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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission file number 000-23019
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KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 700, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,330,418 shares of common
stock, no par value, as of July 31, 1999.
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KENDLE INTERNATIONAL INC.
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Income - Three
Months Ended June 30, 1999 and 1998; Six Months
Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended June 30, 1999 and 1998; Six
Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
Exhibit Index 21
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
-------------------- ---------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,083,414 $ 13,980,300
Available for sale securities 26,354,840 40,768,460
Accounts receivable 32,552,362 28,517,542
Unreimbursed investigator and project costs 7,044,687 4,072,214
Other current assets 4,551,827 4,051,540
-------------------- ---------------------
Total current assets 80,587,130 91,390,056
-------------------- ---------------------
Property and equipment, net 12,970,662 11,319,793
Excess of purchase price over net assets acquired, net 52,188,858 47,691,537
Other assets 5,671,340 2,838,496
-------------------- ---------------------
Total assets $ 151,417,990 $ 153,239,882
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 801,737 $ 910,273
Trade payables 5,945,595 6,252,061
Advances against investigator and project costs 1,788,759 2,695,608
Advance billings 7,842,529 9,722,037
Other accrued liabilities 5,125,941 6,314,274
-------------------- ---------------------
Total current liabilities 21,504,561 25,894,253
-------------------- ---------------------
Obligations under capital leases, less current portion 1,100,981 1,512,680
Note payable -- escrow agreement - 1,590,000
Other noncurrent liabilities 2,173,967 1,742,902
-------------------- ---------------------
Total liabilities 24,779,509 30,739,835
-------------------- ---------------------
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; 11,108,812 and
10,953,390 shares issued and outstanding at
June 30, 1999 and December 31, 1998 respectively 75,000 75,000
Additional paid in capital 117,146,440 114,425,511
Retained earnings 11,412,211 7,517,039
Accumulated other comprehensive income:
Net unrealized holdings losses on available for sale securities (552,673) (81,806)
Foreign currency translation adjustment (1,442,497) 564,303
-------------------- ---------------------
Total shareholders' equity 126,638,481 122,500,047
-------------------- ---------------------
Total liabilities and shareholders' equity $ 151,417,990 $ 153,239,882
==================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------------------- -------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net revenues $ 27,854,050 $ 22,534,019 $ 53,618,175 $ 42,299,158
-------------------- ------------------ -------------------- --------------------
Costs and expenses:
Direct costs 14,886,157 12,032,601 27,814,013 22,485,121
Selling, general and
administrative expenses 8,921,255 6,738,539 16,934,371 12,844,257
Depreciation and amortization 1,529,136 1,158,486 3,017,283 2,059,344
-------------------- ------------------ -------------------- --------------------
25,336,548 19,929,626 47,765,667 37,388,722
-------------------- ------------------ -------------------- --------------------
Income from operations 2,517,502 2,604,393 5,852,508 4,910,436
Other income (expense):
Interest income 312,755 96,504 718,899 297,368
Interest expense (50,809) (90,331) (129,995) (142,174)
Other (176,987) 31,201 (113,240) 54,086
-------------------- ------------------ -------------------- --------------------
Income before income taxes 2,602,461 2,641,767 6,328,172 5,119,716
Income tax expense 1,001,000 1,083,125 2,433,000 2,116,688
-------------------- ------------------ -------------------- --------------------
Net income $ 1,601,461 $ 1,558,642 $ 3,895,172 $ 3,003,028
==================== ================== ==================== ====================
Income per share data:
Basic:
Net income per share $ 0.14 $ 0.18 $ 0.35 $ 0.36
==================== ================== ==================== ====================
Weighted average shares 11,100,594 8,590,559 11,080,590 8,310,405
Diluted:
Net income per share $ 0.14 $ 0.17 $ 0.33 $ 0.33
==================== ================== ==================== ====================
Weighted average shares 11,597,359 9,290,610 11,633,172 8,991,428
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
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1999 1998 1999 1998
---- ---- ---- ----
Net income $ 1,601,461 $ 1,558,642 $ 3,895,172 $ 3,003,028
------------------ ------------------ --------------- ------------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (592,046) 267,693 (2,006,800) (167,529)
