. The Company's revenues from Pfizer Inc.
are derived from numerous projects that vary in size, duration and therapeutic
indication. No other customer accounted for more than 10% of the Company's net
service revenues in either 2003 or 2002.
Reimbursable Out-of-Pocket Revenues
Reimbursable out-of-pocket revenues fluctuate from period to period due
primarily to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues increased 9.4% to $53.4 million in 2003 from
$48.8 million in 2002.
Operating Expenses
Direct costs decreased by $7.3 million, or 7%, for 2003 as compared to 2002. The
7% decrease in direct costs is composed of an 8% decline in organic direct costs
offset by an 1% increase in direct costs due to the Company's acquisitions.
Foreign currency exchange rate fluctuations accounted for a 5% increase in
direct costs in 2003 as compared to 2002. The decrease in organic direct costs
is due to the reduced usage of outside contractors working on Company contracts
as well as the workforce realignment and other cost containment measures
implemented in 2003. In addition, in 2003, direct costs recorded on contracts in
which costs paid to investigators and other out-of-pocket costs are fixed by the
contract terms and recorded as direct costs and net service revenues decreased
by approximately $3.6 million. Direct costs as a percentage of net service
revenues were 58.3% and 59.6% in 2003 and 2002, respectively. The decline in
direct costs as a percentage of net service revenues is attributable primarily
to the mix of direct labor involved in contracts as well as the overall mix of
contracts in 2003 as compared to 2002. In addition, contributing to the decline
was a decrease in the number of contracts in which investigator and other
out-of-pocket costs were fixed by the contract terms and, accordingly, net
service revenue was recorded at little or no margin.
Reimbursable out-of-pocket costs fluctuate from period to period due primarily
to the level of investigator activity in a particular period. Reimbursable
out-of-pocket costs increased 9.4% to $53.4 million in 2003 from $48.8 million
in 2002.
Selling, general and administrative expenses increased by $3.8 million or 8%
from 2002 to 2003. The 8% increase in selling, general and administrative costs
is composed of a 6% increase in organic SG&A costs and a 2% increase in SG&A
costs due to the Company's acquisition. Foreign currency exchange rate
fluctuations in 2003 accounted for a 4% increase in selling, general and
administrative expenses as compared to 2002. The remainder of the increase in
organic SG&A costs is due primarily to broad-based employee incentive
compensation amounts accrued in 2003 that were not present in 2002. Selling,
general and administrative expenses expressed as a percentage of net revenues
were 33.5% for 2003 and 29.5% for 2002. The increase in these costs as a
percentage of net service revenues is due primarily to the increase in SG&A
expenses as discussed previously and a smaller net service revenue base.
Depreciation and amortization expense increased by $0.7 million or 9% in 2003 as
compared to 2002. The increase is due primarily to increased depreciation and
amortization relating to the Company's capital expenditures of $5.6 million
during 2003.
In the first quarter of 2003, to bring its cost structure more in line with the
then-current revenue projections, the Company recorded a charge of approximately
$680,000 for severance and outplacement benefits related to a workforce
reduction program which affected approximately 1 percent of its total workforce.
In the second quarter of 2003, the Company recorded an adjustment to reduce this
charge by approximately $106,000 as a result of lower - than-expected severance
costs related to the workforce reduction. In the third quarter of 2003, the
Company recorded a charge of approximately $897,000 for severance and
outplacement costs in connection with a workforce realignment plan implemented
in August. In the third quarter of 2002, the Company committed to a plan to
consolidate its three New Jersey offices into one central office, located in
Cranford, New Jersey. The Company previously had maintained separate offices in
Princeton, Cranford and Fort Lee, New Jersey. In connection with the office
consolidation, the Company recorded a pre-tax charge of $408,000 in 2002,
consisting primarily of facility lease costs and severance, employee retention
and outplacement costs.
In the fourth quarter of 2002, the Company recognized a goodwill impairment
charge of $67.7 million in accordance with SFAS No. 142. The impairment charge
is presented as a separate line item as a component of loss from operations in
the Company's Consolidated Statements of Operations. For more discussion on this
charge, see Note 6 in the Company's Notes to Consolidated Financial Statements.
Other Income
Total other income (expense) was expense of $1.3 million in 2003 compared to
expense of approximately $2.7 million in 2002. In the second quarter of 2003,
the Company determined that its investment in KendleWits, its 50% owned
joint-venture in China, was permanently impaired and recorded a $405,000
non-cash charge to reduce the carrying value of its investment to zero. Also in
the
9
second quarter of 2003, the Company made a partial early repayment on its $6
million convertible note and recorded a gain of approximately $558,000 from this
early partial debt extinguishment. In addition, in 2003, the Company recorded
foreign currency transaction losses of approximately $449,000 as a result of the
British pound and U.S. dollar weakening against the euro. In the second quarter
of 2002, the Company recorded a $1.9 million non-cash charge to write-off its
investment in Digineer, Inc., a healthcare consulting and software development
company that adopted a plan to cease operations during 2002. Foreign currency
transaction gains amounted to approximately $147,000 in 2002.
Income Taxes
The Company reported a tax expense at an effective rate in excess of 100% in
2003 as compared to a tax benefit at an effective rate of 10.3% for 2002. The
Company's effective tax rate in 2003 and 2002 was affected negatively by a
number of factors. In 2003, the Company continued to record valuation allowances
against net operating loss carryfowards in certain of its European subsidiaries.
Valuation allowances in 2003 against these net operating loss carryforwards
amounted to approximately $1.4 million. The write-off of the Digineer investment
in 2002 is a capital loss for income tax purposes and is deductible only to the
extent the Company generates capital gains in the future to offset this loss.
The Company recorded a valuation allowance against this deferred tax asset and
accordingly, no income tax benefit was recorded. In addition, a tax benefit was
recorded on only that portion of the goodwill impairment charge recorded in 2002
which will be deductible in future tax periods. In 2002, the valuation allowance
relating primarily to net operating loss carryforwards in certain European
subsidiaries of the Company amounted to approximately $3.5 million. Since Kendle
operates on a global basis, the effective tax rate may vary from year to year
based on the locations that generate the pre-tax earnings.
Net Income
Inclusive of the severance and outplacement charges, the write-off of the
KendleWits investment and the gain on early partial extinguishment of debt
(items with an aggregate after-tax impact of approximately $1.1 million, or
$0.08 per share), the net loss for 2003 was $1.7 million or $0.13 per basic and
diluted share. Inclusive of the goodwill impairment charge, the write-off of the
Digineer investment, office consolidation costs and the tax valuation allowance
discussed previously (items with an aggregate after-tax impact of approximately
$59.9 million, or $4.68 per share), the net loss for 2002 was $54.8 million or
$4.30 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
In 2004, cash and cash equivalents decreased by $4.1 million as a result of cash
provided by operating activities of $7.9 million offset by cash used in
investing activities of $6.8 million and cash used in financing activities of
$5.4 million. In addition, the Company has restricted cash of approximately
$971,000, which represents cash received from customers that is segregated in a
separate Company bank account and available for use only for specific
project-related expenses, primarily investigator fees, upon authorization from
the customer. Net cash provided by operating activities consisted primarily of
net income increased by non-cash adjustments (primarily depreciation and
amortization) offset by an increase in net 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. Accounts receivable, net of advance billings, increased from
$20.3 million at December 31, 2003 to $31.1 million at December 31, 2004.
Cash flows from investing activities for the year ended December 31, 2004
consisted primarily of capital expenditures of $5.3 million and net purchases of
available for sale securities of $1.5 million.
Cash flows from financing activities for the year ended December 31, 2004
consisted primarily of net payments under the Company's credit facilities of
$3.0 million, partial repayments of the Company's convertible debt of $1.9
million and payments of capital lease obligations of approximately $975,000.
In 2003, cash and cash equivalents increased by $9.1 million as a result of cash
provided by operating activities of $14.2 million offset by cash used in
investing activities of $0.7 million and cash used in financing activities of
$5.2 million. In addition, the Company has $1.8 million in restricted cash which
represents cash received from customers that is segregated in a separate Company
bank account and available for use only for specific project related expenses,
primarily investigator fees, upon authorization from the customer. Net cash
provided by operating activities consisted primarily of the net loss increased
by non-cash adjustments (primarily depreciation and amortization) and a decrease
in net 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. Accounts receivable, net of advance billings,
decreased from $24.7 million at December 31, 2002 to $20.3 million at December
31, 2003.
10
Cash flows from investing activities for the year ended December 31, 2003
consisted primarily of capital expenditures of $5.6 million and costs related to
the acquisition of ECA of $3.6 million (net of cash acquired), offset by net
proceeds from the sale of available for sale securities of $8.4 million.
Cash flows from financing activities for the year ended December 31, 2003
consisted primarily of net payments under the Company's credit facility of $3.0
million, a partial repayment of the Company's convertible debt of $1.4 million
and payments on capital lease obligations of approximately $850,000.
In 2002, cash and cash equivalents increased by $6.7 million as a result of cash
provided by operating activities of $27.0 million offset by cash used in
investing activities of $18.0 million and cash used in financing activities of
$2.8 million. There was no restriction on cash and cash equivalents in 2002. Net
cash provided by operating activities consisted primarily of the net loss
increased by non-cash adjustments (the goodwill impairment charge, loss on
Digineer investment and depreciation and amortization) and a decrease in net
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. Accounts receivable, net of advance billings,
decreased from $40.7 million at December 31, 2001 to $24.7 million at December
31, 2002.
Cash flows from investing activities for the year ended December 31, 2002
consisted primarily of capital expenditures of $9.0 million, costs related to
the acquisition of CPR of $7.9 million (net of cash acquired), and additional
purchase price of $2.7 million paid in relation to the Company's 1999
acquisition of Health Care Communications, Inc. offset by net proceeds from the
sale of available for sale securities of $1.7 million.
Cash flows from financing activities for the year ended December 31, 2002
consisted primarily of net payments under the Company's credit facility of $1.9
million and payments on capital lease obligations of approximately $800,000.
The Company had available for sale securities totaling $10.3 million and $8.9
million at December 31, 2004 and 2003, respectively.
Cash used for capital expenditures was $5.3 million, $5.6 million and $9.0
million in 2004, 2003 and 2002, respectively.
In June 2002, the Company entered into an Amended and Restated Credit Agreement
(the "Facility") that replaced the previous credit facility that would have
expired in October 2003. Certain provisions of this Facility have been
subsequently amended. The Facility is composed of a revolving credit loan that
expires in May of 2005 and a $15.0 million term loan that matures in March of
2007. The Facility is in addition to an existing $5.0 million Multicurrency
Facility that is renewable annually and is used in connection with the Company's
European operations. The revolving credit loan bears interest at a rate equal to
either (a) The Eurodollar Rate plus the Applicable Percentage (as defined) or
(b) the higher of the Federal Fund's Rate plus 0.5% or the Bank's Prime Rate.
The $15.0 million term loan bears interest at a rate equal to the higher of the
Federal Funds Rate plus 0.5% and the Prime Rate or an Adjusted Eurodollar Rate.
Under terms of the Facility, revolving loans are convertible into term loans
within the Facility if used for acquisitions. The Facility contains various
restrictive financial covenants, including the maintenance of certain
fixed-coverage and leverage ratios. The Company is in compliance with the
financial covenants contained in the Facility (as amended) as of December 31,
2004.
The $5.0 million Multicurrency Facility is composed of a Euro overdraft facility
up to the equivalent of $3.0 million and a pound sterling overdraft facility up
to the equivalent of $2.0 million. This Multicurrency Facility bears interest at
a rate equal to either (a) the rate published by the European Central Bank plus
a margin (as defined) or, (b) the Bank's Base Rate (as determined by the bank
having regard to prevailing market rates) plus a margin (as defined).
At December 31, 2004, no amounts were outstanding under the Company's revolving
credit loan, $6.8 million was outstanding under the term loan, and no amounts
were outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the term loan at a rate of 5.82%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
2007.
Effective July 1, 2002, the Company entered into an interest rate swap agreement
to fix the interest rate on the $15.0 million term loan. The swap is designated
as a cash flow hedge under the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under the swap agreement, the interest rate on the term loan is
fixed at 4.32% plus the applicable margin (currently 1.5%). The swap is in place
through the life of the term loan, ending on March 31, 2007. Changes in fair
value of the swap are recorded in Accumulated Other Comprehensive Loss on the
Consolidated Balance Sheet. At December 31, 2004, approximately $92,000 has been
recorded in Accumulated Other Comprehensive Loss to reflect a decrease in the
fair value of the swap compared to a decrease in the fair value of approximately
$350,000 at December 31, 2003.
With the acquisition of CPR, the Company entered into a $6.0 million convertible
note payable to the shareholders of CPR. The principal balance is convertible at
the holders' option into 314,243 shares of the Company's Common Stock at any
time through
11
January 29, 2005 (the Maturity Date). The note bears interest at an annual rate
of 3.80% from January 29, 2002 through the Maturity Date. Interest is payable
semi-annually.
