1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission file number 000-23019
---------------
KENDLE INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1274091
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 10,941,820 shares of common
stock, no par value, as of July 31, 1998.
2
KENDLE INTERNATIONAL INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 1998 and 1997; Six Months
Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive
Income - Three Months Ended June 30, 1998 and 1997; Six
Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
3
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 53,833,204 $ 15,766,963
Available for sale securities 49,867 8,438,650
Accounts receivable 22,957,234 15,027,791
Unreimbursed investigator and project costs 7,434,224 5,174,967
Other current assets 2,326,419 1,845,297
------------- -------------
Total current assets 86,600,948 46,253,668
------------- -------------
Property and equipment, net 9,076,298 6,194,692
Excess of purchase price over net assets acquired, net 42,587,862 25,929,433
Other assets 4,418,193 1,246,815
------------- -------------
Total assets $ 142,683,301 $ 79,624,608
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 923,770 $ 627,836
Trade payables 6,611,579 9,837,358
Advances against investigator and project costs 1,776,360 1,303,310
Advance billings 8,775,192 8,066,286
Other accrued liabilities 5,395,615 5,708,505
------------- -------------
Total current liabilities 23,482,516 25,543,295
------------- -------------
Obligations under capital leases, less current portion 1,872,653 1,617,256
Note payable -- escrow agreement 1,470,000 1,470,000
Other noncurrent liabilities 1,032,704 645,248
------------- -------------
Total liabilities 27,857,873 29,275,799
------------- -------------
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 15,000,000 shares authorized;
10,939,320 shares issued and outstanding at June 30, 1998,
7,582,367 shares issued and outstanding at December 31, 1997 75,000 75,000
Additional paid in capital 111,827,129 50,186,639
Retained earnings 3,355,002 351,970
Accumulated other comprehensive income (431,703) (264,800)
------------- -------------
Total shareholders' equity 114,825,428 50,348,809
------------- -------------
Total liabilities and shareholders' equity $ 142,683,301 $ 79,624,608
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
4
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 22,534,019 $ 7,210,135 $ 42,299,158 $ 13,171,711
------------ ------------ ------------ ------------
Costs and expenses:
Direct costs 12,339,503 3,971,589 23,176,381 $ 7,347,086
Selling, general and
administrative expenses 6,431,637 2,107,476 12,152,997 4,000,348
Depreciation and amortization 1,158,486 141,139 2,059,344 291,205
------------ ------------ ------------ ------------
19,929,626 6,220,204 37,388,722 11,638,639
------------ ------------ ------------ ------------
Income from operations 2,604,393 989,931 4,910,436 1,533,072
Other income (expense):
Interest income 96,504 1,453 297,368 13,256
Interest expense (90,331) (40,292) (142,174) (71,224)
Other 31,201 (13,638) 54,086 (8,778)
------------ ------------ ------------ ------------
Income before income taxes 2,641,767 937,454 5,119,716 1,466,326
Income tax expense 1,083,125 2,116,688
------------ ------------ ------------ ------------
Net income $ 1,558,642 $ 937,454 $ 3,003,028 $ 1,466,326
============ ============ ============ ============
Pro forma income data:
Net income $ 937,454 $ 1,466,326
Pro forma adjustment for
income taxes 403,855 615,404
------------ ------------
Pro forma net income $ 533,599 $ 850,922
============ ============
Income per share data (pro forma for 1997):
Basic:
Net income per share $ 0.18 $ 0.15 $ 0.36 $ 00.23
============ ============ ============ ============
Weighted average shares
outstanding 8,590,559 3,650,000 8,310,405 3,650,000
Diluted:
Net income per share $ 0.17 $ 0.12 $ 0.33 $ 0.20
============ ============ ============ ============
Weighted average shares and
potential shares outstanding 9,290,610 4,325,283 8,991,428 4,228,521
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
5
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 1,558,642 $ 937,454 $ 3,003,028 $ 1,466,326
----------- --------- ----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 267,693 (167,529)
Net unrealized holdings gains (losses)
on available for sale securities arising
during the period, net of tax (133) 65,099
Reclassification adjustment for holdings
gains included in net income, net of tax (64,473) (64,473)
----------- -----------
