1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 12, 1998
KENDLE INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 000 23019 31-1274091
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
441 Vine Street, Suite 700, Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
(Former name or former address, if changed since last report.)
2
Item 2. Acquisition or Disposition of Assets.
On February 12, 1998, the Registrant acquired all of the outstanding
stock of ACER/EXCEL Inc., headquartered in Cranford, New Jersey. ACER/EXCEL
Inc., is a full service contract research organization, offering Phase II
through IV clinical trial management, data collection, statistical analysis, and
regulatory document preparation. ACER/EXCEL Inc. employs approximately 140
experienced research professionals in its Cranford, New Jersey; New London,
Connecticut; and San Diego, California offices. It also provides drug
development services to the Pacific Rim through a joint venture interest in a
CRO headquartered in Beijing, China and a limited partnership in Taiwan.
Under the agreement the Registrant acquired ACER/EXCEL Inc., for
consideration consisting of $14.1 million from cash on hand and 987,574 shares
of the Registrant's Common Stock. The acquisition will be accounted for under
the purchase method of accounting.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements:
Audited financial statements of ACER/EXCEL Inc. for the years
ended December 31, 1996 and 1997. See "Contents" on Page F-2.
(b) Pro Forma Financial Information:
Pro forma financial information of Kendle International Inc.
See "Index to Unaudited Pro Forma Condensed Consolidated
Financial Statements" on Page F-17.
(c) Exhibits
2.4 Stock Purchase Agreement among Kendle International Inc.,
Tzuo Yan Lee, Jean C. Lee, Michael Minor, Conway Lee,
Steven Lee, Jean C. Lee as Trustee under Trust dated
March 8, 1991 fbo Jeneifer Lee and Citicorp Trust-South
Dakota as Trustee u/a May 15, 1997 m/b Tzuo Yan Lee dated
February 11, 1998 (previously filed)
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant have duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
Date, April 28th, 1998 By: /s/ Timothy M. Mooney
---------------------
Timothy M. Mooney
Vice President -
Chief Financial Officer
3
ACER/EXCEL INC.
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
F-1
4
CONTENTS
PAGES
Report of Independent Accountants ...................................................................F-3
Financial Statements:
Balance Sheets as of December 31, 1996
and December 31, 1997 .........................................................................F-4
Statements of Operations for the years ended
December 31, 1996 and 1997 ....................................................................F-5
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996 and 1997 ....................................................................F-6
Statements of Cash Flows for the years ended
December 31, 1996 and 1997 ....................................................................F-7
Notes to Financial Statements .................................................................F-8 - F-16
F-2
5
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Kendle International Inc.
We have audited the accompanying balance sheets of ACER/EXCEL INC. as of
December 31, 1996 and 1997, and the related statements of operations, changes in
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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of ACER/EXCEL INC. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 27, 1998
F-3
6
ACER/EXCEL INC.
BALANCE SHEETS
as of December 31, 1996 and 1997
1996 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 285,615 $ 1,864,682
Marketable securities 1,617,698 1,906,307
Accounts receivable (net of allowance for doubtful accounts of $28,000 in 1997) 2,675,367 3,200,082
Unreimbursed investigator and project costs 1,193,691 1,273,301
Other current assets 20,207 169,289
------------ ------------
Total current assets 5,792,578 8,413,661
Property and equipment:
Furnishings, equipment and other 1,027,260 1,582,540
Equipment under capital leases 161,817 918,106
Less: accumulated depreciation and amortization (482,726) (787,869)
------------ ------------
Net property and equipment 706,351 1,712,777
------------ ------------
Other assets 12,300 135,962
------------ ------------
Total assets $ 6,511,229 $ 10,262,400
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables $ 939,925 $ 739,940
Other accrued liabilities 192,473 298,579
Current portion of obligations under capital leases 54,091 227,540
Advance billings 805,300 1,328,909
Deferred compensation 200,204
------------ ------------
Total current liabilities 2,191,993 2,594,968
Capital lease obligations, less current portion 37,852 509,244
------------ ------------
Total liabilities 2,229,845 3,104,212
------------ ------------
Shareholders' equity:
Common stock - no par value; no stated value; 5,000 shares authorized
4,000 shares issued and outstanding 23,500 23,500