In June of 2003, the Company and the shareholders of CPR entered into Note
Prepayment Agreements. Under the Note Prepayment Agreements, the Company agreed
to satisfy its payment obligations under the $6.0 million convertible note by
making a series of four payments between June 30, 2003 and January 10, 2005. The
four payments are to be initiated either by the Company through the exercise of
a "call" option or by the CPR shareholders through the exercise of a "put"
option. If the four put or call options are exercised, the Company would pay
$4.5 million to fully settle the $6.0 million note. Gains resulting from this
early extinguishment of debt will be recorded when paid as a gain in the
Company's Consolidated Statements of Operations. In the first quarter of 2004,
the CPR shareholders exercised their put option and the Company paid
approximately $750,000 to settle $1.0 million of the then remaining $4.0 million
of the convertible note that was outstanding at December 31, 2003. A gain of
$254,000 has been recorded in the first quarter of 2004 in the Company's
Consolidated Statements of Operations. Similarly, in the second quarter of 2004,
the CPR shareholders exercised their put option and the Company paid
approximately $1.2 million to settle $1.5 million of the remaining $3.0 million
of the convertible note that was outstanding at March 31, 2004. A gain of
$343,000 was recorded in the second quarter of 2004 in the Company's
Consolidated Statements of Operations. The balance which remains outstanding
under this convertible note at December 31, 2004 is $1.5 million. The final
repayment occurred in the first quarter of 2005.
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
the Facility and the Multicurrency Facility, will be sufficient to meet its
foreseeable cash needs. In the future, the Company will continue to consider the
acquisition of businesses to enhance its service offerings, therapeutic base and
global presence. Any such acquisitions may require additional external
financings and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities. There can be no
assurance that such financings will be available on terms acceptable to the
Company.
CONTRACTUAL OBLIGATIONS
Future minimum payments for all contractual obligations for years subsequent to
December 31, 2004 are as follows:
(in thousands) 2005 2006-2007 2008-2009 After 2009 Total
- -------------------------- ------------ ------------ ------------ ------------ ------------
Capital lease obligations,
including interest $ 784 $ 649 $ 264 $ -- $ 1,697
Operating leases 7,471 13,930 9,841 2,917 34,159
Purchase obligations 535 535 -- -- 1,070
Debt payments 3,000 3,750 -- -- 6,750
Convertible note 1,500 -- -- -- 1,500
Total $ 13,290 $ 18,864 $ 10,105 $ 2,917 $ 45,176
Short-term obligations arising in the ordinary course of business are excluded
from the above table.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States of America requires management to make
significant estimates and assumptions that affect the reported Consolidated
Financial Statements for a particular period. Actual results could differ from
those estimates.
Revenue Recognition
The majority of the Company's net service revenues are based on fixed-price
contracts calculated on a percentage-of-completion basis based upon assumptions
regarding the estimated total costs for each contract. Costs are incurred for
each project and compared to the estimated budgeted costs for each contract to
determine a percentage of completion on the project. The percentage of
completion is multiplied by the total contract value to determine the amount of
revenue recognized. Management reviews the budget on each contract to determine
if the budgeted amounts are correct, and budgets are adjusted as needed. As the
work progresses, original estimates might be changed due to changes in the scope
of the work. When estimates indicate a loss, such loss is provided in the
current period in its entirety. The Company attempts to negotiate contract
amendments with the sponsor to cover services provided outside the terms of the
original contract. However, there can be no guarantee that the sponsor will
agree to proposed amendments, and the Company ultimately bears the risk of cost
overruns.
12
Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed.
As the Company provides services on projects, the Company also incurs
third-party and other pass-through costs, which are typically reimbursable by
its customers pursuant to the contract. In certain contracts, however, these
costs are fixed by the contract terms. In these contracts, the Company is at
risk for costs incurred in excess of the amounts fixed by the contract terms. In
these instances, the Company recognizes these costs as direct costs with
corresponding net service revenues. Excess costs incurred above the contract
terms would affect negatively the Company's gross margin.
Accounts Receivable/Allowance for Doubtful Accounts
Billed accounts receivable represent amounts for which invoices have been sent
to customers. Unbilled accounts receivable are amounts recognized as revenue for
which invoices have not yet been sent to customers. Advance billings represent
amounts billed or payment received for which revenues have not yet been earned.
The Company maintains an allowance for doubtful accounts receivable based on
historical evidence of accounts receivable collections and specific
identification of accounts receivable that might pose collection problems. If
the Company is unable to collect all or part of its outstanding receivables,
there could be a material impact to the Company's Consolidated Results of
Operations or financial position.
Long-Lived Assets
The Company analyzes goodwill and other indefinite-lived intangible assets to
determine any potential impairment loss on an annual basis, unless conditions
exist that require an updated analysis on an interim basis. A fair value
approach is used to test goodwill for impairment. The goodwill impairment
testing involves the use of estimates related to the fair market value of the
reporting unit and is inherently subjective. An impairment charge is recognized
for the amount, if any, by which the carrying amount of goodwill exceeds fair
value. In 2002, the Company recorded a goodwill impairment charge of $67.7
million. At December 31, 2003 and December 31, 2004 the fair value of the
Company exceeded the carrying value, resulting in no goodwill impairment charge.
In addition, the Company has a $15 million indefinite lived intangible asset
representing one customer relationship acquired in the Company's acquisition of
CPR. The intangible asset is evaluated each reporting period to determine
whether events or circumstances continue to support an indefinite useful life.
Internally Developed Software
The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, and amortizes these costs over the useful life of the product, not to
exceed five years. Internally developed software represents software in the
application development stage, and there is no assurance that the software
development process will produce a final product for which the fair value
exceeds its carrying value. Internally developed software is an intangible asset
subject to impairment write-downs whenever events indicate that the carrying
value of the software may not be recoverable. As with other long-lived assets,
this asset is reviewed at least annually to determine the appropriateness of the
carrying value of the asset. Assessing the fair value of the internally
developed software requires estimates and judgment on the part of management.
Tax Valuation Allowance
The Company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. Because the Company conducts
business on a global basis, its effective tax rate has and will continue to
depend upon the geographic distribution of our pre-tax earnings (losses) among
jurisdictions with varying tax rates. These estimates include judgments about
deferred tax assets and liabilities resulting from temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. The Company has assessed the realization of
deferred tax assets and a valuation allowance has been established based on an
assessment that it is more likely than not that realization cannot be assured.
The ultimate realization of this tax benefit is dependent upon the generation of
sufficient operating income in the respective tax jurisdictions. If estimates
prove inaccurate or if the tax laws change unfavorably, significant revisions in
the valuation allowance may be required in the future.
ADDITIONAL CONSIDERATIONS
On July 15, 2002, two of the Company's major customers, Pharmacia Corp. and
Pfizer Inc., announced plans to merge in a stock-for-stock transaction. The
merger closed in the second quarter of 2003. Pharmacia and Pfizer combined
represent approximately 20% of the Company's net service revenues for the year
ended December 31, 2004 and approximately 16% of the Company's December 31,
2004, backlog. During the second quarter of 2003, the Company identified a
change, coinciding with the completion of the announced
13
merger, in the levels of business received from the combined Pfizer company.
Although the level of awards received from Pfizer increased during the second
half of 2003 and in 2004, the level of awards received has not reached
pre-merger levels. There is no assurance that the level of business received
will meet or exceed the business amounts the Company received from Pharmacia
Corp. and Pfizer Inc. in periods prior to the merger.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued State
of Financial Accounting Standards No. 123, "Share-Based Payment" (SFAS 123(R)).
SFAS 123(R) requires that compensation cost relating to share-based payment
transactions be recognized in the financial statements. The cost will be
measured based on the fair value of the equity or liability instruments issued.
SFAS 123(R) covers a range of share-based compensation arrangements, including
share options, restricted stock plans, performance-based awards, share
appreciation rights, and employee stock purchase plans. SFAS 123(R) replaces FAS
Statement 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Public entities will
be required to apply SFAS 123(R) as of the first interim or annual reporting
period that begins after June 15, 2005. The Company is in the process of
evaluating the impact SFAS 123(R) will have on its reported earnings.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The FSP provides
guidance under FAS No. 109, "Accounting for Income Taxes," with respect to
recording the potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax expense
and deferred tax liability. The Jobs Act, enacted on October 22, 2004, creates a
temporary incentive for U.S. corporations to repatriate undistributed income
earned abroad by providing an 85 percent dividends received deduction for
certain dividends from controlled foreign corporations. FSP No. 109-2 states
that companies are allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying FAS No. 109. The
Company has evaluated the effects of the repatriation provision and does not
plan to repatriate undistributed income earned abroad. Therefore, the provisions
of FSP 109-2 have no material effect on the Company's Consolidated Financial
Statements.
In November 2003, during discussions on EITF Issue 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments", the
EITF reached a consensus which requires quantitative and qualitative disclosures
for debt and marketable equity securities classified as available-for-sale or
held-to-maturity under Statements 115 and 224 that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The consensus on quantitative and qualitative disclosures is
effective for fiscal years ending after December 15, 2003 and comparative
information for earlier periods presented is not required. At the March 2004
EITF meeting, the Task Force reached a consensus on a three-step impairment
model. Except for disclosure requirements already in place, the Issue 03-01
consensus will be effective prospectively for all relevant current and future
investments in reporting periods beginning after June 15, 2004. The adoption of
this standard has no material effect on the Company's Consolidated Financial
Statements.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-K that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, changes in the financial conditions of the Company's customers,
potential mergers and acquisitions in the pharmaceutical industry, the Company's
ability to manage growth, 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
fixed price nature of contracts or the loss of large contracts, cancellation or
delay of contracts, the progress of ongoing projects, cost overruns,
fluctuations in the Company's sales cycle, the ability to maintain large
customer contracts or to enter into new contracts, the effects of exchange rate
fluctuations, the carrying value of and impairment of the Company's investments
and the other risk factors set forth in the Company's filings with the
Securities and Exchange Commission, copies of which are available upon request
from the Company's Investor Relations department. The Company's growth and
ability to
14
achieve operational and financial goals is dependent upon its ability to attract
and retain qualified personnel. If the Company fails to hire, retain and
integrate qualified personnel, it will be difficult for the Company to achieve
its financial and operational goals. No assurance can be given that the Company
will be able to realize the net service revenues included in backlog and verbal
awards. The Company believes that its aggregate backlog and verbal awards are
not necessarily meaningful indicators of future results.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
The Company operates on a global basis and is therefore exposed to various types
of currency risks. Two specific transaction risks arise from the nature of the
contracts the Company executes with its customers. From time to time contracts
are denominated in a currency different than the particular local currency. This
contract currency denomination issue is applicable only to a portion of the
contracts executed by the Company. The first risk occurs as revenue recognized
for services rendered is denominated in a currency different from the currency
in which the subsidiary's expenses are incurred. As a result, the subsidiary's
net service revenues and resultant net income can be affected by fluctuations in
exchange rates.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, the Company recognizes a receivable at the
time of invoicing at the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
until the payment from the customer is received will result in the Company
receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by the Company as a
foreign currency transaction gain or loss, as applicable, and is reported in
Other Income (Expense) in the Consolidated Statements of Operations.
The Company's Consolidated Financial Statements are denominated in U.S. dollars.
Accordingly, changes in exchange rates between the applicable foreign currency
and the U.S. dollar will affect the translation of each foreign subsidiary's
financial results into U.S. dollars for purposes of reporting Consolidated
Financial Statements. The Company's foreign subsidiaries translate their
financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account referred to as the foreign currency translation adjustment account. This
account exists only in the foreign subsidiaries' U.S. dollar balance sheet and
is necessary to keep the foreign subsidiaries' balance sheet stated in U.S.
dollars in balance. Foreign currency translation adjustments, reported as a
separate component of shareholders' equity in the Consolidated Balance Sheet,
were $2.7 million at December 31, 2004 compared to $1.2 million at December 31,
2003.
Interest Rates
The Company is exposed to changes in interest rates on its available for sale
securities and amounts outstanding under the Facility and Multicurrency
Facility. Available for sale securities are recorded at fair value in the
Consolidated Financial Statements. These securities are exposed to market price
risk, which also takes into account interest rate risk. At December 31, 2004,
the potential loss in fair value resulting from a hypothetical decrease of 10%
in quoted market price would be approximately $1.0 million.
In July 2002, the Company entered into an interest rate swap agreement with the
intent of managing the interest rate risk on its five-year term loan. Interest
rate swap agreements are contractual agreements between two parties for the
exchange of interest payment streams on a principal amount and an agreed-upon
fixed or floating rate, for a defined period of time. See discussion of debt in
the Liquidity and Capital Resources section of the Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
15
The Financial Statements and Supplementary Data called for by this Item are
incorporated herein from page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None to report.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls and Procedures
Based on the Company's most recent evaluation, which was completed as of the end
of the period covered by this Form 10-K, our Chairman (principal executive
officer) and Chief Financial Officer (principal financial and accounting
officer) believe the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. No change in the Company's internal control over financial reporting
occurred during the Company's last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Management's Report on Internal Control over Financial Reporting
The management of Kendle International Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. Kendle's system
of internal control was designed to provide reasonable assurance to the
company's management and board of directors regarding the preparation and fair
presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of the company's internal control over
financial reporting as of December 31, 2004. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control -- Integrated Framework. Based on
our assessment we believe that, as of December 31, 2004, the company's internal
control over financial reporting is effective based on those criteria.