Net unrealized holdings gains (losses)
on available for sale securities arising
during the period, net of tax (268,424) (133) (423,657) 65,099
Reclassification adjustment for holdings
gains included in net income, net of tax (45,515) (64,473) (47,210) (64,473)
------------------ ------------------ --------------- ------------------
Net change in unrealized holdings gains
(losses) on available for sale securities (313,939) (64,606) (470,867) 626
------------------ ------------------ --------------- ------------------
Comprehensive income $ 695,476 $ 1,761,729 $ 1,417,505 $ 2,836,125
================== ================== =============== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30,
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1999 1998
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Net cash used in operating activities $ (3,256,971) $ (8,143,756)
---------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 19,309,444 10,337,102
Purchases of available for sale securities (5,368,691)
Acquisitions of property and equipment (2,824,238) (2,142,522)
Additions to software costs (1,559,743) (433,619)
Other investments (1,303,550)
Acquisitions of businesses, less cash acquired (6,411,522) (9,855,466)
Cash placed in escrow as a result of business acquisition (2,820,000)
Payment of escrow note related to business acquisition (1,590,000)
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Net cash provided by (used in) investing activities 251,700 (4,914,505)
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Cash flows from financing activities:
Net proceeds from follow-on offering 51,548,708
Proceeds from exercise of stock options 68,746 58,045
Debt issue costs (54,322)
Payments on capital lease obligations (520,235) (397,102)
Other (75,117)
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Net cash provided by (used in) financing activities (526,606) 51,155,329
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Effects of exchange rates on cash and cash equivalents (365,009) (30,827)
Net increase (decrease) in cash and cash equivalents (3,896,886) 38,066,241
Cash and cash equivalents:
Beginning of period 13,980,300 15,766,963
---------------------- --------------------
End of period $ 10,083,414 $ 53,833,204
====================== ====================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with investment in
Component Software International, Inc. $ 371,307
======================
Issuance of common stock in connection with Employee
Stock Purchase Plan $ 501,618
======================
Acquisitions of Businesses:
Fair value of assets acquired $ 9,705,784 $ 23,287,247
Fair value of liabilities assumed (1,690,199) (4,975,689)
Stock issued (1,604,063) (8,456,092)
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Net cash payments 6,411,522 $ 9,855,466
====================== ====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended June
30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. For further information, refer to
the consolidated financial statements and notes thereto included in the
Form 10-K for the year ended December 31, 1998 filed by Kendle
International Inc. ("the Company") with the Securities and Exchange
Commission.
The balance sheet at December 31, 1998 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. NET INCOME PER SHARE DATA:
Net income per basic share is computed using the weighted average
common shares outstanding. Net income per diluted share is computed using
the weighted average common shares and potential common shares outstanding.
The weighted average shares used in computing net income per
diluted share have been calculated as follows:
Three Months Ended June Three Months Ended June
30, 1999 30, 1998
---------------------------- --------------------------
Weighted average common shares
outstanding 11,100,594 8,590,559
Stock options 496,765 700,051
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Weighted average shares 11,597,359 9,290,610
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Six Months Ended Six Months Ended June
June 30, 1999 30, 1998
---------------------------- --------------------------
Weighted average common shares
outstanding 11,080,590 8,310,405
Stock options 552,582 681,023
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Weighted average shares 11,633,172 8,991,428
3. ACQUISITIONS:
In June, 1999, the Company acquired ESCLI S.A., a contract research
organization located in Paris, France, for approximately $2.6 million in
cash.
In January, 1999, the Company acquired Research Consultants
(International) Holdings Ltd. ("IRC"), a U.K.-based company. Total
acquisition costs consisted of approximately $4.4 million in cash and
87,558 shares of Common Stock. The shares have been placed in an escrow
account pursuant to the IRC Share Purchase Agreement, 50% to be released in
January, 2000 and the remainder in 2001.