Net change in unrealized holdings gains
(losses) on available for sale securities (64,606) 626
----------- --------- ----------- -----------
Comprehensive income $ 1,761,729 $ 937,454 $ 2,836,125 $ 1,466,326
=========== ========= =========== ===========
5
6
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
Net cash used in operating activities $ (8,143,756) $ (1,689,116)
------------- ------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 10,337,102
Acquisitions of property and equipment (2,142,522) (458,481)
Additions to software costs (433,619) (84,432)
Acquisition of business, less cash acquired (9,855,466) (14,303,041)
Cash placed in escrow as a result of business acquisition (2,820,000)
------------ ------------
Net cash used in investing activities (4,914,505) (14,845,954)
------------ ------------
Cash flows from financing activities:
Net proceeds from follow-on offering 51,548,708
Borrowings under line of credit 3,100,000
Repayments under line of credit (3,100,000)
Borrowings under senior credit facility 10,745,439
Proceeds from subordinated debt borrowings 5,000,000
Proceeds from exercise of stock options 58,045
Debt issue costs (54,322) (917,133)
Payments on capital lease obligations (397,102) (214,386)
Distributions to shareholders (1,258,351)
Amount payable - book overdraft 1,153,121
------------- ------------
Net cash provided by financing activities 51,155,329 14,508,690
------------ ------------
Effect of exchange rates on cash and cash equivalents (30,827)
Net increase (decrease) in cash and cash equivalents 38,066,241 (2,026,380)
Cash and cash equivalents:
Beginning of period 15,766,963 2,047,476
------------ ------------
End of period $ 53,833,204 $ 21,096
============ ============
Supplemental schedule of noncash investing and financing
activities:
Acquisition of equipment under capital lease obligations $ 500,939
============
Note payable under escrow agreement for acquisition of U-Gene $ 1,530,000
============
Equipment acquired for note payable $ 739,684
============
Acquisition of Business (Note 4):
Fair value of assets acquired $ 23,287,247 $ 20,056,233
Fair value of liabilities assumed (4,975,689) (5,753,192)
Stock issued (8,456,092)
------------ ------------
Net cash payments $ 9,855,466 $ 14,303,041
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
7
KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended June
30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. For further information, refer to
the consolidated financial statements and notes thereto included in the
Form 10-K filed by Kendle International Inc. ("the Company") on March 31,
1998 with the Securities and Exchange Commission.
The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements.
Certain amounts reflected in the prior periods' condensed
consolidated financial statements have been reclassified to be comparable
with the current periods.
2. SHAREHOLDER'S EQUITY:
In June, 1998, the Company completed its follow-on offering of
2,415,000 shares of common stock at a price to the public of $23.50 per
share. Of the 2,415,000 shares sold, 2,315,000 were sold by the Company and
100,000 shares were sold by selling shareholders. Proceeds to the Company
approximated $51.5 million, net of underwriting commissions and discounts
and offering expenses of $2.9 million.
7
8
3. NET INCOME PER SHARE DATA:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," net income per basic share is
computed using the weighted average common shares outstanding for all
periods presented. Net income per diluted share is computed using the
weighted average common shares and potentially dilutive common shares
outstanding for all periods presented.
The weighted average shares and potential shares outstanding used
in computing net income per diluted share have been calculated as follows:
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------------- -------------------
Weighted average common shares
outstanding 8,590,559 3,650,000
Stock purchase warrants 153,738
Stock options 700,051 521,545
--------- ---------
Weighted average shares and potential
shares outstanding 9,290,610 4,325,283
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------- -------------------
Weighted average common shares
outstanding 8,310,405 3,650,000
Stock purchase warrants 153,738
Stock options 681,023 424,783
--------- ---------
Weighted average shares and potential
shares outstanding 8,991,428 4,228,521
4. ACQUISITION:
On February 12, 1998, the Company completed its acquisition of
ACER/EXCEL Inc. ("ACER/EXCEL"), headquartered in Cranford, New Jersey.