Deloitte and Touche LLP, Kendle's independent auditors, have issued an audit
report on our assessment of the company's internal control over financial
reporting. This report appears below.
_________________ Chairman of the Board of March 16, 2005
Candace Kendle Directors, Chief Executive
Officer and Principal Executive
Officer
_________________ Senior Vice President, March 16, 2005
Karl Brenkert III Chief Financial Officer,
Treasurer and Principal Financial
and Accounting Officer
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kendle International Inc.
Cincinnati, Ohio
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that Kendle
International Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective
16
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Financial
Statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 16, 2005 expressed an unqualified opinion on those financial
statements.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 16, 2005
ITEM 9B OTHER INFORMATION
Nothing to report.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
The name, age and background information for each of the Company's Directors is
set forth in the section entitled "Information about Nominees" contained in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
17
AUDIT COMMITTEE
Information regarding the members of the audit committee and the audit committee
financial expert is set forth in the section entitled "Audit Committee" under
the heading "Committees of the Board of Directors" in the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission and is
incorporated herein by reference. Notwithstanding the foregoing, the "Report of
the Audit Committee", which is set forth in the section entitled "Audit
Committee", is not incorporated by reference in this Form 10-K.
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers of the Company at March 1, 2005 were as follows:
NAME AGE POSITION OFFICER SINCE
- --------------------- --- -------------------------------------- -------------
Candace Kendle 58 Chief Executive Officer and Chairman 1989
of the Board of Directors
Christopher C. Bergen 54 President, Chief Operating 1989
Officer and Director
Simon Higginbotham 43 Vice President and Chief 2004
Marketing Officer
Karl Brenkert III 57 Senior Vice President, Chief Financial 2002
Officer and Treasurer
Douglas W. Campbell 41 Vice President , Secretary 2004
and Chief Legal Officer
Background information regarding Dr. Kendle and Mr. Bergen is set forth in a
section entitled "Information about Nominees." Background information regarding
Mr. Higginbotham, Mr. Brenkert and Mr. Campbell is set forth in a section
entitled "Securities Ownership of Management." Both sections are contained in
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission, and the information in those sections is incorporated
herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information on compliance with Section 16(a) of the Exchange Act set forth in
the sections entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
is contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission and is incorporated herein by reference.
CODE OF ETHICS
The Company has adopted a Code of Ethics and Conduct, which applies to the
Company's employees, including its chief executive officer and its principal
financial and accounting officer. The Code of Ethics and Conduct is available on
the Company's Web site at www.kendle.com. Amendments to the Code of Ethics and
Conduct will be posted to the Company's Web site. In addition, the Company will
make available, free of charge, to any person, a copy of its Code of Ethics and
Conduct upon written request submitted to the Company. This written request
should be addressed to the Company's Secretary at the Company's principal
executive offices.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is set forth in the definitive proxy
statement to be filed with the Securities and Exchange Commission under the
heading "Election of Directors" and within the following sections under such
heading: "Executive Compensation" , "Stock Options", "Compensation of
Directors", "Protective Compensation and Benefits Agreement" and "Compensation
Committee Interlocks and Insider Participation." The information required by
this item also is set forth under the
18
section entitled "Management Development and Compensation Committee" in the
definitive proxy statement to be filed with the Securities and Exchange
Commission. The information set forth in each of the foregoing sections is
incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on the number of shares beneficially owned by each Director and by
all Directors and Executive Officers as a group is set forth in the section
entitled "Securities Ownership of Management" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission. The
information set forth in such section is incorporated herein by reference.
Information on the number of shares beneficially owned by any person who is
known to the Company to be the beneficial owner of more than five percent of the
Company's Common Stock is set forth in the section entitled "Principal
Shareholders" in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission. The information set forth in such section is
incorporated herein by reference.
The following table presents summary information at December 31, 2004 with
respect to all the Company's equity compensation plans.
Equity Compensation Plan Information
(a) (b) (c)
Number of securities remaining
Number of Securities to be Weighted-average exercise available for future issuance
issued upon exercise of price of outstanding options, under equity compensation plans
outstanding options, warrants warrants and rights (1) (excluding securities reflected
Plan Category and rights (1) in column (a))
- ----------------------------- ----------------------------- ----------------------------- -------------------------------
Equity compensation plans 2,000,373 $ 10.51 1,125,728
approved by security holders
--------- --------------- ---------
Equity compensation plans not -- -- --
--------- --------------- ---------
approved by security holders
Total 2,000,373 $ 10.51 1,125,728
--------- --------------- ---------
(1) Excludes the 2003 Directors' Compensation Plan under which no options,
warrants or rights are granted.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None to report.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is contained in the sections entitled "Audit
Committee's Pre-Approval Policies and Procedures" and "Fees Paid to Independent
Public Accountant" in the Company's Proxy Statement for its 2005 Annual Meeting
of Shareholders and is incorporated herein by reference.
19
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) - All financial statements and schedules required to be
filed by Item 8 of this Form 10-K and included in this report are
listed beginning on page F-1. No additional financial statements or
schedules are being filed as the required information is not
applicable or because the information is required and is included in
the respective financial statements or notes thereto.
(3) Exhibits - Exhibits set forth below that are on file with the
Securities and Exchange Commission are incorporated by reference as
exhibits hereto.
Exhibit
Number Description of Exhibit Filing Status
- ------ -------------------------------------------------------------------------- -------------
2.1 Stock Purchase Agreement dated July 1, 1997 by and among the Company and
Shareholders of U-Gene Research B.V. A
2.2 Escrow Agreement dated June 27, 1997 among the Company, Keating, Muething
& Klekamp, P.L.L., Bio-Medical Research Holdings, B.V., Utrechtse
Particatiemaatschappij B.V., P.J. Morrison, T.S. Schwarz, I.M. Hoepelman ,
Ph.K. Peterson, J. Remington, M. Rozenberg-Arska and L.G.W. Sterkman A
2.3 Share Purchase Agreement dated July 2, 1997 by and among the Company and
the Shareholders of GMI Gescellschaft fur Angewandte Mathematick und
Informatik mbH A
2.4 Stock Purchase Agreement dated February 11, 1998 by and among the Company
and the Shareholders of ACER/EXCEL Inc. B
2.5 Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan Lee,
Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee, as
Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee, Citicorp
Trust-South Dakota and The Fifth Third Bank C
2.6 Registration Rights Agreement dated February 11, 1998 among the Company
and Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean
C. Lee, as Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee,
Citicorp Trust-South Dakota C
2.7 Share Purchase Agreement dated December 23, 1998 by and among the Company
and the Shareholders of Research Consultants (International) Holdings
Limited D
2.8 Escrow Agreement dated January 5, 1999 among the Company, John Glasby,
Gillian Gregory, Michael Roy Broomby and Peter Nightingale D
2.9 Option Agreement dated September 9, 1998 by and between the Company and
Component Software International, Inc. D
2.10 Notice of Option Exercise dated January 11, 1999 of the Option Agreement
dated September 9, 1998 D
2.11 Multi-Year Strategic Services Agreement dated January 20,1999 by and
between the Company and Component Software International, Inc. D
2.12 Asset Purchase Agreement dated June 27, 1999 by and among the Company and
the Shareholders of Health Care Communications, Inc. F
2.13 Stock Purchase Agreement dated June 4, 1999 by and among the Company and
the Shareholders of ESCLI S.A. G
2.14 Asset Purchase Agreement dated July 13, 1999 by and among the Company and
the Shareholders of HCC Health Care Communications (1991), Ltd. G
2.15 Share Purchase Agreement dated August 31, 1999 by and among the Company
and the Shareholder of Specialist Monitoring Services Limited G
2.16 Escrow Agreement dated July 13, 1999 by and among the Company, Geoffrey H.
Kalish, M.D., Bradley D. Kalish, Jill Kalish, and The Fifth Third Bank, as
Escrow Agent I
2.17 Escrow Agreement dated August 31, 1999 by and among the Company, Paul
Martin, and The Fifth Third Bank, as Escrow Agent I
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 J
2.19 Stock Purchase Agreement dated February 27, 2001 by and among the Company
and the Shareholders of AAC Consulting Group, Inc. M
2.20 Form of Note Prepayment Agreement R
2(a) Asset Purchase Agreement dated January 29, 2002 among Kendle International
Inc., Clinical and
20
Pharmacologic Research, Inc., Thomas S. Clark, M.D., Charles T. Clark, and
E. Stuart Clark N
2(b) Convertible Subordinated Note, dated January 29, 2002 issued by Kendle
International Inc. to Clinical and Pharmacologic Research, Inc. N
3.1 Restated and Amended Articles of Incorporation A
3.2 Amended and Restated Code of Regulations A
3.3 Amendment of the Restated and Amended Articles of Incorporation to
Increase the Authorized Shares E
4 Specimen Common Stock Certificate A
4.1 Shareholder Rights Agreement dated August 13, 1999 between the Company and
The Fifth Third Bank, as Rights Agent H
10.1 Amended and Restated Shareholders' Agreement dated June 26, 1997 A
10.2 Master Lease Agreement dated November 27, 1996 by and between the Company
and Bank One Leasing Corporation, as amended on April 18, 1997 A
10.6 Master Equipment Lease dated August 16, 1996 by and between the Company
and The Fifth Third Leasing Company A
10.7 Lease Agreement dated December 9, 1991 by and between the Company and
Carew Realty, Inc., as amended on December 30, 1991, March 18, 1996,
October 8, 1996, January 29, 1997, and February 16, 1999 D
10.8 Indemnity Agreement dated June 21, 1996 by and between the Company and
Candace Kendle Bryan A
10.9 Indemnity Agreement dated June 21, 1996 by and between the Company and
Christopher C. Bergen A
10.10 Indemnity Agreement dated June 21, 1996 by and between the Company and
Timothy M. Mooney A
10.11 Indemnity Agreement dated May 14, 1997 by and between the Company and
Charles A. Sanders C
10.12 Indemnity Agreement dated May 14, 1997 by and between the Company and
Philip E. Beekman C
10.13 Indemnity Agreement dated December 10, 1998 by and between the Company and
Robert Buck D
10.14 Indemnity Agreement dated December 10, 1998 by and between the Company and
Mary Beth Price D
10.15 Form of Indemnity Agreement by and between the Company and each member of
the Company's Board of Directors, except for those Indemnity Agreements
noted above and filed previously. S
10.22 Credit Agreement dated as of October 13, 2000 among the Company, the
Several Lenders from Time to Time Party Hereto, and Bank One, NA, as Agent K
10.23 Amended and Restated Credit Agreement dated as of June 3, 2002 among
Kendle International Inc., The Several Lenders from Time to Time Party
Hereto and Bank One, NA as Agent O
10.24 Third Amendment to Amended and Restated Credit Agreement Q
10.25 Fourth Amendment to Amended and Restated Credit Agreement S
10.20 MANAGEMENT CONTRACTS AND COMPENSATION PLANS
(a) 1995 Stock Option and Stock Incentive Plan A
(b) 1995 Stock Option and Stock Incentive Plan -- Individual Stock
Option Agreement for Incentive Stock Option (contained in Exhibit
10.20(a)) A
(c) 1997 Stock Option and Stock Incentive Plan A
(c)(1) Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan P
(c)(2) Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan L
(c)(3) Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan P
(c)(4) Form of Restricted Stock Award Agreement T
(d) Form of Protective Compensation and Benefit Agreement A
(e) 1998 Employee Stock Purchase Plan D
(e)(1) Amendment No. 1 to 1998 Employee Stock Purchase Plan P
(e)(2) Amendment No. 2 to 1998 Employee Stock Purchase Plan P
(e)(3) Amendment No. 3 to 1998 Employee Stock Purchase Plan P
(n) 2003 Directors Compensation Plan R
14 Code of Ethics S
21 List of Subsidiaries T
23.1 Consent of PricewaterhouseCoopers LLP T
23.2 Consent of Deloitte & Touche LLP T
24 Powers of Attorney T
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) T
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) T
32.1 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002- Chief Executive Officer T
21
32.2 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer T
Filing
Status Description of Filing Status
A Incorporated by reference to the Company's Registration Statement No.
333-30581 filed under the Securities Act of 1933
B Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 13, 1997
C Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997
D Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998
E Incorporated by reference to the Company's Proxy Statement for its 1999
Annual Shareholders' Meeting
F Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999
G Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999
H Incorporated by reference to the Company's filing on Form 8-A dated
September 7, 1999
I Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999
J Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000
K Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000
L Incorporated by reference to the Company's Proxy Statement for its 2000
Annual Shareholders' Meeting
M Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000
N Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 29, 2002
O Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002
P Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002
Q Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003
R Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2003
S Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003
T Filed herewith
The Company will furnish, without charge, to a security holder upon request a
copy of the documents, portions of which are incorporated by reference (Annual
Report to Shareholders and Proxy Statement), and will furnish any other Exhibit
upon payment of reproduction charges.