The Company acquired ACER/EXCEL Inc. ("ACER/EXCEL") in February,
1998 for approximately $14.4 million in cash and 987,574 shares of the
Company's Common Stock.
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 results from the date of acquisition.
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of each year:
Six Months Ended June Six Months Ended June
30, 1999 30, 1998
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Net revenues $55,324,938 $46,830,530
Net income $3,891,973 $2,924,327
Net income per diluted share $0.33 $0.31
Weighted average shares 11,633,172 9,459,830
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been consummated
as of January 1, 1998, nor are they necessarily indicative of future operating
results.
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4. INVESTMENT:
In January, 1999, the Company acquired a minority interest in
Component Software International, Inc. ("CSI"), a software consulting and
development company, for approximately $1.6 million in cash and 19,995 shares of
the Company's Common Stock. Concurrent with this transaction, the Company
entered into a Multi-Year Strategic Service Agreement with CSI whereby the
Company will pay CSI $7.0 million over the next four years in exchange for
strategic software consulting and development services from CSI.
5. SEGMENT INFORMATION:
The Company does not manage nor is it organized into separate
operating segments. The Company manages its business in the aggregate, as a
full-service international CRO. Principal financial information by geographic
area is as follows:
Three Months Ended June Three Months Ended
30, 1999 June 30, 1998
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Net revenues
North America $20,240,501 $17,634,090
Foreign 7,613,549 4,899,929
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$27,854,050 $22,534,019
Six Months Ended June Six Months Ended June
30, 1999 30, 1998
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Net revenues
North America $38,966,405 $31,088,137
Foreign 14,651,770 11,211,021
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$53,618,175 $42,299,158
June 30, 1999 December 31, 1998
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Identifiable Assets
North America $104,574,189 $113,125,603
Foreign 46,843,801 40,114,279
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$151,417,990 $153,239,882
Net revenues of the Company's wholly-owned subsidiaries have been
included in the condensed consolidated statements of income from the
respective dates of acquisition.
6. SUBSEQUENT EVENT:
In July, 1999, the Company acquired Health Care Communications Inc.
("HCC"), a New Jersey based medical communications company, and HCC Health Care
Communications (1991) Ltd., a Toronto based contract research organization.
Total acquisition costs consisted of approximately $5.6 million in cash and
174,559 shares of the Company's Common Stock. The
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purchase price may be increased dependent upon the achievement of certain
operating objectives. This acquisition will be accounted for using the purchase
method of accounting.
7. NEW ACCOUNTING PRONOUNCEMENT:
In June, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000
(January 1, 2001 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. Since the
Company's only derivative transaction has historically been the use of foreign
currency exchange rate hedge instruments from time to time within a year,
management of the Company anticipates that the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information set forth and discussed below for the three and six
months ended June 30, 1999, 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 services
including Phase I through IV drug development, on a contract basis to the
pharmaceutical and biopharmaceutical industries.
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.
The Company's results are subject to volatility due to such factors as
the commencement, completion, cancellation or delay of contracts; the progress
of ongoing projects; cost overruns; the Company's sales cycle; the ability to
maintain large customer contracts or to enter into new contracts, and other
factors. In 1998, the Company's Phase I unit experienced a decline in revenues
and a resulting loss from operations. The Phase I unit results in part reflect
the inherent volatility in Phase I revenues due to the nature of Phase I studies
(shorter duration studies with shorter lead time and higher potential for
cancellation) combined with turnover in certain management personnel. The
Company has taken steps designed to enhance the performance of the Phase I
facility including the hiring of experienced Phase I management personnel and
increasing its Phase I new business development efforts. As a result of these
efforts, the backlog of projects in the Phase I facility more than tripled from
March 31, 1999 to June 30, 1999. Assuming no cancellations or delays in
projects, the increase in new business activity should benefit the Phase I unit
beginning in the second half of 1999. The Company will
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continue to focus on its Phase I unit and further improving its operating
results throughout 1999. However, the decline in revenues and resulting loss
from operations in the Phase I unit could continue if the Company's efforts are
unsuccessful.