Total acquisition costs consisted of $14.4 million in cash and 987,574
shares of the Company's Common Stock. The total purchase price includes
$6.0 million ($2.8 million in cash and 197,516 shares of the Company's
Common Stock) placed in escrow pending resolution of an issue relating to
ACER/EXCEL's S corporation tax status. In early 1998, ACER/EXCEL
determined that, with respect to its tax status as an S corporation,
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 amount has not been included as consideration in the
computation of the excess of acquisition costs over
8
9
net assets acquired. Such escrowed amounts, once released, will increase
purchase price and the excess of acquisition costs over net assets
acquired.
An additional $2.0 million (124,224 shares of the Company's Common
Stock) was placed in escrow to be released to the selling shareholders,
50% in February, 1999 and 50% in February, 2000, for indemnification of
sellers' representation and warranties. 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 acquisition has been accounted for using the purchase method
of accounting, with goodwill as a result of the transaction being
amortized over 30 years. The results of operations are included in the
Company's results from the date of acquisition.
The following unaudited pro forma results of operations assume the
acquisition of ACER/EXCEL occurred at the beginning of each year:
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------- -------------------
Net revenues $43,562,781 $19,850,548
Net income $2,898,625 $3,841,329
Net income (assuming the Company was
taxed as a C corporation throughout 1997) $2,898,625 $2,275,924
Net income per diluted share (assuming
the Company was taxed as a C corporation
throughout 1997) $0.32 $0.45
Weighted average shares and
potential shares outstanding 9,174,756 5,018,579
The pro forma financial information is not necessarily indicative
of the operating results that would have occurred had the ACER/EXCEL
acquisition been consummated as of January 1, 1997 and 1998, nor are they
necessarily indicative of future operating results.
5. COMPREHENSIVE INCOME:
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires display of comprehensive
income in a set of general purpose financial statements. Comprehensive
income is defined as changes in equity of a business enterprise during a
period from transactions and other events from non-owner sources. In
accordance with SFAS No. 130, the Company has displayed a statement of
comprehensive income for all periods presented.
9
10
Accumulated other comprehensive income was as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Net unrealized holdings losses
on available for sale securities, net
of tax $ (133) $ (759)
Cumulative foreign currency translation
adjustment (431,570) (264,041)
------------- --------------
Accumulated other comprehensive
income $ (431,703) $ (264,800)
6. INCOME TAXES:
The condensed consolidated financial statements of the Company for
the three and six months ended June 30, 1997 do not include a provision
for income taxes because the taxable income of the Company was included in
the income tax returns of the individual shareholders under the S
corporation election. Pro forma income data is presented to give effect to
a tax provision on taxable income for financial reporting purposes using
statutory federal, state and local rates that would have resulted if the
Company had filed corporate tax returns during this period.
7. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131
"Disclosures about Segments of an Enterprise and Related Information."
This statement requires selected information to be reported on the
Company's operating segments. Operating segments are determined by the way
management structures the segments in making operating decisions and
assessing performance. The Company is currently reviewing what changes, if
any, this will require on the presentation of the financial statements for
fiscal periods beginning after December 15, 1997.
In March, 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement defines the accounting for computer software developed or
obtained (purchased) for internal use, including (1) a requirement to
capitalize specified costs as a long-lived asset, (2) amortization of such
amounts, and (3) recognition and measurement of impairment of those
amounts. The Company plans to adopt the SOP January 1, 1999. The Company
does not believe the adoption of this SOP will have a material impact on
its financial statements.
10
11
In June, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates
that, due to its limited use of derivative instruments, the adoption of
SFAS No. 133 will not have a significant effect on the Company's results
of operations or its financial position.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information set forth and discussed below for the three and six months
ended June 30, 1998 and 1997, is derived from the Condensed Consolidated
Financial Statements included herein and should be read in conjunction
therewith. The Company's results of operations for a particular quarter may not
be indicative of results expected during subsequent quarters or for the entire
year.