(b) Exhibits required by this Form 10-K:
22
See (a)(3) above.
(c) Financial Statements and Schedules
See (a)(2) above.
Kendle International Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firms F-2
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002. F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003. F-4
Consolidated Statements of Shareholder's Equity for the years ended December 31, 2004, 2003 and 2002. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002. F-6
Notes to Consolidated Financial Statements. F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kendle International Inc.
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheets of Kendle
International Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2004 and 2003 Consolidated Financial Statements present
fairly, in all material respects, the financial position of the Company at
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 16, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 16, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Kendle International Inc:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) and (2), present fairly, in all material respects,
the results of operations and cash flows of Kendle International Inc. and its
subsidiaries (the "Company") for the year ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 6 of the Notes to Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Cincinnati, Ohio
February 11, 2003
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data) 2004 2003 2002
For the Years Ended December 31, ------------ ------------- ------------
Net service revenues $ 172,888 $ 156,221 $ 165,173
Reimbursable out-of-pocket revenues 42,980 53,436 48,841
------------ ------------- ------------
Total revenues 215,868 209,657 214,014
Cost and expenses:
Direct costs 96,909 91,133 98,438
Reimbursable out-of-pocket costs 42,980 53,436 48,841
Selling, general and administrative 59,797 52,402 48,646
Depreciation and amortization 9,175 9,057 8,347
Employee severance and office consolidation costs 302 1,468 408
Goodwill impairment - - 67,745
------------ ------------- ------------
Total costs and expenses 209,163 207,496 272,425
Income (loss) from operations 6,705 2,161 (58,411)
Other income (expense):
Interest income 400 334 534
Interest expense (776) (1,039) (1,219)
Other (873) (725) (61)
Investment impairment - (405) (1,938)
Gain on debt extinguishment 597 558 -
------------ ------------- ------------
Total other (expenses) (652) (1,277) (2,684)
Income (loss) before income taxes 6,053 884 (61,095)
Income taxes 2,481 2,574 (6,295)
------------ ------------- ------------
Net income (loss) $ 3,572 $ (1,690) $ (54,800)
============ ============= ============
Income (loss) per share data:
Basic:
Net income (loss) per share $ 0.27 $ (0.13) $ (4.30)
Weighted average shares 13,166 12,973 12,734
Diluted:
Net income (loss) per share $ 0.27 $ (0.13) $ (4.30)
Weighted average shares 13,391 12,973 12,734
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
December 31, 2004 2003
- -------------------------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,665 $ 21,750
Restricted cash 971 1,777
Available-for-sale-securities 10,271 8,881
Accounts receivable 56,025 41,573
Other current assets 10,243 9,947
------------- ------------
Total current assets 95,175 83,928
Property and equipment, net 16,821 17,607
Goodwill 26,003 25,404
Other finite-lived intangible assets 663 821
Other indefinite-lived intangible assets 15,000 15,000
Long-term deferred tax asset 2,621 3,706
Other assets 6,397 7,949
------------- ------------
Total assets $ 162,680 $ 154,415
============= ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of obligations under capital leases $ 740 $ 827
Current portion of amounts outstanding under credit facilities 3,000 3,000
Convertible note 1,500 -
Trade payables 9,169 5,601
Advance billings 24,924 21,243
Other accrued liabilities 15,128 14,734
------------- ------------
Total current liabilities 54,461 45,405
Obligations under capital leases, less current portion 863 926
Convertible note - 4,000
Long-term debt 3,750 6,750
Deferred income taxes payable 486 531
Other liabilities 345 434
------------- ------------
Total liabilities 59,905 58,046
Commitments and contingencies
Shareholders' equity:
Preferred stock--no par value; 100,000 shares authorized; none issued
and outstanding Common stock--no par value; 45,000,000 shares
authorized;
13,262,826 and 13,079,912 shares issued and 13,242,929 and 13,060,015
outstanding at December 31, 2004 and 2003, respectively 75 75
Additional paid-in capital 136,111 135,034
Accumulated deficit (35,596) (39,168)
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities (49) 1
Unrealized loss on interest rate swap (92) (350)
Foreign currency translation adjustment 2,719 1,170
------------- ------------
Total accumulated other comprehensive income 2,578 821
------------- ------------
Less: Cost of Common Stock held in treasury, 19,897
shares at December 31, 2004 and 2003 (393) (393)
------------- ------------
Total shareholders' equity 102,775 96,369
------------- ------------
Total liabilities and shareholders' equity $ 162,680 $ 154,415
============= ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
accumulated compre-
stock common additional deficit comprehensive total hensive
(in thousands except number of stock paid in treasury retained income shareholders' income
share data) shares amounts capital stock earnings (loss) equity (loss)
- -------------------------- ------- ---------- ----------- --------- ------------ ------------ ------------ ----------
BALANCE AT JANUARY 1, 2002 12,382,126 $ 75 $ 128,986 $ (350) 17,322 $ (3,726) $ 142,307
Net loss (54,800) (54,800) (54,800)
Other comprehensive income:
Foreign currency
translation adjustment 2,223 2,223 2,223
Net unrealized holding
losses on available-for-
sale securities, net of
tax (41) (41) (41)
Net unrealized holding
losses on interest rate
swap agreement (566) (566) (566)
---------- ------ --------- ------- ------ --------- --------- ---------
Comprehensive loss (53,184)
---------- ------ --------- ------- ------ --------- --------- ---------
Issuance of Common Stock for
acquisition 314,243 4,092 4,092
Shares issued under stock
plans 147,861 913 913
Income tax benefit from
exercise of stock options 275 275
Treasury stock transaction (2,617) (43) (43)
---------- ------ --------- ------- ------ --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 12,841,613 $ 75 $ 134,266 $ (393) (37,478) $ (2,110) $ 94,360
---------- ------ --------- ------- ------ --------- --------- ---------
Net loss (1,690) (1,690) (1,690)
Other comprehensive income:
Foreign currency
translation adjustment 2,708 2,708 2,708
Net unrealized holding
gains on available-for-
sale securities, net of
tax 7 7 7
Net unrealized holding
gains on interest rate
swap agreement 216 216 216
---------- ------ --------- ------- ------ --------- --------- ---------
Comprehensive income 1,241
---------- ------ --------- ------- ------ --------- --------- ---------
Shares issued under stock
plans 218,402 684 684
Income tax benefit from
exercise of stock options 84 84
---------- ------ --------- ------- ------ --------- --------- ---------
BALANCE AT DECEMBER 31, 2003 13,060,015 $ 75 $135,034 $ (393) (39,168) $ 821 $ 96,369
---------- ------ --------- ------- ------ --------- --------- ---------
Net income 3,572 3,572 3,572
Other comprehensive income:
Foreign currency
translation adjustment 1,549 1,549 1,549
Net unrealized holding
losses on available-for-
sale securities, net of
tax (50) (50) (50)
Net unrealized holding
gains on interest rate
swap agreement 258 258 258
---------- ------ --------- ------- ------ --------- --------- ---------
Comprehensive income 5,329
---------- ------ --------- ------- ------ --------- --------- ---------
Shares issued under stock
plans 182,914 985 985
Deferred compensation-
restricted stock (116) (116)
Income tax benefit from
exercise of stock options 208 208
---------- ------ --------- ------- ------ --------- --------- ---------
BALANCE AT DECEMBER 31, 2004 13,242,929 $ 75 $136,111 $ (393) (35,596) $ 2,578 $ 102,775
========== ====== ======== ======= ======== ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 2004 2003 2002
- -------------- -------- -------- --------
FOR THE YEARS ENDED DECEMBER 31,
Cash flows from operating activities
Net income (loss) $ 3,572 $ (1,690) $(54,800)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization 9,175 9,057 8,347
Goodwill and investment impairment - 405 69,684
Deferred income taxes 514 1,358 (10,870)
Other 589 513 584
Gain on convertible note repayment (597) (558) -
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable (10,727) 5,245 14,421
Other current assets (225) (1,469) (2,025)
Other assets (58) (271) (136)
Investigator and project costs 935 (202) 1,724
Trade payables 3,302 (1,072) (964)
Advance billings 786 (1,595) 455
Accrued liabilities and other 616 4,429 532
-------- -------- --------
Net cash provided by operating activities 7,882 14,150 26,952
Cash flows from investing activities
Purchase of available-for-sale securities (9,419) (47,741) (48,989)
Proceeds from sale and maturity of available-for-sale securities 7,889 56,149 50,643
Acquisitions of property and equipment (3,663) (3,801) (6,708)
Additions to internally developed software (1,651) (1,791) (2,268)
Acquisitions of businesses, less cash acquired - (3,584) (7,942)
Additional purchase price paid in connection with prior acquisition - - (2,704)
Other 17 33 -
-------- -------- --------
Net cash used in investing activities (6,827) (735) (17,968)
Cash flows from financing activities
Net repayments under credit facility (3,024) (3,000) (1,902)
Payment of convertible note (1,903) (1,442) -
Proceeds from issuance of Common Stock 141 192 383
Amounts payable - book overdraft 327 18 (401)
Payments on capital lease obligations (975) (851) (818)
Other - - 58
Debt issue costs - (71) (89)
-------- -------- --------
Net cash used in by financing activities (5,434) (5,154) (2,769)
Effects of exchange rates on cash and cash equivalents 294 818 440
Net increase (decrease) in cash and cash equivalents (4,085) 9,079 6,655
Cash and cash equivalents
Beginning of year 21,750 12,671 6,016
-------- -------- --------
End of year $ 17,665 $ 21,750 $ 12,671
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 805 $ 921 $ 1,130
Cash paid (received) during the year for income taxes $ (90) $ 1,227 $ 5,758
Supplemental schedule of noncash investing and financing activities
Acquisition of equipment under capital leases $ 938 $ 339 $ 1,107
Treasury stock acquired in escrow settlement $ - $ - $ (43)
Acquisitions of businesses:
Fair value of assets acquired $ - $ 3,806 $ 19,165
Fair value of liabilities assumed or incurred $ - $ (222) $ (1,131)
Stock issued $ - $ - $ (4,092)
Convertible debt issued $ - $ - $ (6,000)
-------- -------- --------
NET CASH PAYMENTS $ - $ 3,584 $ 7,942
======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Kendle International Inc. (the Company) is an international contract research
organization (CRO) providing integrated clinical research services, including
clinical trial management, clinical data management, statistical analysis,
medical writing, regulatory consultation and organizational meeting management
and publication services on a contract basis to the pharmaceutical and
biotechnology industries. The Company has operations in North America, Latin
America, Europe, Asia, Africa and Australia.
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The Consolidated Financial Statements include the financial information of
Kendle International Inc. and its wholly-owned subsidiaries. Investments in
unconsolidated companies that are at least 20% owned and in which the Company
can exercise significant influence but not control, are carried at cost plus
equity in undistributed earnings since acquisition. Investments in
unconsolidated companies, which are less than 20% owned and the Company cannot
exercise significant influence, are carried at cost. There are no significant
amounts on the Consolidated Balance Sheet related to investments in
unconsolidated companies.
All intercompany accounts and transactions have been eliminated. The results of
operations of the Company's wholly-owned subsidiaries have been included in the
Consolidated Financial Statements of the Company from the respective dates of
acquisition.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's wholly-owned subsidiaries are translated
into U.S. dollars at year-end exchange rates. Income statement accounts are
translated at average exchange rates for the year. These translation adjustments
are recorded as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in the Consolidated Statements of
Operations.
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH
Cash and cash equivalents consist of demand deposits and money market funds held
with a financial institution, with an initial maturity of three months or less.
The Company maintains its demand deposits with certain financial institutions.
The balance of one account from time-to-time exceeds the maximum U.S. federally
insured amount. Additionally, there is no state insurance coverage on bank
balances held in The Netherlands.
In 2004, the Company held cash of approximately $971,000 that is restricted as
to its use as compared to approximately $1.8 million in 2003. The restricted
cash represents cash received from customers that is segregated in a separate
Company bank account and available for use only for specific project related
expenses, primarily investigator fees, upon authorization from the customer.
AVAILABLE-FOR-SALE-SECURITIES
Investments purchased with initial maturities greater than three months are
classified as available-for-sale-securities and consist of highly liquid debt
securities. These securities are stated in the Consolidated Financial Statements
at market value. The Company's investments represent the investment of cash
available for current operations and are therefore classified as current assets
in the Consolidated Balance Sheets. Realized gains and losses are included in
the Consolidated Statements of Operations, calculated based on a specific
identification basis. Unrealized gains and losses, net of tax, are reported as a
separate component of shareholders' equity.
REVENUE RECOGNITION
Net service revenues are earned by performing services primarily under
fixed-price contracts. Net service revenues from contracts are generally
recognized on the percentage of completion method, measured principally by the
total costs incurred as a percentage of estimated total costs for each contract.
This method is used because management considers total costs incurred to be the
best available measure of progress on these contracts. The estimated total costs
of contracts are reviewed and revised periodically throughout the lives of the
contracts with adjustment to revenues resulting from such revisions being
recorded on a cumulative basis in the period in which the revisions are made.