Unrealized gains (losses) on marketable securities 65,204 158,568
Paid in capital 100,000
Retained earnings 4,192,680 6,876,120
------------ ------------
Total shareholders' equity 4,281,384 7,158,188
------------ ------------
Total liabilities and shareholders' equity $ 6,511,229 $ 10,262,400
============ ============
The accompanying notes are an integral part of these financial statements
F-4
7
ACER/EXCEL INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1997
1996 1997
----------- -----------
Net revenues $ 7,848,080 $12,700,366
Cost and expenses:
Direct costs 3,940,434 6,440,159
Selling, general, and administrative 2,121,379 3,001,955
Depreciation and amortization 140,693 306,591
----------- -----------
6,202,506 9,748,705
----------- -----------
Income from operations 1,645,574 2,951,661
Other income (expense):
Interest income 59,433 29,971
Dividend Income 72,998 154,709
Interest expense (13,721) (39,290)
Other 30,443 3,305
----------- -----------
149,153 148,695
----------- -----------
Income tax expense 92,794 173,000
----------- -----------
Net income $ 1,701,933 $ 2,927,356
=========== ===========
Pro forma (unaudited) (Note 4):
Net income, as reported $ 1,701,933 $ 2,727,356
Pro forma income tax expense 596,609 1,067,142
----------- -----------
Pro forma net income $ 1,105,324 $ 1,860,214
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
8
ACER/EXCEL INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the years ended December 31,
1996 and 1997
COMMON STOCK
------------------------
UNREALIZED TOTAL
GAINS ON SHARE-
NUMBER OF MARKETABLE PAID IN RETAINED HOLDERS'
SHARES AMOUNT SECURITIES CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 2,000 $ 20,000 $ 1,545,107 $1,565,107
Adjustment for merger 2,000 3,500 $ 24,526 1,265,124 1,293,150
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995,
as restated 4,000 23,500 24,526 2,810,231 2,858,257
Net income 1,701,933 1,701,933
Unrealized gains 40,678 40,678
Distributions to shareholders (319,484) (319,484)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 4,000 23,500 65,204 4,192,680 4,281,384
Net income 2,927,356 2,927,356
Unrealized gains 93,364 93,364
Capital contribution $ 100,000 100,000
Distributions to shareholders (243,916) (243,916)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 4,000 $ 23,500 $ 158,568 $ 100,000 $ 6,876,120 $7,158,188
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
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ACER/EXCEL INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1997
1996 1997
----------- -----------
Cash flows from operating activities:
Net income $ 1,701,933 $ 2,927,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 140,693 306,591
Realized security gains (24,524) (3,305)
Deferred income taxes 56,445 66,000
Deferred and non-cash compensation 91,509 100,000
(Increase) decrease in:
Accounts receivable (1,584,559) (524,715)
Unreimbursed investigator and project costs (148,715) (79,610)
Other current assets (5,342) (149,082)
Other assets (1,983) (26,299)
Increase (decrease) in:
Trade payables 543,975 (265,985)
Other accrued liabilities (53,795) 106,106
Advance billings 2,635 523,609
Deferred compensation payable (200,204)
----------- -----------
Net cash provided by operating activities 718,272 2,780,462
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (315,041) (455,030)
Leasehold improvements (36,383) (101,698)
Purchases of marketable securities (1,397,960) (1,053,289)
Proceeds from sales of marketable securities 1,368,071 861,349
Investment in joint venture interests (97,363)
----------- -----------
Net cash used by investing activities (381,313) (846,031)
----------- -----------
Cash flows from financing activities:
Repayment of capital lease obligations (42,066) (111,448)
Distributions to shareholders (319,484) (243,916)
----------- -----------
Net cash used by financing activities (361,550) (355,364)
----------- -----------
Net increase (decrease) in cash and cash equivalents (24,591) 1,579,067
Cash and cash equivalents at beginning of year 310,206 285,615
----------- -----------
Cash and cash equivalents at end of year $ 285,615 $ 1,864,682
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,721 $ 39,290
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment under capital leases $ 756,289
===========
The accompanying notes are an integral part of these financial statements.
F-7
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ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
ACER/EXCEL INC. (the "Company") is a clinical research organization
providing a broad range of integrated product development services to
complement the research and development activities of the pharmaceutical
and biotechnology industries. The Company's services include Phase II to
Phase IV clinical trial management, clinical data management and
biostatistical analysis, medical writing and regulatory consultation and
representation. The Company conducts its operations in the United States.