ACQUISITIONS
In January, 1999, the Company acquired Research Consultants
(International) Holdings Ltd. ("IRC"), a U.K. based regulatory affairs company.
In June, 1999, the Company acquired ESCLI S.A., a contract research
organization located in Paris, France.
In July, 1999, the Company acquired Health Care Communications Inc., a
New Jersey based medical communications company, and HCC Health Care
Communications (1991) Ltd., a Toronto based contract research organization.
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 income from the dates of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net revenues increased to $27.9 million for the three months ended June
30, 1999 from $22.5 million for the three months ended June 30, 1998. The 24%
increase in net revenues was comprised of organic growth of 19% and growth from
acquisitions of 5%. Revenues from G.D. Searle and Co. and Centocor, Inc.
accounted for approximately 29% and 21%, respectively, of net revenues for the
three months ended June 30, 1999. Net revenues during the three months ended
June 30, 1999 were negatively impacted by approximately $215,000 due to a
revision in the estimated costs to complete on one of the Company's contracts
and $400,000 due to foreign currency translation.
Direct costs increased by $2.9 million, or 24%, from $12.0 million for
the three months ended June 30, 1998 to $14.9 million for the three months ended
June 30, 1999. This increase is primarily comprised of increases in direct
salaries and fringe benefits to support the increases in net revenues for the
period. Direct costs were impacted by an adjustment due to a potential loss of
approximately $212,000 related to one of the Company's contracts. Direct costs
expressed as a percentage of net revenues were 53.4% for the three months ended
June 30, 1999 which is consistent with the quarter ended June 30, 1998.
Selling, general and administrative expenses increased by $2.2 million,
or 32%, from $6.7 million for the three months ended June 30, 1998 to $8.9
million for the three months ended June 30, 1999. Selling, general and
administrative expenses as a percentage of net revenues increased from 29.9% for
the three months ended June 30, 1998 to 32% for the three months ended June 30,
1999. The increase in these costs as a percentage of net revenues is primarily
the result of significantly higher costs to recruit and relocate personnel for a
number of key
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management positions which were not expected to be filled until later in the
year. Given the success of filling these positions in the second quarter, the
Company believes that recruiting and relocation costs should be lower in the
second half of the year than the first half of 1999.
Depreciation and amortization expense increased $300,000, or 32%, from
$1.2 million for the three months ended June 30, 1998 to $1.5 million for the
three months ended June 30, 1999. The increase was due primarily to amortization
of goodwill as a result of the Company's acquisitions.
The Company's effective tax rate was 38.5% for the three months ended
June 30, 1999 as compared to 41% for the three months ended June 30, 1998. The
decrease in the effective tax rate is due to the Company's investment in tax
advantaged securities in 1999 as compared to taxable securities in 1998 in order
to achieve a better after-tax return on these investments.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net revenues increased to $53.6 million for the six months ended June
30, 1999 from $42.3 million for the six months ended June 30, 1998. The 27%
increase in net revenues was comprised of organic growth of 21% and growth from
acquisitions of 6%. Revenues from G.D. Searle and Co. and Centocor, Inc.
accounted for approximately 29% and 17% respectively, of net revenues for the
six months ended June 30, 1999.
Direct costs increased by $5.3 million, or 24%, from $22.5 million for
the six months ended June 30, 1998 to $27.8 million for the six months ended
June 30, 1999. This increase is primarily comprised of increases 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 were 51.9% for
the six months ended June 30, 1999 compared to 53.2% for the six months ended
June 30, 1998. The decrease in these costs as a percentage of net revenues is
due to the absorption of direct project related costs over a large revenue base
offset by a second quarter adjustment due to a potential loss relating to one of
the Company's contracts.