Hence, the effect of the changes on future periods of contract performance is
recognized as if the revised estimates had been the original estimates. When
estimates indicate a loss, such loss is provided in the current period in its
entirety. Because of the uncertainties inherent in estimating costs, it is at
least reasonably possible that the estimates used will change in the near
F-7
term and could result in a material change. Work is also performed under
time-and-materials contracts, recognizing revenue as hours are worked based on
the hourly billing rate for each contract. Additionally, the Company recognizes
revenue under units-based contracts by multiplying units completed by the
applicable contract per-unit price. Finally, at one of the company's
subsidiaries, the contracts are of a short-term nature and revenue is recognized
under the completed contract method of accounting.
Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and an allocated
portion of indirect costs including facilities, information systems, and other
costs. Selling, general, and administrative costs are charged to expense as
incurred.
Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed. Advance billings represent amounts
billed in excess of revenue recognized.
CONCENTRATION OF CREDIT RISK
Accounts receivable represent amounts due from customers who are concentrated
mainly in the biopharmaceutical industry. The concentration of credit risk is
subject to the financial and industry conditions of the Company's customers.The
Company does not require collateral or other securities to support customer
receivables. The Company monitors the creditworthiness of its customers, and
credit losses have been immaterial and consistent with management's
expectations. Management considers the likelihood of material credit risk
exposure as remote. Refer to Note 16 for additional information regarding
revenue concentration.
LONG-LIVED ASSETS
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed over estimated useful lives of two to ten years using
the straight-line method. Repairs and maintenance are charged to expense as
incurred. Upon disposition, the asset and the related accumulated depreciation
are relieved and any gains or losses are reflected in the Consolidated
Statements of Operations.
Equipment under capital leases is recorded at the present value of future
minimum lease payments and is amortized over the estimated useful lives of the
assets, not to exceed the terms of the related leases. Accumulated amortization
on equipment under capital leases was $2.9 million and $3.0 million at December
31, 2004 and 2003, respectively.
The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, and amortizes these costs on a straight-line basis over the estimated
useful life of the product, not to exceed five years. Unamortized software costs
included in the consolidated balance sheets at December 31, 2004 and 2003 were
$16.1 million and $15.7 million, respectively. The related accumulated
amortization at December 31, 2004 and 2003 was $11.0 million and $8.8 million,
respectively.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets," long-lived assets
such as property, plant and equipment, software, and investments are reviewed
for impairment whenever facts and circumstances indicate that the carrying value
may not be recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the asset. The fair value is
determined based on estimates of future cash flows, market value of similar
assets, if available, or independent appraisals, if required. If the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows, an impairment loss is recognized for the difference between the carrying
amount and fair value of the asset.
DERIVATIVES
From time to time, the Company may use derivative instruments to manage exposure
to interest rates. Derivatives meeting the hedge criteria established by SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, are recorded in the Consolidated Balance Sheet at fair
value at each balance sheet date. When the derivative is entered into, the
Company designates whether or not the derivative instrument is an effective
hedge of an asset, liability or firm commitment and classifies the hedge as a
cash flow hedge or a fair value hedge. If the hedge is determined to be an
effective cash flow hedge, changes in the fair value of the derivative
instrument are recorded as a component of other comprehensive income (loss).
Changes in the value of fair value hedges are recorded in results of operations.
In July of 2002, the Company entered into an interest rate swap agreement to fix
the interest rate on its $15 million term loan. The swap is designated as a cash
flow hedge. At December 31, 2004, approximately $92,000 has been recorded in
Accumulated Other Comprehensive Income in the Consolidated Balance Sheets to
reflect a decrease in the fair market value of the swap compared to
approximately $350,000 at December 31, 2003.
INVESTIGATOR AND PROJECT COSTS
F-8
In addition to various contract costs previously described, the Company incurs
costs, in excess of contract amounts, which are reimbursable by its customers.
Emerging Issues Task Force (EITF) 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred", requires the
Company to include amounts paid to investigators and other out-of-pocket costs
as reimbursable out-of-pocket revenues and reimbursable out-of-pocket expenses
in the Consolidated Statements of Operations. In certain contracts, these costs
are fixed by the contract terms, so the Company recognizes these costs as part
of net service revenues and direct costs.
NET INCOME (LOSS) PER SHARE DATA
Net income (loss) per basic share is computed using the weighted average common
shares outstanding. Net income (loss) per diluted share is computed using the
weighted average common shares and potential common shares outstanding.
The weighted average shares used in computing net income (loss) per diluted
share have been calculated as follows:
(in thousands) 2004 2003 2002
-------------- ------------- -------------
Weighted average common shares outstanding 13,166 12,973 12,734
Stock options 225 - -
-------------- ------------- -------------
Weighted average shares 13,391 12,973 12,734
Options to purchase approximately 1.4 million shares of common stock were
outstanding during 2004 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.
Options to purchase approximately 2.1 million shares of common stock were
outstanding during 2003 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.
Options to purchase approximately 2.4 million shares of common stock were
outstanding during 2002 but were not included in the computation of earnings per
diluted share because the effect would be antidilutive.
INCOME TAXES
The Company records deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities and for tax benefit carryforwards using enacted tax rates in effect
in the year in which the differences are expected to reverse. Management
provides valuation allowance against deferred tax assets for amounts which are
not considered more likely than not to be realized.
STOCK OPTIONS
The Company accounts for stock options issued in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, the Company recognizes expense based on the
intrinsic value of the options. The Company has adopted disclosure requirements
of SFAS No. 123 "Accounting for Stock-Based Compensation,", as amended by SFAS
No.148, which requires compensation expense to be disclosed based on the fair
value of the options granted at the date of grant.
The weighted average fair value of the options granted in 2004, 2003, and 2002
was estimated as $4.34, $3.50 and $6.32, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
------------ ----------- -----------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 3.7% 3.0% 3.8%
Expected volatility 67.5% 69.8% 68.9%
Expected holding period 5.0 years 5.3 years 6.3 years
Had the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for expense recognition purposes, the amount of compensation expense that would
have been recognized in 2004, 2003 and 2002 would have been $3.9 million, $4.7
million and $5.0 million respectively. The Company's pro forma net income (loss)
and pro forma net income (loss) per basic and diluted share for 2004, 2003, and
2002 would have been reduced to the amounts below:
F-9
(in thousands, except per share data) 2004 2003 2002
-------------- -------------- ---------------
Pro forma net income (loss)
As reported $ 3,572 $ (1,690) $ (54,800)
Less: pro forma adjustment for stock-based compensation, net of tax (3,015) (3,487) (3,979)
-------------- -------------- ---------------
Pro forma net income (loss) 557 (5,177) (58,779)
============== ============== ===============
Pro forma net income (loss) per diluted share
As reported 0.27 (0.13) (4.30)
Pro forma 0.04 (0.40) (4.62)
-------------- -------------- ---------------
Effect of pro forma expense (0.23) (0.27) (0.32)
Pro forma net income (loss) per basic share
As reported 0.27 (0.13) (4.30)
Pro forma 0.04 (0.40) (4.62)
-------------- -------------- ---------------
Effect of pro forma expense (0.23) (0.27) (0.32)
USE OF ESTIMATES
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued State
of Financial Accounting Standards No. 123, "Share-Based Payment" (SFAS 123(R)).
SFAS 123(R) requires that compensation cost relating to share-based payment
transactions be recognized in the financial statements. The cost will be
measured based on the fair value of the equity or liability instruments issued.
SFAS 123(R) covers a range of share-based compensation arrangements, including
share options, restricted stock plans, performance-based awards, share
appreciation rights, and employee stock purchase plans. SFAS 123(R) replaces FAS
Statement 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Public entities will
be required to apply SFAS 123(R) as of the first interim or annual reporting
period that begins after June 15, 2005. The Company is in the process of
evaluating the impact SFAS 123(R) will have on its reported earnings.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The FSP provides
guidance under FAS No. 109, "Accounting for Income Taxes," with respect to
recording the potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax expense
and deferred tax liability. The Jobs Act, enacted on October 22, 2004, creates a
temporary incentive for U.S. corporations to repatriate undistributed income
earned abroad by providing an 85 percent dividends received deduction for
certain dividends from controlled foreign corporations. FSP No. 109-2 states
that companies are allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying FAS No. 109. The
Company has evaluated the effects of the repatriation provision and does not
plan to repatriate undistributed income earned abroad. Therefore, the provisions
of FSP 109-2 have no material effect on the Company's Consolidated Financial
Statements.
In November 2003, during discussions on EITF Issue 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments", the
EITF reached a consensus which requires quantitative and qualitative disclosures
for debt and marketable equity securities classified as available-for-sale or
held-to-maturity under Statements 115 and 224 that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The consensus on quantitative and qualitative disclosures is
effective for fiscal years ending after December 15, 2003 and comparative
information for earlier periods presented is not required. At the March 2004
EITF meeting, the Task Force reached a consensus on a three-step impairment
model. Except for disclosure requirements already in place, the Issue 03-01
consensus will be effective prospectively for all relevant current and future
investments in reporting periods beginning after June 15, 2004. The adoption of
this standard has no material effect on the Company's Consolidated Financial
Statements.
F-10
2. AVAILABLE FOR SALE SECURITIES:
The fair value of available-for-sale securities is estimated based on quoted
market prices. The Company views its available-for-sale portfolio as available
for use in current operations. Accordingly, the Company has classified all
investments as short-term, even though the stated maturity date may be one year
or more beyond the current balance sheet date. The following is a summary as of
December 31, 2004 of available-for-sale securities by contractual maturity where
applicable (in thousands):
AMORTIZED UNREALIZED FAIR
COST GAIN / (LOSS) VALUE
-------------- -------------- ---------------
AVAILABLE-FOR-SALE SECURITIES:
Corporate-backed securities:
Maturing in one year or less $ 2,477 $ (9) $ 2,468
Maturing after 1 year through 5 years 4,978 (40) 4,938
Maturing after 10 years 445 - 445
Government-backed securities:
Maturing in one year or less - - -
Maturing after 1 year through 5 years 690 - 690
Maturing after 10 years 1,730 - 1,730
-------------- -------------- ---------------
12/31/04 Totals $ 10,320 $ (49) $ 10,271
============== ============== ===============
The following is a summary as of December 31, 2003 of available-for-sale
securities by contractual maturity where applicable (in thousands):
AMORTIZED UNREALIZED FAIR
COST GAIN / (LOSS) VALUE
-------------- -------------- ---------------
AVAILABLE-FOR-SALE SECURITIES:
Corporate-backed securities:
Maturing in one year or less $ - $ - $ -
Maturing after 1 year through 5 years 50 - 50
Maturing after 5 years through 10 years 749 - 749
Maturing after 10 years 7,325 - 7,325
Government-backed securities:
Maturing in one year or less - - -
Maturing after 1 year through 5 years 366 1 367
Maturing after 10 years 390 - 390
-------------- -------------- ---------------
12/31/03 Totals $ 8,880 $ 1 $ 8,881
============== ============== ===============
Proceeds from the sales or maturities of investments in securities were $7.9
million, $56.1 million and $50.6 million in 2004, 2003 and 2002, respectively.
There were no gross losses realized on these sales for the years ended December
31, 2004, 2003 and 2002.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, available-for-sale securities, amounts outstanding under
credit facility, and notes payable, approximate their fair value.
4. ACCOUNTS RECEIVABLE:
Accounts receivable are billed when certain milestones defined in customer
contracts are achieved. All unbilled accounts receivable are expected to be
collected within one year.
(in thousands)
December 31, 2004 2003
------------- ------------
Billed $ 34,508 $ 23,813
Unbilled 21,517 17,760
------------- ------------
$ 56,025 $ 41,573
============= ============
F-11
The Company maintains an allowance for doubtful accounts receivable based on
historical evidence of accounts receivable collections and specific
identification of accounts receivable that might cause collection problems. The
balance in allowance for doubtful accounts receivable was as follows:
Balance at 12/31/01 $ 377
Invoice write-offs (82)
Acquired via acquisition 149
-----
Balance at 12/31/02 $ 444
Invoice write-offs (8)
Additional expense 97
-----
Balance at 12/31/03 $ 533
Invoice write-offs (436)
Additional expense 149
-----
Balance at 12/31/04 $ 246
5. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows:
(in thousands)
DECEMBER 31, 2004 2003
------------- -------------
Furnishings, equipment and other $ 45,225 $ 40,931
Equipment under capital leases 4,453 4,612
Less: accumulated depreciation and amortization (32,857) (27,936)
------------- -------------
Property and equipment, net $ 16,821 $ 17,607
============= =============
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$5.3 million, $5.4 million and $5.1 million, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No.142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002 the Company discontinued the amortization of goodwill
and other identifiable intangible assets that have indefinite useful lives.
Intangible assets that have finite useful lives will continue to be amortized
over their useful lives.