In 1997, the Company contributed capital to form a joint venture, Beijing
ACERWITS Medical Consulting Co., Lt. ("ACERWITS"), in which the Company
has a 50% interest. The joint venture is a clinical research organization
located in Beijing, China. In addition, the Company purchased a 13.67%
investment in Taiwan Medi Pharm Consulting Company ("TMP") in 1997. The
Company's investment in these investees is immaterial.
2. BUSINESS COMBINATION:
On December 31, 1996, ACER/EXCEL INC. (formerly Advanced Clinical
Epidemiological Research, Inc.) consummated a merger through an exchange
of 2,848 shares of common stock for all outstanding common stock of Excel
Scientific Protocols, Inc. ("Excel"), a company related through common
ownership. Each share of Excel was exchanged for 1.582 shares of
ACER/EXCEL INC. common stock. This business combination qualified as a
"tax-free reorganization" pursuant to the IRC Section 368(a) and has been
accounted for as if it were a pooling of interests under Accounting
Principles Board Opinion No. 16, since it was a merger of companies under
common control. Accordingly, all prior period financial statements
presented reflect the combined results of operations, financial position
and cash flows of ACER/EXCEL INC. and Excel.
F-8
11
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. BUSINESS COMBINATION, CONTINUED:
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
1996
----------
Net revenues:
ACER/EXCEL INC $2,762,590
Excel Scientific Protocols, Inc. 5,546,143
Elimination of intercompany transaction (460,653)
----------
Combined $7,848,080
==========
Net income:
ACER/EXCEL INC $ 366,842
Excel Scientific Protocols, Inc. 1,335,091
----------
Combined $1,701,933
==========
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of money market funds held with a
financial institution.
The Company maintains its demand deposits with a single financial
institution, the balance of which from time-to-time exceeds the maximum
federally insured amount.
MARKETABLE SECURITIES
The Company classifies its marketable securities as "available for sale."
These securities are stated in the financial statements at market value.
Realized gains and losses are included in the statements of operations,
calculated based on the weighted average cost of the investments.
Unrealized gains and losses are shown as a separate component of
shareholders' equity.
F-9
12
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over
estimated useful lives of five 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 operations.
Equipment under capital lease is recorded at the present value of future
minimum lease payments and is amortized over the terms of the related
leases. Accumulated amortization in these leases was $46,083 and 151,606
at December 31, 1996 and 1997, respectively.
INVESTMENTS
The Company accounts for its 50% investment in the ACERWITS joint venture
using the equity method of accounting and its investment in TMP using the
cost method of accounting. The equity in the earnings of ACERWITS were
not material.
REVENUE RECOGNITION
Revenues are earned by performing services primarily under fixed-price
contracts. Revenues are recognized on the percentage of completion
method, measured by the percentage of costs incurred to date to 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. Because of the inherent uncertainties in estimating
costs, it is at least reasonably possible that the estimates used will
change in the near term and could result in a material change.
Contract costs include direct labor costs and indirect costs related to
contract performance, such as indirect labor, supplies, depreciation,
rent and utilities. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are recognized in the period in which such losses
become known.
Amendments to contracts resulting in revenues and costs are recognized in
the period in which the amendments 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.
F-10
13
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVESTIGATOR AND PROJECT COSTS
In addition to various contract costs previously described, the Company
incurs costs, in excess of contract amounts, which are reimbursable by
its clients. Such pass-through costs incurred, but not yet reimbursed,
are reflected as a current asset in the accompanying balance sheet.
Advances from clients for such costs not yet incurred are reflected as a
current liability. Such costs and reimbursement for such costs are
excluded from direct costs and net revenues and totaled $3,001,000 and
$5,810,640 for the years ended December 31, 1996 and 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4. INCOME TAXES
The Company has filed its federal income tax returns as an "S
Corporation" under Subchapter S of the Internal Revenue Code and passed
its tax attributes through to its shareholders. However, in January 1998,
the Company discovered that certain inadvertent terminating events had
occurred in 1991 which caused the Company to cease to qualify as an S
Corporation. On February 11, 1998, the Company filed a request for waiver
of its inadvertent termination status retroactive to the date of the
terminating events in 1991. The Company expects to be granted such
waiver; accordingly no provision or liability for federal income taxes
has been included in the financial statements. The Company is subject to
state income taxes in certain states in which they conduct business. The
provision for state income taxes consists of current and deferred taxes.
The statements of operations include the unaudited pro forma income tax
provision on taxable income for financial reporting purposes using
statutory federal, state and local rates that would have resulted if the
Company had been responsible for paying taxes during those periods.