Selling, general and administrative expenses increased by $4.1 million,
or 32%, from $12.8 million for the six months ended June 30, 1998 to $16.9
million for the six months ended June 30, 1999. Selling, general and
administrative expenses as a percentage of net revenues increased from 30.4% for
the six months ended June 30, 1998 to 31.6% for the six months ended June 30,
1999. The increase in these costs as a percentage of net revenues is primarily
the result of significantly higher costs to recruit and relocate personnel for a
number of key management positions which were not expected to be filled until
later in the year.
Depreciation and amortization expense increased approximately $900,000,
or 47%, from $2.1 million for the six months ended June 30, 1998 to $3.0 million
for the six months ended June 30, 1999. The increase was due primarily to
amortization of goodwill as a result of the Company's acquisitions.
The Company's effective tax rate was 38.4% for the six months ended
June 30, 1999 as compared to 41.3% for the six months ended June 30, 1998. The
decrease in the effective tax rate is due to the Company's investment in tax
advantaged securities in 1999 as compared to taxable securities in 1998 in order
to achieve a better after-tax return on these investments.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $3.9 million for the six months
ended June 30, 1999 primarily as a result of cash used in operating and
financing activities of $3.3 million and approximately $500,000, respectively.
Net cash used in operating activities resulted from net income primarily offset
by an increase in accounts receivable and a decrease in advance billings.
Fluctuations in accounts receivable and advance billings occur on a regular
basis as services are performed, milestones or other billing criteria are
achieved, invoices are sent to customers, and payments for outstanding accounts
receivable are collected from customers. Such activity varies by individual
customer and contract.
Investing activities for the six months ended June 30, 1999 consisted
of the costs related to the IRC and ESCLI acquisitions of $4.1 million and $2.3
million, respectively (net of cash acquired), payment of an escrow note in
connection with the Company's acquisition of U-Gene Research B.V. in June, 1997,
of approximately $1.6 million, capital expenditures of approximately $4.4
million and investments in Component Software International, Inc. ("CSI") of
$1.3 million, offset by net proceeds from sales and purchases of available for
sale securities of $13.9 million.
The Company had available for sale securities totaling $26.4 million at
June 30, 1999.
The Company has a $30 million credit facility with certain banks. The
credit facility bears interest at a rate equal to either (a) LIBOR plus the
Applicable Margin (as defined) or (b) the higher of the Bank's prime rate or the
Federal Funds rate plus 0.50%, plus the Applicable Margin. All amounts
outstanding thereunder become due and payable in February, 2001. 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, 1999, 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.
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 miscalculations causing disruptions of
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operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has a detailed plan in place to address the Year 2000
Issue. The Company has formed an ongoing internal review team to address the
Year 2000 Issue that encompasses personnel from various operational and
administrative areas of the Company and involves the engagement of an outside
consultant. Progress against the Year 2000 plan is monitored by this internal
review team and reported to senior management and the Board of Directors on a
regular basis. The project has proceeded according to plan thus far.
The Company's Year 2000 plan encompasses the following: (a) inventory
and assessment, (b) remediation, and (c) validation and implementation. To date,
the Company's key financial and operational systems have been inventoried and
detailed plans are in place for the required systems modifications or
replacements. Implementation of required changes to critical business systems,
including testing of those changes, is substantially complete. The remainder of
the plan, including remediation of certain European clinical data management
systems, is expected to be completed by September 30, 1999.
The Company has initiated formal communications with its suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. These suppliers
include utility companies, telecommunications companies and business specific
product suppliers such as software and hardware providers and Phase I unit
equipment providers. To date, responses have been received from approximately
63% of the Company's inventory of suppliers. Contingency plans have been or are
currently being developed to determine alternative sources of supplies from
vendors who have not yet responded to the Company's inquiries. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely manner, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
Incremental costs, which include contractor costs to modify existing
systems and costs of internal resources involved in achieving Year 2000
compliance, are charged to expense as incurred. The Company has utilized both
internal and external resources to reprogram or replace and test the software
for Year 2000 modifications. Costs for the Year 2000 project are estimated to
total $900,000, of which approximately 59% has been spent through June 30, 1999.