In accordance with SFAS No. 142, goodwill is evaluated on an annual basis for
impairment at the reporting unit level. Such evaluation is based on a two-step
test starting with a comparison of the carrying amount of the reporting unit to
the fair value of the reporting unit. If the carrying amount of the reporting
unit exceeds the fair value, the second phase of the test measures the
impairment.
The Company has identified the reporting unit as the Company as a whole. The
Company analyzed goodwill for impairment by comparing the carrying amount of the
Company to the fair value of the Company. The fair value of the Company was
calculated based on the Income Approach, which uses discounted cash flows, as
well as public information regarding the market capitalization of the Company.
The Company completed the testing in the fourth quarter of 2004. The fair value
of the Company exceeded the carrying value, resulting in no goodwill impairment
for 2004. Similarly, the analysis in the fourth quarter of 2003 resulted in no
goodwill impairment.
In the fourth quarter of 2002, the Company determined that goodwill was impaired
and recognized an impairment loss of $67.7 million in the fourth quarter of
2002. The impairment charge is presented as a separate line item as a component
of loss from operations in the Company's Consolidated Statements of Operations.
Non-amortizable intangible assets at December 31, 2004 and December 31, 2003 are
composed of:
F-12
Indefinite-lived
(in thousands) Goodwill intangible
- -------------- --------- ----------------
Balance at 12/31/02 $ 22,033 $ 15,000
Additional amount acquired 1,932 -
Foreign currency fluctuations 1,828 -
Tax benefit to reduce goodwill (389) -
--------- ----------------
Balance at 12/31/03 $ 25,404 $ 15,000
Additional amount acquired - -
Purchase accounting adjustment (13) -
Foreign currency fluctuations 1,001 -
Tax benefit to reduce goodwill (389) -
--------- ----------------
Balance at 12/31/04 $ 26,003 $ 15,000
The Company acquired $1.9 million of goodwill in 2003 resulting from the
acquisition of Estadisticos y Clinicos Asociados, S.A. (ECA). The goodwill
acquired is deductible for income tax purposes. Approximately $1.6 million of
the goodwill is immediately deductible with the remainder deductible over a 15
year period.
The Company acquired $2.9 million of goodwill in 2002 resulting from the
acquisition of Clinical and Pharmacologic Research, Inc. (CPR). The goodwill and
the intangible asset acquired in the acquisition are deductible for income tax
purposes over a 15-year period.
The $15 million intangible asset represents one customer relationship acquired
in the Company's acquisition of CPR, the fair value of which was determined by
management based on a third party valuation. The nature of this identifiable
intangible asset was reviewed at the end of 2002, 2003 and 2004 and the
determination was made that the original indefinite life remains appropriate.
The contract was determined to have an indefinite useful life based on a number
of factors, including the unique nature of the services provided by CPR, high
barriers to entry to a competitor, and the long-term historical relationship
between CPR and its sole customer without material modifications to the terms of
the arrangement and without substantial cost of renewal. The intangible asset
will continue to be evaluated each reporting period to determine whether events
or circumstances continue to support an indefinite useful life.
Amortizable intangible assets at December 31, 2004 and December 31, 2003 are
composed of:
Customer Non-Compete Internally-Developed
(in thousands) Relationships Agreements Software
- -------------- ------------- ----------- --------------------
Balance at 12/31/02 $ - $ - $ 7,967
Additional amount acquired 400 460 1,791
Dispositions - - -
2003 amortization (11) (28) (2,790)
------------- ----------- --------------------
Balance at 12/31/03 $ 389 $ 432 $ 6,968
Additional amount acquired - - 1,651
Dispositions - - (586)
2004 amortization (43) (115) (2,936)
------------- ----------- --------------------
Balance at 12/31/04 $ 346 $ 317 $ 5,097
============= =========== ====================
Amortization expense for the next five years relating to these amortizable
intangible assets is estimated to be as follows:
(in thousands)
2005 $ 2,254
2006 $ 1,430
2007 $ 987
2008 $ 433
2009 $ 165
For further detail regarding the amortizable assets acquired during 2003, see
Note 13, Acquisitions.
7. OTHER ACCRUED LIABILITIES:
Other accrued liabilities at December 31, 2004 and 2003 consisted of the
following:
F-13
2004 2003
(in thousands) ------- -------
DECEMBER 31,
Accrued compensation and related payroll withholdings and taxes $ 6,592 $ 7,966
Amounts payable - book overdraft 453 114
Other 8,083 6,654
------- -------
$15,128 $14,734
======= =======
8. DEBT:
In June 2002, the Company entered into an Amended and Restated Credit Agreement
(the "Facility") that replaced the previous credit facility that would have
expired in October 2003. Certain provisions of this Facility have been
subsequently amended. The Facility is composed of a revolving credit loan that
expires in May of 2005 and a $15.0 million term loan that matures in March of
2007. The Facility is in addition to an existing $5.0 million Multicurrency
Facility that is renewable annually and is used in connection with the Company's
European operations. The revolving credit loan bears interest at a rate equal to
either (a) The Eurodollar Rate plus the Applicable Percentage (as defined) or
(b) the higher of the Federal Fund's Rate plus 0.5% or the Bank's Prime Rate.
The $15.0 million term loan bears interest at a rate equal to the higher of the
Federal Funds Rate plus 0.5% and the Prime Rate or an Adjusted Eurodollar Rate.
Under terms of the Facility, revolving loans are convertible into term loans
within the Facility if used for acquisitions. The Facility contains various
restrictive financial covenants, including the maintenance of certain fixed
coverage and leverage ratios. The Company is in compliance with the financial
covenants contained in the Facility (as amended) as of December 31, 2004.
The $5.0 million Multicurrency Facility is composed of a euro overdraft facility
up to the equivalent of $3.0 million and a pound sterling overdraft facility up
to the equivalent of $2.0 million. This Multicurrency Facility bears interest at
a rate equal to either (a) the rate published by the European Central Bank plus
a margin (as defined) or (b) the Bank's Base Rate (as determined by the bank
having regard to prevailing market rates) plus a margin (as defined).
At December 31, 2004, no amounts were outstanding under the Company's revolving
credit loan, $6.8 million was outstanding under the term loan, and no amounts
were outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the term loan at a rate of 5.82%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
2007.
Effective July 1, 2002, the Company entered into an interest rate swap agreement
to fix the interest rate on the $15.0 million term loan. The swap is designated
as a cash flow hedge under the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under the swap agreement, the interest rate on the term loan is
fixed at 4.32% plus the applicable margin (currently 1.5%). The swap is in place
through the life of the term loan, ending on March 31, 2007. Changes in fair
value of the swap are recorded in Accumulated Other Comprehensive Loss on the
Condensed Consolidated Balance Sheet. At December 31, 2004, approximately
$92,000 has been recorded in Accumulated Other Comprehensive Loss to reflect a
decrease in the fair value of the swap compared to a decrease in the fair value
of approximately $351,000 at December 31, 2003.
With the acquisition of CPR, the Company entered into a $6.0 million convertible
note payable to the shareholders of CPR. The principal balance is convertible at
the holders' option into 314,243 shares of the Company's Common Stock at any
time through January 29, 2005 (the Maturity Date). The note bears interest at an
annual rate of 3.80% from January 29, 2002 through the Maturity Date. Interest
is payable semi-annually.
In June of 2003, the Company and the shareholders of CPR entered into Note
Prepayment Agreements. Under the Note Prepayment Agreements, the Company agreed
to satisfy its payment obligations under the $6.0 million convertible note by
making a series of four payments between June 30, 2003 and January 10, 2005. The
four payments are to be initiated either by the Company through the exercise of
a "call" option or by the CPR shareholders through the exercise of a "put"
option. If the four put or call options are exercised, the Company would pay
$4.5 million to fully settle the $6.0 million note. Gains resulting from this
early extinguishment of debt are recorded when paid as a gain in the Company's
Consolidated Statements of Operations. In the first quarter of 2004, the Company
paid approximately $750,000 to settle $1.0 million of the then remaining $4.0
million of the convertible note that was outstanding at December 31, 2003. A
gain of $254,000 was recorded in the first quarter of 2004 in the Company's
Consolidated Statements of Operations. Similarly, in the second quarter of 2004,
the Company paid approximately $1.2 million to settle $1.5 million of the
remaining $3.0 million of the convertible note that was outstanding at March 31,
2004. A gain of $343,000 was recorded in the second quarter of 2004 in the
Company's Consolidated Statements of Operations. The balance which remains
outstanding under this convertible note at December 31, 2004 is $1.5 million.
The final repayment occurred in the first quarter of 2005.
F-14
9. EMPLOYEE SEVERANCE AND OFFICE CONSOLIDATION COSTS:
In the first quarter of 2004, in order to align its resources to meet customer
need and demand projections, the Company implemented a workforce realignment
plan which resulted in a pre-tax charge of approximately $254,000 for severance
and outplacement benefits. An additional $48,000 in net costs (composed of
approximately $80,000 in additional costs offset by a reduction to the liability
of approximately $32,000) was incurred in the second quarter of 2004 relating to
this plan. The workforce realignment plan impacted approximately 3 percent of
the Company's North American workforce. Payments in 2004 totaled $302,000 and no
amounts remain accrued at December 31, 2004.
In August, 2003, the Company initiated a workforce realignment plan which
immediately eliminated approximately 65 positions from its global workforce. In
the third quarter of 2003, the Company recorded a pre-tax charge of
approximately $897,000 for severance and outplacement benefits relating to this
workforce realignment. Approximately $882,000 was paid during the third and
fourth quarters of 2003 and approximately $15,000 remains accrued and is
reflected in Other Accrued Liabilities on the Company's Consolidated Balance
Sheet. Costs relating to this program are reflected in the line item entitled
Severance and Office Consolidation Costs in the Company's Consolidated
Statements of Operations.
To bring its cost structure more in line with the then current revenue
projections, in the first quarter of 2003, the Company recorded a pre-tax charge
of approximately $680,000 for severance and outplacement benefits relating to a
workforce reduction program which impacted approximately 17 employees. In the
second quarter of 2003, the Company recorded an adjustment to reduce this charge
by $106,000 as a result of lower than expected severance costs related to the
workforce reduction. No amounts remain accrued at December 31, 2003. Costs
relating to this program are reflected in the line item entitled Severance and
Office Consolidation Costs in the Company's Consolidated Statements of
Operations.
On August 29, 2002, the Company committed to a plan that consolidated its three
New Jersey offices into one central office, located in Cranford, New Jersey. At
that time, the Company maintained separate offices in Princeton, Cranford and
Ft. Lee, New Jersey. The leases for the Ft. Lee and Princeton offices expired
during the fourth quarter of 2002 and the first quarter of 2003, respectively.
The Company vacated these offices in the fourth quarter in advance of the
expiration of each of the respective office leases. As part of this plan, the
Company eliminated approximately 22 full-time positions.
In connection with the office consolidation, the Company recorded a pre-tax
charge of $321,000 in the third quarter of 2002, consisting primarily of
facility lease costs and severance and outplacement costs. In the first quarter
of 2003, the Company incurred an additional $52,000 in costs relating to the
office consolidation.
Employee
Severance Facilities Other Total
(in thousands) --------- ---------- ------- -------
Liability at December 31, 2001 $ - $ - $ - $ -
Amounts accrued 172 97 52 321
Amounts paid (99) (53) (12) (164)
------- ------- ------- -------
Liability at December 31, 2002 $ 73 $ 44 $ 40 $ 157
Amounts accrued 1,639 - - 1,639
Amounts paid (1,568) (25) - (1,593)
Non-cash charge - (4) - (4)
Adjustment to liability (129) (15) (30) (174)
------- ------- ------- -------
Liability at December 31, 2003 $ 15 $ - $ 10 $ 25
Amounts accrued 334 - - 334
Amounts paid (302) - (10) (312)
Non-cash charge - - - -
Adjustment to liability (32) - - (32)
------- ------- ------- -------
Liability at December 31, 2004 $ 15 $ - $ - $ 15
======= ======= ======= =======
10. EMPLOYEE BENEFIT PLANS:
401(k) PLAN
F-15
The Company maintains a 401(k) retirement plan covering substantially all U.S.
associates who have completed at least six months of service and meet minimum
age requirements. The Company makes a matching contribution of 50% of each
participant's contribution of up to 6% of salary. The Company's matching
contributions to this plan totaled approximately $1,042,000, $1,144,000 and
$989,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan (the Purchase Plan) which
is intended to provide eligible employees an opportunity to acquire the
Company's Common Stock. Participating employees have the option to purchase
shares at 85% of the lower of the fair market value of the Common Stock on the
first or last day of the Purchase Period. The Purchase Period is defined as the
twelve month period beginning on July 1 of each year. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended. The Board of Directors has
reserved 500,000 shares of Common Stock for issuance under the Purchase Plan.
During 2004, 2003 and 2002, respectively, 103,693, 63,812 and 38,098 shares were
purchased under the Purchase Plan. At December 31, 2004, 139,331 shares were
available for issuance under the Purchase Plan.