COMPANY OVERVIEW
Kendle International Inc. ("the Company") is an international contract
research organization (CRO) that provides integrated clinical research and drug
development services on a contract basis to the pharmaceutical and
biopharmaceutical industries. These services include Phase I through IV clinical
trial management, clinical data management, statistical analysis, medical
writing and regulatory consultation and representation.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A portion
of the contract fee is typically required to be paid at the time the contract is
entered into and the balance is received in installments over the contract's
duration, in most cases on a milestone achievement basis. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured principally by the total costs incurred as a percentage of estimated
total costs for each contract. The estimated total costs of contracts are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. Additionally,
the Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators. Such costs, which are reimbursable by its customers,
are excluded from direct costs and net revenues.
Direct costs consist of compensation and related fringe benefits for
project-related employees, unreimbursed project-related costs and indirect costs
including facilities, information systems and other costs. Selling, general and
administrative expenses consist of compensation and related fringe benefits for
sales and administrative employees, professional services and advertising costs,
as well as unallocated costs related to facilities, information systems and
other costs.
ACQUISITIONS
In 1997, the Company acquired U-Gene Research B.V. and GMI Gesellschaft
fur Angewandte Mathematik und Informatik mbH as of June 30, 1997 and September
3, 1997, respectively.
In 1998, the Company acquired ACER/EXCEL Inc. ("ACER/EXCEL") headquartered
in Cranford, New Jersey, as of February 12, 1998. ACER/EXCEL provides customers
with Phase II through IV clinical trial management, data collection, statistical
analysis and regulatory document preparation. It also provides drug development
services to the Pacific Rim, through a
12
13
joint venture which operates a CRO headquartered in Beijing, China, and through
a limited partnership in Taiwan.
The acquisitions have been accounted for using the purchase method of
accounting, with goodwill as a result of the transactions being amortized over
30 years. The results of operations are included in the Company's condensed
consolidated statements of operations from the dates of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
Net revenues increased by $15.3 million, or 213%, from $7.2 million for
the three months ended June 30, 1997 to $22.5 million for the three months ended
June 30, 1998. The increase in net revenues was due to: (a) 27 new projects in
the three months ended June 30, 1998 as compared to the three months ended June
30, 1997, which resulted in net revenues of $6.4 million for the three months
ended June 30, 1998; (b) a net increase in revenues recognized on existing
projects of $800,000; and (c) an increase of approximately $8.1 million in net
revenues relating to the Company's acquisitions. Revenues from G.D. Searle & Co.
accounted for approximately 40% of net revenues for the three months ended June
30, 1998 and no other customer accounted for more than 10% of the Company's net
revenues for the three months ended June 30, 1998.
Direct costs increased by $8.3 million, or 211%, from $4.0 million for
the three months ended June 30, 1997 to $12.3 million for the three months ended
June 30, 1998. This increase is primarily comprised of approximately $7.5
million in direct salaries and fringe benefits to support the increases in net
revenues for the period. Direct costs expressed as a percentage of net revenues
decreased from 55.1% for the three months ended June 30, 1997 to 54.8% for the
three months ended June 30, 1998. The decrease in those costs as a percentage of
net revenues is due primarily to the absorption of direct project-related costs
over a larger revenue base.
Selling, general and administrative expenses increased by $4.3 million,
or 205%, from $2.1 million for the three months ended June 30, 1997 to $6.4
million for the three months ended June 30, 1998. The increase is primarily
comprised of: (a) an increase of approximately $1.6 million in salaries and
benefits, which is the result of the Company's continued efforts to increase
its infrastructure in order to support the growth in business activity; (b) an
increase of approximately $479,000 in rent and other facilities expenses; and
(c) an increase of approximately $2.2 million consisting of increases in
training, contractual services, recruiting, marketing, advertising, and other
expenses for the three months ended June 30, 1998 as compared to the same
period in 1997. Selling, general and administrative expenses as a percentage of
net revenues decreased from 29.2% for the three months ended June 30, 1997 to
28.5% for the three months ended June 30, 1998.
