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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Year Ended December 31, 2003
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 000-23019
KENDLE INTERNATIONAL INC.
Ohio IRS Employer ID
(State or other jurisdiction No. 31-1274091
of incorporation or organization)
441 Vine Street, 1200 Carew Tower
Cincinnati, Ohio 45202
513-381-5550
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[ ]
The aggregate market value of the Registrant's Common Stock at June 30, 2003
held by non-affiliates was $56,116,757 (based on the closing price of the
Company's Common Stock on The Nasdaq National Market on June 30, 2003 of $6.19).
Shares of Common Stock held by each Executive Officer and Director and by any
person who owns 10% or more of the outstanding Common Stock have been excluded
in that such person might be deemed to be an affiliate.
As of February 27, 2004, 13,099,789 shares of no par value Common Stock were
issued and 13,079,892, shares of no par value Common Stock were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the Commission for
its 2004 Annual Meeting of Shareholders to be held May 6, 2004 are incorporated
by reference into Part III.
See Exhibit Index on page 19.
KENDLE INTERNATIONAL INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
Part I
Item 1 - Business.......................................................... 3
Item 2 - Properties........................................................ 4
Item 3 - Legal Proceedings................................................. 4
Item 4 - Submission of Matters to a Vote of Security Holders............... 4
Part II
Item 5 - Market for Registrant's Common Equity and Related
Shareholder Matters............................................... 4
Item 6 - Selected Financial Data........................................... 5
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 6
Item 7A- Quantitative and Qualitative Disclosures about Market Risk........ 16
Item 8 - Financial Statements and Supplementary Data....................... 17
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 17
Item 9A- Controls and Procedure............................................ 17
Part III
Item 10 - Directors and Executive Officers of the Registrant............... 17
Item 11 - Executive Compensation........................................... 18
Item 12 - Security Ownership of Certain Beneficial Owners and Management .. 18
Item 13 - Certain Relationships and Related Transactions................... 20
Item 14 - Principal Accounting Fees and Services........................... 20
Part IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 20
Signatures
2
PART I
ITEM 1.
BUSINESS
Kendle International Inc. (the "Company") , an Ohio corporation established in
1989, is a contract research organization (CRO) that provides a broad range of
Phase I through IV clinical research and drug development services to the
pharmaceutical and biotechnology industries. The Company augments the research
and development activities of pharmaceutical and biotechnology companies by
offering high quality, value added clinical research services and proprietary
information technology designed to reduce drug development time and expense. The
Company is managed in one reportable segment encompassing Phase I through IV
contract services.
The Company believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as these companies strive to increase revenues through faster drug
development while also dealing with cost containment pressures. The CRO
industry, by specializing in clinical trial management, is often able to perform
the needed services with a higher level of expertise or specialization, more
quickly and at a lower cost than a customer could perform the services
internally.
The Company's strategy is to continue to enhance its reputation as a
high-quality provider of a full range of CRO services. The Company's strategy
consists of the following key elements: (i) continue to expand its broad range
of therapeutic expertise; (ii) offer its customers a full range of services that
encompass the clinical research process and complement the research and
development departments of its customers; (iii) expedite the drug development
process through a variety of innovative information technology platforms such as
the Company's proprietary TrialWare(R) software including TrialWeb(TM), its
clinical trial information web service; (iv) continue to build a brand presence
that portrays high-quality work; and (v) supplement internal growth through
strategic acquisitions that expand the Company's geographic presence and add to
the Company's clinical development capabilities in existing or new therapeutic
areas or service offerings.
In October 2003, the Company acquired Estadisticos y Clinicos Asociados, S.A.
(ECA). ECA is a Phase I-IV contract research organization located in Mexico
City, Mexico. The Company acquired substantially all the assets and assumed
certain liabilities of ECA for a purchase price of approximately $3.6 million in
cash, including acquisition costs.
Revenues from the top five customers accounted for approximately 47% of the
Company's total net service revenues for the year ended December 31, 2003. The
Company's net service revenues from Pfizer Inc. accounted for approximately 27%
of the Company's net service revenues for the year ended December 31, 2003. No
other customer accounted for more than 10% of the Company's net service revenues
for the year.
Segment and geographic information of the Company is contained in Note 16 to the
Consolidated Financial Statements.