STOCK OPTION AND STOCK INCENTIVE PLAN
In 1997, the Company established the 1997 Stock Option and Stock Incentive Plan
(the 1997 Plan) that provides for the grant of up to 1,000,000 options to
acquire the Company's Common Stock, consisting of both incentive and
non-qualified stock options. In April 2000, shareholders approved an amendment
to the 1997 Plan increasing the number of stock options that can be granted to
3,000,000. Participation in the 1997 Plan is at the discretion of the Board of
Directors' Management Development and Compensation Committee. Prior to August
2002, the 1997 Plan was administered by the Board of Director's Compensation
Subcommittee. The exercise price of incentive stock options granted under the
1997 Plan must be no less than the fair market value of the Common Stock, as
determined under the 1997 Plan provisions, at the date the option is granted
(110% of fair market value for shareholders owning more than 10% of the
Company's Common Stock). The exercise price of non-qualified stock options must
be no less than 95% of the fair market value of the Common Stock at the date the
option is granted. The vesting provisions of the options granted under the 1997
Plan are determined at the discretion of the Management Development and
Compensation Committee. The options generally expire either 90 days after
termination of employment or, if earlier, ten years after date of grant. No
options under this 1997 plan can be granted after August 2007. The Company has
reserved 3,000,000 shares of Common Stock for the 1997 Plan, of which 1,061,526
are available for grant at December 31, 2004.
The 1997 Plan replaced a similar plan under which 152,283 options were
outstanding at December 31, 2004.
Aggregate stock option activity during 2004, 2003 and 2002 was as follows:
Weighted
Average
Shares Exercise Price
---------- --------------
Options outstanding at 12/31/01 1,927,992 $ 12.62
Granted 804,700 9.60
Canceled (247,916) 15.41
Exercised (105,909) 3.60
---------- ---------
Options outstanding at 12/31/02 2,378,867 11.84
Granted 329,300 5.72
Canceled (498,353) 12.26
Exercised (137,511) 1.40
---------- ---------
Options outstanding at 12/31/03 2,072,303 11.24
Granted 307,000 6.89
Canceled (313,070) 13.39
Exercised (65,860) 2.14
---------- ---------
Options outstanding at 12/31/04 2,000,373 10.51
F-16
Options Outstanding
Weighted Average Weighted
Range of Outstanding at Remaining Average
Exercise Price December 31, 2004 Contractual Life Exercise Price
- ----------------- ----------------- ----------------- --------------
$ 0.91 - $ 3.10 188,283 2.8 $ 1.35
$ 3.11 - $ 6.20 178,800 8.5 4.96
$ 6.21 - $ 9.30 824,700 7.8 7.88
$ 9.31 - $ 12.40 200,750 6.5 9.97
$12.41 - $ 15.50 141,080 4.1 13.71
$15.51 - $ 21.70 403,840 6.7 19.69
$21.71 - $ 31.00 62,920 3.7 23.85
Options Exercisable
Range of Options Exercisable Weighted Average
Exercise Price at December 31, 2004 Exercise Price
- ----------------- -------------------- ----------------
$ 0.00 - $ 3.10 164,950 $ 1.54
$ 3.11 - $ 6.20 55,440 5.34
$ 6.21 - $ 9.30 298,300 8.26
$ 9.31 - $12.40 136,580 10.12
$12.41 - $15.50 118,248 13.92
$15.51 - $21.70 234,900 19.69
$21.71 - $31.00 62,920 23.85
--------- ------
1,071,338 11.36
At December 31, 2003, 1,001,469 options were exercisable with a weighted-average
exercise price of $11.59. At December 31, 2002, 850,593 options were exercisable
with a weighted-average exercise price of $10.60.
Effective October 1, 2002 the Company granted awards of restricted shares to
certain executives pursuant to the 1997 Plan. Such shares vest ratably over a
three year period, with shares restricted from transfer until vesting. If a
participant ceases to be an eligible employee prior to the lapsing of transfer
restrictions, such shares return to the Company without consideration. The
Company granted 18,000 shares of restricted stock in May 2004, none of which
have vested as of December 31, 2004. In 2002, 24,500 restricted shares were
issued. As of December 31, 2004, 12,333 of the shares granted in 2002 are
vested.
11. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases facilities, office equipment and computers under agreements
that are classified as either capital or operating leases. The leases have
initial terms which range from two to seven years, with eight facility leases
that have provisions to extend the leases for an additional three to five years.
Future minimum payments, by year and in the aggregate, net of sublease income,
under non-cancelable capital and operating leases with initial or remaining
terms of one year or more, are as follows at December 31, 2004:
F-17
Capital Operating
Leases Leases
(in thousands) ------- ---------
2005 $ 784 $ 7,471
2006 427 7,125
2007 222 6,805
2008 192 5,962
2009 72 3,879
thereafter - 2,917
------- ---------
Total minimum lease payments 1,697 $ 34,159
Amounts representing interest (94)
-------
Present value of net minimum lease payments 1,603
Current portion 740
-------
Obligations under capital leases, less current portion $ 863
=======
The Company expects rental income from subleases of approximately $0.4 million
in 2005 and $0.1 million in 2006 based on a sublease agreement executed in June
2000.
Rental expense under operating leases for 2004, 2003 and 2002 was $7.0 million,
$5.7 million and $6.4, million, respectively.
PROTECTIVE COMPENSATION AND BENEFIT AGREEMENTS:
The Company has entered into Protective Compensation and Benefit Agreements with
certain associates, including all Executive Officers of the Company. These
Agreements, subject to annual review by the Company's Board of Directors, expire
on the last day of the fiscal year, and are automatically extended in one year
increments unless canceled by the Company. These Agreements provide for
specified benefits in the event of a change in control, as defined in the
Agreements. At December 31, 2004, the maximum amount which could be required to
be paid under these Agreements, if such events occur, is approximately $5.9
million.
LEGAL PROCEEDINGS:
In the normal course of business, the Company is a party to various claims and
legal proceedings. The Company records a reserve for these matters when an
adverse outcome is probable and the amount of the potential liability is
reasonably estimable. Although the ultimate outcome of these matters is
currently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial condition, results of operations or
cash flows for an interim or annual period.
12. INCOME TAXES:
The provision for income taxes for the years ended December 31, 2004, 2003 and
2002, is as follows:
2004 2003 2002
(in thousands) -------- -------- --------
Current:
Federal $ (708) $ (2,330) $ 2,134
State and local (639) 241 300
Foreign 2,925 2,916 1,752
-------- -------- --------
Subtotal 1,578 827 4,186
Deferred:
Federal 395 1,610 (8,233)
State and local (114) (418) (2,243)
Foreign 233 166 (394)
-------- -------- --------
Subtotal 514 1,358 (10,870)
Benefit applied to reduce goodwill 389 389 389
-------- -------- --------
Total provision $ 2,481 $ 2,574 $ (6,295)
======== ======== ========
The sources of income (loss) before income taxes are presented as follows:
F-18
2004 2003 2002
(in thousands) -------- -------- --------
United States $ (529) $ (1,726) $(30,677)
Foreign 6,582 2,610 (30,418)
-------- -------- --------
Income (loss) before income taxes $ 6,053 $ 884 $(61,095)
======== ======== ========
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate of 35% as set forth below:
2004 2003 2002
---- ----- -----
Income tax expense at the U.S. federal statutory rate 35.0% 35.0% 35.0%
Effects of foreign taxes, net of foreign tax credits and deductions 13.9 235.1 (19.7)
State and local income taxes, net of federal benefit (7.6) (8.6) 2.0
Non-deductible write-down of joint venture - 16.0 -
Non-deductible goodwill amortization - - (5.9)
Other (0.3) 13.7 (1.1)
---- ----- -----
Total 41.0% 291.2% 10.3%
A provision has not been made for U.S. or additional foreign taxes on the
undistributed portion of earnings of foreign subsidiaries as those earnings have
been permanently reinvested. The undistributed earnings of foreign subsidiaries
approximate $13.8 million.
Components of the Company's net deferred tax asset and liability included in the
consolidated balance sheet at December 31, 2004 and 2003 are as follows:
2004 2003
(in thousands) -------- --------
Deferred tax assets:
Compensation and employee benefits $ 518 $ 469
Accrued expenses and other future deductible items 725 560
Foreign operating loss carryforward 5,162 4,642
State and local operating loss carryforward 2,295 2,086
Tax benefit of unrealized losses 33 -
Contributions carryforward 73 29
Capital loss carryforward 992 985
Foreign tax credit carryforward 373 613
Intangible assets 5,741 7,809
Accounting method differences 248 189
-------- --------
Total deferred tax assets 16,160 17,382
Deferred tax liabilities:
Software costs 2,004 2,757
Depreciation 908 1,543
Unrealized foreign exchange gains 128 281
Change of tax accounting method - 160
Deferred state income taxes 310 391
Tax cost of unrealized gains - 1
-------- --------
Total deferred tax liability 3,350 5,133
-------- --------
Valuation allowance 7,014 5,865
-------- --------
Total net deferred tax (asset)/liability $ (5,796) $ (6,384)
======== ========
The deferred tax asset for state and local operating loss carryforward of $2.3
million relates to amounts that expire at various times from 2006 to 2025.
The Company has foreign operating loss carryforwards of $830,000 with a
recognized tax benefit of $221,000. Of this benefit, $33,000 will expire in
2010, $19,000 will expire in 2013, $154,000 will expire in 2014 and $15,000 can
be carried forward indefinitely.
F-19
The Company has foreign operating loss carryforwards of $15.7 million with a tax
benefit of $4.9 million for which a valuation allowance has been established
based upon an assessment that it is more likely than not that realization cannot
be assured. The ultimate realization of this tax benefit is dependent upon the
generation of sufficient operating income in the respective tax jurisdictions.
Of this benefit, $29,000 will expire in 2009, $20,000 will expire in 2010 and
$4,891,000 can be carried forward indefinitely.
The Company has capital loss carryforwards of $2.3 million with a tax benefit of
$992,000 for which a valuation allowance has been established based upon an
assessment that it is more likely than not that realization cannot be assured.
Of this tax benefit, $140,000 will expire in 2005, $14,000 will expire in 2006,
$4,000 will expire in 2007, $827,000 will expire in 2008 and $7,000 will expire
in 2010. The ultimate realization of this tax benefit is dependent upon the
generation of sufficient capital gains within the carryforward periods.
The Company has foreign tax credit carryforwards with a tax benefit of $373,000
for which a valuation allowance has been established based upon an assessment
that it is more likely than not that realization cannot be assured. Of this
benefit, $17,000 will expire in 2007, $334,000 will expire in 2008 and $22,000
can be carried forward indefinitely.
A valuation allowance has been established for other deferred tax assets of
$708,000 related to operations in foreign tax jurisdictions based upon an
assessment that it is more likely than not that realization cannot be assured.
Income tax benefits related to stock option exercises and the employee stock
purchase plan were $208,000, $84,000 and $275,000 for 2004, 2003 and 2002,
respectively, and have been shown as increases to additional paid-in capital.
The income tax costs (benefits) related to unrealized gains and losses in other
comprehensive income components of shareholders' equity were $(34,000) in 2004,
$5,000 in 2003 and ($27,000) in 2002.
13. ACQUISITIONS:
Details of the Company's acquisitions from 2002 through 2003 are listed below.
The acquisitions have been accounted for using the purchase method of
accounting. The escrow accounts referred to have been established at acquisition
date to provide indemnification of sellers' representations and warranties.
Valuation of the Common Stock issued in the acquisitions was based on an
appraisal obtained by the Company on previous similarly structured acquisitions,
which provided for a discount of the shares due to lock-up restrictions and the
lack of registration of the shares.
2003:
In October 2003, the Company acquired substantially all the assets and assumed
certain liabilities of Estadisticos y Clinicos Asociados, S.A., a CRO located in
Mexico City, Mexico. The acquisition enables the Company to expand its
capability to conduct clinical trials in Latin America.
The aggregate purchase price was approximately $3.6 million in cash (including
acquisition costs).
The following summarizes the fair value of the assets acquired and liabilities
assumed at the date of acquisition.
At October 1, 2003
(in thousands) ------------------
Current assets $ 727
Fixed assets 275
Other assets 12
Goodwill 1,932
Intangible assets 860
------
Total assets acquired 3,806
------
Current liabilities 222
------
Net assets acquired $3,584
======
Of the $860,000 of intangible assets, $400,000 was assigned to customer
relationships and $460,000 was assigned to non-compete agreements. The
intangible assets are amortizable over a period of 20 years for the customer
relationships and four years for the non-compete agreements. The fair value of
the intangible assets was determined by management based on a third party
valuation. The goodwill acquired is deductible for income tax purposes.
F-20
2002:
In January 2002, the Company acquired substantially all of the assets of
Clinical and Pharmacologic Research, Inc. (CPR) located in Morgantown, West
Virginia. CPR specializes in Phase I studies for the generic drug industry,
enabling the Company to expand into the generic drug market.
The aggregate purchase price was approximately $18.2 million, including
approximately $8.1 million in cash (including acquisition costs), 314,243 shares
of Common Stock valued at $4.1 million and a $6.0 million subordinated note. The
note is convertible at the holders' option into 314,243 shares of the Company's
Common Stock at any time before January 29, 2005, the Maturity Date (see Note
8).