Approximately $125,000 of the $370,000 of costs which remain relate to the
replacement of certain of the Company's noncritical business systems.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and the ability of third parties
with whom the Company has business relationships to successfully address their
own Year 2000 concerns.
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The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a business
critical system. These procedures will be expanded to include specific
procedures for potential Year 2000 Issues. Contingency plans to protect the
business from Year 2000 related interruptions are being developed. The Company
expects these plans to be completed during the third quarter of 1999 and they
will include, for example, development of backup procedures and identification
of alternative suppliers.
Worst-case scenarios resulting from Year 2000 problems could include
the following: loss of electrical, water and other utility services which could
result in disruption of the Company's services; software and embedded technology
failure which could disrupt the Company's equipment, systems and networks
resulting in an inability to perform existing and future studies and/or have an
adverse impact on the health and well being of patients; the loss of
telecommunications capabilities (both voice and data), which could result in an
inability of the Company to internally communicate or to communicate with, among
others, its customers and investigational sites; and the inability of the
Company's third party investigational sites to become Year 2000 compliant, which
could result in the loss to the Company of their services. As previously
discussed, the Company is currently in the process of developing contingency
plans to address the consequences of these issues, should they arise. These or
other events could result in business slowdowns or suspensions and have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000 (January
1, 2001 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. Since the
Company's only derivative transaction has historically been the use of foreign
currency exchange rate hedge instruments from time to time within a year,
management of the Company anticipates that the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors 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
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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 Company's ability
to meet deadlines regarding Year 2000 readiness, 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
SEC filings, copies of which are available upon request from the Company's
investor relations department.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held May 20,
1999. At such meeting, the Shareholders of the Company elected the following as
Directors of the Company: Candace Kendle, Philip E. Beekman, Christopher C.
Bergen, Robert R. Buck, Timothy M. Mooney, Mary Beth Price, and Charles A.
Sanders. Share were voted as follows: Candace Kendle (FOR: 8,714,668 AGAINST:
6,100), Philip E. Beekman (FOR: 8,713,843 AGAINST: 6,925), Christopher C. Bergen
(FOR: 8,714,643 AGAINST: 6,125), Robert R. Buck (FOR: 8,714,543 AGAINST: 6,225),
Timothy M. Mooney (FOR: 8,714,843 AGAINST: 5,925), Mary Beth Price (FOR:
8,714,468 AGAINST: 6,300), and Charles A. Sanders (FOR: 8,714,593 AGAINST:
6,175).
The Shareholders also approved the Amendment to the Company's Restated
and Amended Articles of Incorporation to increase the number of authorized
shares of Common Stock. In connection with such approval, there were 8,380,600
shares voted for the approval of the amendment, 335,498 shares cast against, and
4,670 shares cast to abstain.
In addition, the Shareholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the calendar year 1999. In connection with such ratification, 8,716,128 shares
were voted for ratification, 740 shares cast against, and 3,900 shares cast to
abstain.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits Description
-------- -----------
2.12 Asset Purchase Agreement dated
June 27, 1999 by and among the
Company and the Shareholders of Health Care
Communications, Inc.
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27.1 Financial Data Schedule For the Six
Months Ended June 30, 1999
27.2 Financial Data Schedule For the Three
Months Ended June 30, 1999
(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace K. Kendle
-----------------------------------------
Date: August 13, 1999 Candace K. Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
-----------------------------------------
Date: August 13, 1999 Timothy M. Mooney
Executive Vice President - Chief Financial
Officer
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KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
-------- -----------
2.12 Asset Purchase Agreement dated June 27,
1999 by and among the Company and the
Shareholders of Health Care
Communications, Inc.
27.1 Financial Data Schedule For the Six
Months Ended June 30, 1999
27.2 Financial Data Schedule For the Three
Months Ended June 30, 1999
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