F-11
14
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. MARKETABLE SECURITIES:
The fair value of marketable securities is estimated based on quoted
market prices. Information related to the company's marketable securities
is as follows:
DECEMBER 31, 1996
----------------------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ------------- --------------- ------------
Certificates of deposit $ 110,248 $ (528) $$ 109,720
Mutual funds 1,060,130 $ 67,217 1,127,347
Debt securities:
U.S. government obligations 50,807 (472) 50,335
Municipal obligations 331,309 (1,013) 330,296
-------------- ------------- --------------- -------------
Total $ 1,552,494 $ 67,217 $ (2,013) $ 1,617,698
============== ============= =============== ============
DECEMBER 31, 1997
---------------------------------------------------------------
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- ------------- --------------
Certificates of deposit $ 374,955 $ (1,461) $ 373,494
Mutual funds 796,661 $ 139,383 936,044
Common stock 34,242 14,157 48,399
Debt securities:
U.S. government obligations 50,807 1,318 52,125
Municipal obligations 491,074 5,171 496,245
-------------- -------------- ------------- --------------
Total $ 1,747,739 $ 160,029 $ (1,461) $ 1,906,307
============== ============== ============= ==============
F-12
15
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. MARKETABLE SECURITIES, CONTINUED:
Contractual maturities of marketable debt securities are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1997
COST FAIR VALUE COST FAIR VALUE
-------------- -------------- ------------- --------------
Due after one year through five years $ 230,195 $ 229,941 $ 133,077 $ 134,461
Due after five years through ten
years 151,921 150,690 408,804 413,909
-------------- -------------- ------------- --------------
Total debt securities $ 382,116 $ 380,631 $ 541,881 $ 548,370
============== ============== ============= ==============
Proceeds from sales or maturities of investments in securities were $ 1,368,071
and $861,349 during 1996 and 1997, respectively. Gross gains and losses realized
on such sales or maturities were not material for each of the two periods.
Shareholders' equity includes a net unrealized holding gain of $65,204 and
158,568, at December 31, 1996 and 1997, respectively.
6. ACCOUNTS RECEIVABLE:
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- ----------------
Billed $ 1,929,541 $ 2,033,975
Unbilled 745,826 1,166,107
----------------- -----------------
$ 2,675,367 $ 3,200,082
================= =================
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.
F-13
16
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. DEBT:
In 1997, the Company entered into an agreement with a financial services
company for a $1,000,000 line of credit which expires July 31, 1998.
Interest is charged at the 30 day commercial paper rate plus 2.3%.
Advances under the line are evidenced by a note which is collateralized
by all of the Company's financial assets, and is subject to various
covenants and restrictions, including, among others, maintaining minimum
tangible capital as defined. There were no outstanding borrowings under
the line at December 31, 1997.
8. 401(K) EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) retirement plan covering substantially all
employees who have completed at least five months of service and meet
minimum age requirements. The Company is required to contribute 25% of
each participant's contribution of up to 6% of salary. Contributions to
this plan totaled $29,486 and $49,595 for the years ended December 31,
1996 and 1997, respectively.
9. DEFERRED COMPENSATION:
As of December 31, 1996, ACER/EXCEL INC. and Excel each maintained a
"Phantom Stock" plan that provided certain key employees the right to
earn awards.
For both plans, participants earned phantom shares of the Company's
common stock each year, limited to certain defined maximums, based on
years of employment service. Shares earned under the plans were
immediately vested. Upon termination of employment as a result of death,
disability, retirement (after age 55) or termination without cause, the
participant was entitled to receive a cash benefit equal to the book
value, adjusted as provided under the plans, as of such date, of the
number of shares in the participant's account.
For the year ended December 31, 1996, compensation costs related to the
plans totaled $91,509 and were determined based on the book value,
adjusted as provided under the plans, of the awards earned by the
participants as of that date. The plans were terminated January 1, 1997,
upon the merger of the two companies. Payments to participants in the
plans were made in October 1997.
F-14
17
ACER/EXCEL INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10.LEASES:
The Company leases facilities, office equipment and computers under
agreements which are classified as capital and operating leases. The
leases have initial terms which range from seven months to five years,
with two facility leases that have escalating rent terms and provisions
to extend the leases for an additional two to five years.