The following summarizes the fair values of the assets acquired and liabilities
assumed at the date of acquisition. The intangible asset represents one customer
contract, the fair value which was determined by management based on a third
party valuation.
At January 29, 2002
(in thousands) -------------------
Current assets $ 1,241
Fixed assets 213
Goodwill 2,927
Intangible assets 15,000
-------
Total assets acquired 19,381
-------
Liabilities assumed 1,131
-------
Net assets acquired $18,250
=======
The following unaudited pro forma results of operations assume the 2003 and 2002
acquisitions occurred at the beginning of 2002:
2003 2002
(in thousands, except per share data) --------- ---------
Net service revenues $ 161,563 $ 168,672
Net loss (880) (54,459)
Net loss per diluted share $ (0.07) $ (4.27)
Weighted average shares 12,973 12,758
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been consummated
at January 1, 2002, nor are they necessarily indicative of future operating
results.
14. INVESTMENTS:
The Company has a 50% owned joint venture investment in Beijing KendleWits
Medical Consulting Co., Ltd. (KendleWits), a company located in China. This
investment is accounted for under the equity method. To date, the Company has
contributed approximately $750,000 for the capitalization of KendleWits. In the
second quarter of 2003, the Company determined that its investment in KendleWits
was permanently impaired and as a result recorded a $405,000 non-cash charge to
reduce the carrying value of its investment to zero. Future capital investment
needs will be dependent upon the on-going capitalization needs of KendleWits and
the Company's willingness to provide additional capital. The Company is not
obligated to make any additional investment in KendleWits and currently has no
plans to do so. The loss recorded from the equity investment in KendleWits for
the year ended December 31, 2002 was approximately $126,000.
In January 1999, the Company acquired a minority interest in Digineer, Inc.
("Digineer", formerly Component Software International, Inc.), an internet
healthcare consulting and software development company, for approximately $1.6
million in cash and 19,995 shares of the Company's Common Stock valued at
approximately $0.3 million. The Company accounted for this investment under the
cost method.
During the second quarter of 2002, Digineer adopted a plan to cease operations.
As a result of this action, the Company determined that its investment in
Digineer was permanently impaired. In the second quarter of 2002, the Company
recorded a $1.9 million non-cash charge to reflect the write-off of its
investment. The write-off is a capital loss for income tax purposes and is
deductible only to
F-21
the extent the Company generates capital gains in the future to offset this
loss. The Company has recorded a valuation allowance against the deferred tax
asset relating to the Digineer write-off and no income tax benefit has been
recorded.
15. RELATED PARTY TRANSACTIONS:
The Company made payments in 2003 and 2002 totaling approximately $21,000 and
$400,000, respectively, to a construction company owned by a relative of the
Company's primary shareholder, for construction and renovations at various
Company locations. No such payments were made in 2004.
The former majority shareholder of CPR is no longer employed by CPR and never
was employed by the Company, but he has provided consulting services to the
Company. In the past, he provided consulting services to the customer that
accounted for the majority of CPR's business. Payments to this individual for
consulting services in 2003 and 2002 were $65,000 and $55,000, respectively. No
such payments were made in 2004.
16. SEGMENT INFORMATION:
Effective January 1, 2002, the Company integrated the medical communications
group into its Phase IV product and services offering. As a result, the Company
is now managed under a single operating segment referred to as contract research
services, which encompasses Phase I through IV services.
Financial information by geographic area is as follows:
2004 2003 2002
(in thousands) -------- -------- --------
Net service revenues
North America $101,012 $102,596 $120,713
Foreign 71,876 53,625 44,460
-------- -------- --------
$172,888 $156,221 $165,173
======== ======== ========
Identifiable assets
North America $113,566 $127,912 $133,424
Foreign 49,114 26,503 21,973
-------- -------- --------
$162,680 $154,415 $155,397
======== ======== ========
Net revenues from sponsors that accounted for more than 10% of the Company's
consolidated net revenues for 2004, 2003 and 2002 are as follows:
2004 2003 2002
---- ---- ----
Sponsor A 20% 27% 29%
Sponsor A accounted for approximately 13% and 11% of the Company's consolidated
accounts receivable at December 31, 2004 and December 31, 2003, respectively.
F-22
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
First Second Third Fourth
Quarter -------- -------- -------- --------
2004
Net service revenues $ 40,786 $ 41,217 $ 42,920 $ 47,965
Income from operations 696 287 1,916 3,806
Net income 673 211 600 2,088
Net income per diluted share 0.05 0.02 0.04 0.16
Net income per basic share 0.05 0.02 0.04 0.16
2003
Net service revenues $ 37,180 $ 38,497 $ 40,424 $ 40,120
Income (loss) from operations (1,518) 549 1,046 2,084
Net income (loss) (2,124) (423) 344 513
Net income (loss) per diluted share (0.16) (0.03) 0.03 0.04
Net income (loss) per basic share (0.16) (0.03) 0.03 0.04
F-23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KENDLE INTERNATIONAL INC.
DATE SIGNED: March 16, 2005
/s/ Candace Kendle
_____________________________________________
Candace Kendle
Chairman, CEO and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
- --------------------------- ---------------------------------- --------------
/s/ Candace Kendle
___________________________ Chairman of the Board of March 16, 2005
Candace Kendle Directors, Chief Executive
Officer and Principal Executive
Officer
/s/ Christopher C. Bergen
___________________________ President, Chief Operating March 16, 2005
Christopher C. Bergen Officer and Director
/s/ Karl Brenkert III
___________________________ Senior Vice President, March 16, 2005
Karl Brenkert III Chief Financial Officer,
Treasurer and Principal Financial
and Accounting Officer
* Director March 16, 2005
___________________________
G. Steven Geis, Ph.D., M.D.
* Director March 16, 2005
___________________________
Donald C. Harrison, M.D.
* Director March 16, 2005
___________________________
Timothy E. Johnson, Ph.D.
* Director March 16, 2005
___________________________
Frederick A. Russ, Ph.D.
* Director March 16, 2005
___________________________
Robert C. Simpson
* Director March 16, 2005
___________________________
Robert R. Buck
*/s/ Karl Brenkert III as Attorney In-Fact March 16, 2005
___________________________
Karl Brenkert III
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Filing Status
- ------- ------------------------------------------------------------------------------------------------ -------------
2.1 Stock Purchase Agreement dated July 1, 1997 by and among the Company and Shareholders
of U-Gene Research B.V. *
2.2 Escrow Agreement dated June 27, 1997 among the Company, Keating, Muething & Klekamp,
P.L.L., Bio-Medical Research Holdings, B.V., Utrechtse Particatiemaatschappij B.V.,
P.J. Morrison, T.S. Schwarz, I.M. Hoepelman , Ph.K. Peterson, J. Remington,
M. Rozenberg-Arska and L.G.W. Sterkman *
2.3 Share Purchase Agreement dated July 2, 1997 by and among the Company
and the Shareholders of GMI Gescellschaft fur Angewandte Mathematick
und Informatik mbH *
2.4 Stock Purchase Agreement dated February 11, 1998 by and among the Company
and the Shareholders of ACER/EXCEL Inc. *
2.5 Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan
Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee,
as Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee,
Citicorp Trust-South Dakota and The Fifth Third Bank *
2.6 Registration Rights Agreement dated February 11, 1998 among the Company and
Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee, as Trustee
under a Trust dated March 8, 1991 fbo Jennifer Lee, Citicorp Trust-South Dakota *
2.7 Share Purchase Agreement dated December 23, 1998 by and among the Company and
the Shareholders of Research Consultants (International) Holdings Limited *
2.8 Escrow Agreement dated January 5, 1999 among the Company, John Glasby, Gillian
Gregory, Michael Roy Broomby and Peter Nightingale *
2.9 Option Agreement dated September 9, 1998 by and between the Company and Component
Software International, Inc. *
2.10 Notice of Option Exercise dated January 11, 1999 of the Option Agreement dated
September 9, 1998 *
2.11 Multi-Year Strategic Services Agreement dated January 20,1999 by and between the
Company and Component Software International, Inc. *
2.12 Asset Purchase Agreement dated June 27, 1999 by and among the Company and the
Shareholders of Health Care Communications, Inc. *
2.13 Stock Purchase Agreement dated June 4, 1999 by and among the Company and the
Shareholders of ESCLI S.A. *
2.14 Asset Purchase Agreement dated July 13, 1999 by and among the Company and the
Shareholders of HCC Health Care Communications (1991), Ltd. *
2.15 Share Purchase Agreement dated August 31, 1999 by and among the Company and
the Shareholder of Specialist Monitoring Services Limited
*
2.16 Escrow Agreement dated July 13, 1999 by and among the Company, Geoffrey H. Kalish, M.D.,
Bradley D. Kalish, Jill Kalish, and The Fifth Third Bank, as Escrow Agent *
2.17 Escrow Agreement dated August 31, 1999 by and among the Company, Paul Martin, and The
Fifth Third Bank, as Escrow Agent *
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 Stock Purchase Agreement dated February 27, 2001 by and among the Company and
the Shareholders of AAC Consulting Group, Inc. *
2.20 Form of Note Prepayment Agreement *
2(a) Asset Purchase Agreement dated January 29, 2002 among Kendle International Inc., Clinical and
Pharmacologic Research, Inc., Thomas S. Clark, M.D., Charles T. Clark, and E. Stuart Clark *
2(b) Convertible Subordinated Note, dated January 29, 2002 issued by Kendle International Inc.
to Clinical and Pharmacologic Research, Inc. *
3.1 Restated and Amended Articles of Incorporation *
3.2 Amended and Restated Code of Regulations *
3.3 Amendment of the Restated and Amended Articles of Incorporation to Increase the
Authorized Shares *
4 Specimen Common Stock Certificate *
4.1 Shareholder Rights Agreement dated August 13, 1999 between the Company and The Fifth Third
Bank, as Rights Agent *
10.1 Amended and Restated Shareholders' Agreement dated June 26, 1997 *
10.2 Master Lease Agreement dated November 27, 1996 by and between the Company
and Bank One Leasing Corporation, as amended on April 18, 1997 *
10.6 Master Equipment Lease dated August 16, 1996 by and between the Company and
The Fifth Third Leasing Company
*
10.7 Lease Agreement dated December 9, 1991 by and between the Company and Carew
Realty, Inc., as amended on December 30, 1991, March 18, 1996, October 8, 1996,
January 29, 1997, and February 16, 1999 *
10.8 Indemnity Agreement dated June 21, 1996 by and between the Company and Candace
Kendle Bryan *
10.9 Indemnity Agreement dated June 21, 1996 by and between the Company and Christopher
C. Bergen *
10.10 Indemnity Agreement dated June 21, 1996 by and between the Company and Timothy M.
Mooney *
10.11 Indemnity Agreement dated May 14, 1997 by and between the Company and Charles A. Sanders *
10.12 Indemnity Agreement dated May 14, 1997 by and between the Company and Philip E. Beekman *
10.13 Indemnity Agreement dated December 10, 1998 by and between the Company and Robert Buck *
10.15 Form of Indemnity Agreement by and between the Company and each member of the Company's
Board of Directors, except for those Indemnity Agreements noted above
and filed previously. *
10.14 Indemnity Agreement dated December 10, 1998 by and between the Company and Mary Beth
Price *
10.22 Credit Agreement dated as of October 13, 2000 among the Company, the Several Lenders
from Time to Time Party Hereto, and Bank One, NA, as Agent *
10.23 Amended and Restated Credit Agreement dated as of June 3, 2002 among Kendle
International Inc., The Several Lenders from Time to Time Party Hereto and Bank One,
NA as Agent *
10.24 Third Amendment to Amended and Restated Credit Agreement *
10.25 Fourth Amendment to Amended and Restated Credit Agreement *
10.20 MANAGEMENT CONTRACTS AND COMPENSATION PLANS
(a) 1995 Stock Option and Stock Incentive Plan *
(b) 1995 Stock Option and Stock Incentive Plan--Individual Stock Option
Agreement for Incentive Stock Option (contained in Exhibit 10.20(a)) *
(c) 1997 Stock Option and Stock Incentive Plan *
(c)(1) Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan *
(c)(2) Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan *
(c)(3) Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan *
(c)(4) Form of Restricted Stock Award Agreement T
(d) Form of Protective Compensation and Benefit Agreement *
(e) 1998 Employee Stock Purchase Plan *
(e)(1) Amendment No. 1 to 1998 Employee Stock Purchase Plan *
(e)(2) Amendment No. 2 to 1998 Employee Stock Purchase Plan *
(e)(3) Amendment No. 3 to 1998 Employee Stock Purchase Plan *
(n) 2003 Directors Compensation Plan *
14 Code of Ethics *
21 List of Subsidiaries T
23.1 Consent of PricewaterhouseCoopers LLP T
23.2 Consent of Deloitte & Touche LLP T
24 Powers of Attorney T
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) T
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) T
32.1 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002- Chief Executive Officer T
32.2 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Chief Financial Officer T
Filing
Status Description of Exhibit
* Incorporated by reference - See Item 15
T Filed herewith