Backlog
Backlog is based on signed contracts and letters of intent. Backlog at December
31, 2003 was approximately $119 million compared to approximately $156 million
at December 31, 2002. Total backlog plus verbally awarded business at December
31, 2003 was approximately $186 million compared to approximately $192 million
at December 31, 2002. No assurance can be given that the Company will be able to
realize the net service revenues that are included in the backlog and verbal
awards. Backlog and verbal awards are not necessarily meaningful indicators of
future results for a variety of reasons, including, but not limited to, the
following: (i) contracts vary in size and duration, with revenue from some
studies realized over a number of years; (ii) the scope of contracts may change,
either increasing or decreasing the value of the contract; and (iii) studies may
be terminated or delayed by the sponsor or by regulatory authorities.
Competition
The Company competes primarily against in-house research and development
departments of pharmaceutical and biotechnology companies, universities,
teaching hospitals and other full-service CROs, some of which possess
substantially greater capital, technical and other resources than the Company.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, the quality of services
provided, the ability to manage large-scale trials on a global basis, medical
database management capabilities, the ability to provide statistical and
regulatory services, the ability to recruit investigators, the ability to
recruit patients into studies, the ability to integrate information technology
with systems to improve the efficiency of contract research, an international
presence with strategically located facilities, financial viability and price.
3
The CRO industry is highly fragmented with several hundred CROs ranging from
small, limited-service providers to full-service, global drug development
corporations. Some of the full-service CROs competing with the Company include
Covance, Inc., PAREXEL International Corporation, Pharmaceutical Product
Development, Inc., ICON plc, Inveresk, and Quintiles Transnational Corporation.
Employees
As of February 29, 2004, the Company had approximately 1,680 employees. None of
the Company's employees are covered by a collective bargaining agreement.
Available Information
The Company maintains a website at the address www.kendle.com. The Company is
not including the information contained on its website as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. The Company
makes available free of charge through its website its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission.
Required filings by the Company's officers and directors with respect to the
Company furnished in electronic form are also made available on our website as
are the Company's proxy statements for its meetings of shareholders. These
filings also my be read or copied at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 70549. The SEC also maintains an Internet
site (http://www.SEC.gov) that contains reports, proxy and other information
statements and other information regarding issuers that file electronically with
the SEC.
ITEM 2.
PROPERTIES
The Company leases all of its facilities with the exception of the Company-owned
facility in Ely, United Kingdom. The Company's principal executive offices are
located in Cincinnati, Ohio, where it leases approximately 115,000 square feet
under a lease expiring in 2009. The Company also maintains offices in various
other North American, European and Australian locations.
Management believes that such offices are sufficient to meet its present needs
and does not anticipate any difficulty in securing additional space, as needed,
on terms acceptable to the Company.
ITEM 3.
LEGAL PROCEEDINGS
The Company currently is not a party to any pending material litigation, nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
Shares of the Company's Common Stock are listed on the Nasdaq Stock Market(R)
and are traded under the symbol "KNDL". The following table sets forth the high
and low prices for shares of the Company's Common Stock for the periods
indicated.
4
First Second Third Fourth
------ ------ ------ ------
2003 Quarter
Ranges of stock price
High $10.10 $ 6.80 $ 7.24 $ 7.50
Low 3.05 3.35 4.43 5.25
2002 Quarter
Ranges of stock price
High 20.35 18.65 13.98 10.76
Low 13.92 9.75 6.49 6.47
The number of holders of record of Kendle International Inc. common stock was
192 as of February 27, 2004. This total excludes shares held under beneficial
ownership in nominee name or within clearinghouse positions of brokerage firms
or banks. The Company has not paid dividends on its Common Stock since its
initial public offering in August 1997. The Company does not currently intend to
pay dividends in the foreseeable future, but instead intends to reinvest
earnings in its business.
Securities Authorized Under Equity Compensation Plans:
The information required for Securities Authorized Under Equity Compensation
Plans can be found in Part III, Item 12, Security Ownership of Certain
Beneficial Owners and Management of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities:
On April 4, 2003, Philip Beekman, Robert Simpson, Donald Harrison, Steven Geis,
Timothy Johnson and Frederick Russ, the non-employee directors of the Company at
the time, were each issued 815 shares of Common Stock in exchange for their
services as directors of the Company pursuant to the 1997 Directors'
Compensation Plan. These issuances were exempt from registration under the
Securities Act of 1933 pursuant to Section 4 (2) as transactions by an issuer
not involving any public offering.