Future minimum payments, by year and in the aggregate, under
noncancelable capital leases and operating leases with initial or
remaining terms of one year or more are as follows at December 31, 1997:
CAPITAL OPERATING
LEASES LEASES
-------------- -------------
1998 $ 288,490 $ 464,224
1999 263,563 399,614
2000 170,756 385,836
2001 84,196 419,371
2002 62,797 409,802
-------------- -------------
Total minimum lease payments 869,802 $ 2,078,847
=============
Amounts representing interest 133,018
--------------
Present value of net minimum lease payments 736,784
Current portion 227,540
--------------
Obligations under capital leases, less current portion $ 509,244
==============
Rental expense for the years ended December 31, 1996 and 1997, was and
$306,901 and $411,346, respectively.
F-15
18
11.MAJOR CLIENTS:
The following sets forth the net revenues from clients who accounted for
more than 10% of the Company's net revenues during each of the periods
presented:
CLIENTS 1996 1997
------------------ ---------------- ----------------
A $ 1,893,048 $ 4,459,355
B 2,837,323 4,158,641
C * 1,553,337
D 945,983 *
<FN>
*Net revenues did not exceed 10%
</FN>
12.RELATED PARTY TRANSACTION:
The Company has subcontracted clinical projects to ACERWITS (see Note 1)
and TMP in 1997. Total revenues recognized related to work subcontracted
to these companies were $34,000 and $115,000, respectively.
13.SUBSEQUENT EVENT (UNAUDITED):
On February 12, 1998, the Company was acquired by Kendle International
Inc. (Kendle). Kendle acquired 100% of all issued and outstanding capital
stock in exchange for $14.1 million in cash and 987,574 shares of Kendle
Common Stock.
F-16
19
Kendle International Inc.
Index to Unaudited Pro Forma Condensed Consolidated Financial Statements
Financial Statements Page Number
Unaudited Pro Forma Condensed Consolidated Balance
Sheet---as of December 31, 1997 F-18
Unaudited Pro Forma Condensed Consolidated Statement
of Operations---for the year ended December 31, 1997 F-20
Notes to Unaudited Condensed Consolidated Pro Forma
Financial Statements F-21
F-17
20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
PRO
FORMA
ACTUAL ADJUSTMENTS
ACTUAL ACER/ TO REFLECT CONSOLIDATED
KENDLE EXCEL ACQUISITION PRO FORMA
------ ----- ----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,767 $ 1,865 $ (14,100) (1) $ 3,532
Available for sale securities 8,439 1,906 10,315
Accounts receivable 15,028 3,200 17,728
Unreimbursed investigator and
project costs 5,175 1,273 6,448
Other current assets 1,845 169 2,014
------------------------------------------------------------------------------------
Total current assets 46,254 8,413 (14,100) 40,567
Property and equipment, net 6,195 1,713 7,908
Excess of purchase price over net assets acq. 25,929 19,484 (1) (2) 45,413
Other assets 1,247 136 1,383
------------------------------------------------------------------------------------
TOTAL ASSETS $ 79,625 $ 10,262 $ 5,384 $ 95,271
====================================================================================
F-18
21
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of obligations
under capital leases $ 628 $ 227 $ 855
Trade payables 9,837 740 10,577
Advances against investigator
and project costs 1,303 1,303
Income taxes payable 1,414 1,414
Accrued liabilities 4,295 299 4,594
Billings in excess of costs
and estimated earnings
on uncompleted contracts 8,066 1,329 9,395
------------------------------------------------------------------------
Total current liabilities 25,543 2,595 28,138
------------------------------------------------------------------------
Obligations under capital leases,
less current portion 1,617 509 2,126
Note payable 1,470 1,470
Other liabilities 646 646
------------------------------------------------------------------------
Total liabilities 29,276 3,104 32,380
------------------------------------------------------------------------
Shareholders Equity:
Common stock 75 23 $ (23)(1) 75
Paid-in capital 50,187 100 12,542 (1) 62,729
(100)(1)
Retained earnings 352 6,876 (6,876)(1) 352
Unrealized losses on available for
sale securities (1) 159 (159)(1) (1)
Cumulative foreign currency translation adjustments (264) (264)
------------------------------------------------------------------------
Total shareholders' equity 50,349 7,158 5,384 62,891
TOTAL LIABILITIES AND
========================================================================
SHAREHOLDERS' EQUITY $ 79,625 $ 10,262 $ 5,384 $ 95,271
========================================================================
F-19
22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Actual Pro Consolidated
Actual ACER/ Forma Pro Forma
Kendle EXCEL Adjustments Totals
------ ----- ----------- ------
Net Revenues $44,233 $12,700 56,933
Costs and Expenses:
Direct costs 25,818 6,440 32,258
Selling, general and administrative 11,603 3,002 14,605
Depreciation and amortization 1,583 306 $ 649 (1) 2,538
--------------------------- ------------ ---------
Total Costs and Expenses 39,004 9,748 649 49,401
--------------------------- ------------ ---------
Income from operations 5,229 2,952 (649) 7,532
Other income(expense) (115) 148 33
Income before income taxes and extraordinary item 5,114 3,100 (649) 7,565
Income taxes 1,451 173 1,402 (2) 3,026
=========================== ============ =========
Income before extraordinary item $ 3,663 (3) $ 2,927 $ (2,051) $ 4,539
=========================== ============ =========
Per share information:
Basic:
Weighted average shares outstanding 6,043 (4)
Income per share before extraordinary item $ 0.75
Diluted:
Weighted average shares outstanding 6,751 (4)
Income per share before extraordinary item $ 0.67
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The Company acquired ACER/EXCEL on February 12, 1998. The unaudited pro
forma condensed consolidated statement of operations for the year ended December
31, 1997 gives effect to this acquisition as if it had occurred on January 1,
1997. The unaudited pro forma condensed consolidated balance sheet as of
December 31, 1997 gives effect to the acquisition as if it had occurred on
December 31, 1997.