Depreciation and amortization expense increased $1.0 million, or 721%,
from $141,000 for the three months ended June 30, 1997 to $1.2 million for the
three months ended June 30, 1998. The increase was due to capital expenditures
and amortization of goodwill as a result of the Company's acquisitions.
13
14
Income taxes of $1.1 million, or 41% of income before income taxes were
recorded for the three months ended June 30, 1998. No income taxes were recorded
with respect to periods prior to the Company's August, 1997 initial public
offering ("IPO") as the Company was taxed as an S corporation.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues increased by $29.1 million, or 221%, from $13.2 million
for the six months ended June 30, 1997 to $42.3 million for the six months ended
June 30, 1998. The increase in net revenues was due to: (a) 27 new projects in
the six months ended June 30, 1998 as compared to the six months ended June 30,
1997, which resulted in net revenues of $9.7 million for the six months ended
June 30, 1998; (b) a net increase in revenues recognized on existing projects of
$3.7 million; and (c) an increase of approximately $15.7 million in net revenues
relating to the Company's acquisitions. Revenues from G.D. Searle & Co.
accounted for approximately 42% of net revenues for the six months ended June
30, 1998 and no other customer accounted for more than 10% of the Company's net
revenues for the six months ended June 30, 1998.
Direct costs increased by $15.9 million, or 215%, from $7.3 million for
the six months ended June 30, 1997 to $23.2 million for the six months ended
June 30, 1998. This increase is primarily comprised of approximately $14.1
million in direct salaries and fringe benefits to support the increases in net
revenues for the period. Direct costs expressed as a percentage of net revenues
decreased from 55.8% for the six months ended June 30, 1997 to 54.8% for the six
months ended June 30, 1998. The decrease in those costs as a percentage of net
revenues is due primarily to the absorption of direct project-related costs over
a larger revenue base.
Selling, general and administrative expenses increased by $8.2 million,
or 204%, from $4.0 million for the six months ended June 30, 1997 to $12.2
million for the six months ended June 30, 1998. The increase is primarily
comprised of: (a) an increase of approximately $3.9 million in salaries and
benefits, which is the result of the Company's continued efforts to increase its
infrastructure in order to support the growth in business activity; (b) an
increase of approximately $1.0 million in rent and other facilities expenses;
and ( c) an increase of approximately $3.3 million consisting of increases in
training, contractual services, recruiting, marketing, advertising and other
expenses for the six months ended June 30, 1998 as compared to the same period
in 1997. Selling, general and administrative expenses as a percentage of net
revenues decreased from 30.3% for the six months ended June 30, 1997 to 28.7%
for the six months ended June 30, 1998.
Depreciation and amortization expense increased $1.8 million, or 607%,
from $291,000 for the six months ended June 30, 1997 to $2.1 million for the six
months ended June 30, 1998. The increase was due to capital expenditures and
amortization of goodwill as a result of the Company's acquisitions.
Income taxes of $2.1 million, or 41.3% of income before income taxes
were recorded for the six months ended June 30, 1998. No income taxes were
recorded with respect to periods prior to the Company's August, 1997 initial
public offering ("IPO") as the Company was taxed as an S corporation.
14
15
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $38.1 million for the six months
ended June 30, 1998 as a result of cash used in operating and investing
activities of $8.1 million and $4.9 million, respectively, and cash provided by
financing activities of $51.1 million. Net cash used in operating activities
resulted primarily from net income offset by additional working capital used to
support the Company's growth.
Investing activities for the six months ended June 30, 1998 consisted
primarily of the costs related to the ACER/EXCEL acquisition of $9.9 million,
net of cash acquired. Financing activities for the six months ended June 30,
1998 consisted primarily of net proceeds of $51.5 million as a result of the
Company's follow-on offering of common stock.
Cash and cash equivalents decreased by $2.0 million for the six months
ended June 30, 1997 as a result of cash used in operating and investing
activities of $1.7 million and $14.8 million, respectively, and cash provided by
financing activities of $14.5 million. Net cash used in operating activities
resulted primarily from net income offset by additional working capital used to
support the Company's growth.
Investing activities for the six months ended June 30, 1997 consisted
primarily of the costs related to the U-Gene acquisition of $14.3 million, net
of cash acquired. Financing activities for the six months ended June 30, 1997
consisted primarily of borrowings under the senior credit facility which were
used to finance the acquisition of U-Gene.
The Company has a $30 million credit facility with a U.S. bank. The credit
facility bears interest at a rate equal to either LIBOR plus the Applicable
Margin (as defined), or the higher of the Bank's prime rate or the Federal Funds
rate plus 0.50%, plus the Applicable Margin. All amounts outstanding thereunder
become due and payable in June, 2000. The facility includes various restrictive
covenants including the maintenance of certain fixed coverage and leverage
ratios as well as minimum net worth levels. At June 30, 1998, there were no
amounts outstanding under the credit facility.
The Company's primary cash needs on both a short-term and long-term basis
are for the payment of salaries and fringe benefits, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its credit facility, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and global presence. Any such
acquisitions may require additional external 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.
15
16
IMPACT OF THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or data corruption causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar business activities.
The Company has made an initial assessment of the Year 2000 Issue and
its potential impact. Based on this assessment, the Company has determined that
it may be required to modify or replace significant portions of the software at
an estimated total cost of $800,000, so that systems will properly utilize dates
beyond December 31, 1999. The Company currently believes it can mitigate the
impact of the Year 2000 Issue internally through modifications to existing
software and conversions to new software. The Company has also initiated formal
communications with its suppliers and customers to evaluate the possible effects
of such parties' failure to remediate their Year 2000 Issue.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
selected information to be reported on the Company's operating segments.
Operating segments are determined by the way management structures the segments
in making operating decisions and assessing performance. The Company is
currently reviewing what changes, if any, this will require on the presentation
of the financial statements for fiscal periods beginning after December 15,
1997.
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines the
accounting for computer software developed or obtained (purchased) for internal
use, including (1) a requirement to capitalize specified costs as a long-lived
asset, (2) amortization of such amounts, and (3) recognition and measurement of
impairment of those amounts. The Company plans to adopt the SOP January 1, 1999.
The Company does not believe the adoption of this SOP will have a material
impact on its financial statements.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
16
17
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, the ability of the combined businesses to be integrated with the
Company's operations, the ability to penetrate new markets, the ability of joint
venture businesses to be integrated with the Company's operations, and the
ability to maintain large customer contracts or to enter into new contracts, and
the other risk factors set forth in the Company's recent SEC filings, copies of
which are available upon request from the Company's investor relations
department.
17
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
applicable
Item 5. Other Information
The form of Proxy for the Company's Annual Meeting of Shareholders
grants authority to the designated proxies to vote in their discretion on any
matters that come before the meeting except those set forth in the Company's
Proxy Statement and except for matters as to which adequate notice is received.
In order for a notice to be deemed adequate for the 1999 Annual Shareholders'
Meeting, it must be received prior to February 28, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
27.1 Financial Data Schedule For the
Six Months Ended June 30, 1998
27.2 Financial Data Schedule For the
Three Months Ended June 30, 1998
(b) The Company filed a Form 8-KA, dated April 28, 1998, in which the
Company amended its Form 8-K dated February 12, 1998, to provide financial
information with respect to its acquisition of ACER/EXCEL. No other reports on
Form 8-K were filed during the quarter.
18
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace K. Bryan
-----------------------------
Date: August 14, 1998 Candace K. Bryan
Chairman of the Board and
Chief Executive Officer
By: /s/ Timothy M. Mooney
-----------------------------
Date: August 14, 1998 Timothy M. Mooney
Vice President - Chief
Financial Officer
19
20
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
27.1 Financial Data Schedule For the
Six Months Ended June 30, 1998
27.2 Financial Data Schedule For the
Three Months Ended June 30, 1998
20