The unaudited pro forma condensed consolidated financial statements gives effect
only to the reclassifications and adjustments set forth herein. The pro forma
financial information is provided as additional information only and is not
necessarily indicative of actual results that would have been achieved had the
acquisition been consummated at the beginning of the periods presented or of
future results.
These statements have been prepared from the consolidated financial statements
and notes thereto of the Company as contained in the Form 10-K for the year
ended December 31, 1997, and the financial statements and notes thereto of
ACER/EXCEL included in this report on Form 8-K and should be read in conjunction
therewith.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(1) To record the purchase of the net assets of ACER/EXCEL (including the
recording of the excess of acquisition costs over net assets acquired) and
elimination of shareholders' equity. The acquisition costs consist of
approximately $14,100 in cash and 988 shares of Common Stock, valued at $12,542.
The value of the stock consideration was determined for financial reporting
purposes as of December 23, 1997, the date the purchase price was agreed to.
Valuation of the common stock was based on an appraisal obtained by the Company
which discounted the shares due to lock-up restrictions and the lack of
registration of the shares.
The total purchase price includes $6,000 placed in escrow pending
resolution of an issue relating to ACER/EXCEL's S corporation tax status. In
early 1998, ACER/EXCEL determined that certain inadvertent terminating events
occurred in 1991. ACER/EXCEL has filed a request for waiver of its inadvertent
termination status retroactive to the date of the terminating events and expects
to be granted such waiver, at which time the escrowed amounts will be paid to
the seller. This escrowed amount has been included in the pro forma purchase
price as the issue is expected to be favorably resolved. An additional $2,000
was placed in escrow to be released to the selling shareholders, $1,000 in
February 1999 and $1,000 in February 2000, for indemnification of sellers'
representation and warranties. This amount is also included in the purchase
price in the pro forma balance sheet.
No allocation of purchase price was made to existing contracts as the
Company believes that profits to be earned on contracts will be proportionate to
the costs incurred subsequent to the acquisition.
(2) The Company follows the practice of allocating purchase price to
specifically identifiable intangible assets based on their estimated values as
determined by appropriate valuation methods. No allocation of purchase price was
made to specifically identifiable intangible assets other than excess of
purchase price over net assets acquired as the Company believes it did not
acquire any other significant specifically identifiable intangible assets.
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24
NOTES TO UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) Adjusted to reflect amortization expense. The excess of the cost of the
acquisition over the net assets acquired is amortized over 30 years using the
straight line method.
(2) Adjusted to reflect: (i) the tax effect of the pro forma adjustments
using an estimated statutory rate of 40%; and (ii) the application of corporate
income taxes to the Company and ACER/EXCEL's net income at an assumed statutory
combined federal and state rate of 40% which would have been recorded if each
the Company and ACER/EXCEL had been a C corporation during the entire period
presented.
(3) Kendle recorded an extraordinary charge of $1,140, net of tax benefit
of $400, resulting from the early extinguishment of debt during the third
quarter of 1997.
(4) Pro forma weighted average shares outstanding includes the issuance of
988 shares of the Company's Common Stock for the ACER/EXCEL acquisition.
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