ITEM 6.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Net service revenues $ 156,221 $ 165,173 $ 154,302 $ 120,487 $ 117,151
Reimbursable out-of-pocket revenues 53,436 48,841 40,197 35,651 33,441
--------- --------- --------- --------- ---------
Total revenues 209,657 214,014 194,499 156,138 150,592
--------- --------- --------- --------- ---------
Costs and expenses:
Direct costs 91,133 98,438 93,729 74,077 61,032
Reimbursable out-of-pocket costs 53,436 48,841 40,197 35,651 33,441
Selling, general and administrative 52,402 48,646 44,047 39,249 37,316
Depreciation and amortization 9,057 8,347 9,988 7,930 6,731
Employee severance and office consolidation costs 1,468 408 (766) 2,980 --
Goodwill impairment -- 67,745 -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses 207,496 272,425 187,195 159,887 138,520
Income (loss) from operations 2,161 (58,411) 7,304 (3,749) 12,072
Interest income 334 534 903 988 1,059
Interest expense (1,039) (1,219) (877) (643) (367)
Other (725) (61) 23 (292) (67)
Investment impairment (405) (1,938) -- -- --
Gain on debt extinguishment 558 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss)before income taxes 884 (61,095) 7,353 (3,696) 12,697
Income taxes 2,574 (6,295) 3,147 (1,566) 4,968
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (1,690) $ (54,800) $ 4,206 $ (2,130) $ 7,729
INCOME (LOSS) PER SHARE DATA
Basic:
Net income (loss) per share $ (0.13) $ (4.30) $ 0.34 $ (0.18) $ 0.69
Weighted average shares 12,973 12,734 12,251 11,708 11,251
Diluted:
5
Net income (loss) per share $ (0.13) $ (4.30) $ 0.33 $ (0.18) $ 0.65
Weighted average shares 12,973 12,734 12,858 11,708 11,826
CONSOLIDATED BALANCE SHEET DATA(1)
Working capital $ 38,523 $ 41,451 $ 36,664 $ 39,396 $ 44,838
Total assets 154,415 155,397 204,051 176,519 184,382
Total short and long-term debt 15,503 21,236 16,217 2,746 10,188
Total shareholders' equity 96,369 94,360 142,307 132,870 133,646
(1) From 1999 to 2003, the Company made eight acquisitions. See Note 13 to the
consolidated financial statements.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information set forth and discussed below is derived from the Company's
Consolidated Financial Statements and the related notes thereto included herein
and should be read in conjunction therewith.
COMPANY OVERVIEW
Kendle International Inc. (the Company) is an international contract research
organization (CRO) that provides integrated clinical research services,
including clinical trial management, clinical data management, statistical
analysis, medical writing, regulatory consulting and organizational meeting
management and publications services on a contract basis to the pharmaceutical
and biotechnology industries. The Company is managed in one reportable segment
encompassing Phase I through IV contract services.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A contract
typically requires a portion of the contract fee to be paid at the time the
contract is entered into and the balance is received in installments over the
contract's duration, in most cases on a milestone achievement basis. Net service
revenues from contracts are generally recognized on the percentage of completion
method, measured principally by the total costs incurred as a percentage of
estimated total costs for each contract. The estimated total costs of contracts
are reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. When estimates
indicate a loss, such loss is provided in the current period in its entirety.
The Company also performs work under time-and-materials contracts, recognizing
revenue as hours are worked based on the hourly billing rates for each contract.
Additionally, the Company recognizes revenue under units-based contracts as
units are completed multiplied by the contract per-unit price.
The Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators as well as other out-of-pocket costs. These
out-of-pocket costs are reimbursable by the Company's customers. Effective
January 1, 2002 in connection with the implementation of Emerging Issues Task
Force (EITF) 01-14, "Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred," the Company includes amounts paid
to investigators and other out-of-pocket costs as reimbursable out-of-pocket
revenues and reimbursable out-of-pocket expenses in the Consolidated Statements
of Operations. In certain contracts, these costs are fixed by the contract
terms, so the Company recognizes these costs as part of net service revenues and
direct costs.
Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and an allocation
of indirect costs including facilities, information systems and other costs.
Selling, general and administrative expenses consist of compensation and related
fringe benefits for sales and administrative associates and professional
services, as well as unallocated costs related to facilities, information
systems and other costs.
Depreciation and amortization expenses consist of depreciation and amortization
costs recorded on a straight-line method over the useful life of the property or
equipment and internally developed software. In July 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142, which requires intangible assets with indefinite
useful lives to no longer be amortized, but instead be reviewed at least
annually for impairment. The Company adopted SFAS No. 142 as of January 1, 2002,
and no longer records goodwill amortization expense. In 2002, the Company
recorded a goodwill impairment charge of $67.7 million. See Note 6 in Notes to
Consolidated Financial Statements for further detail on the 2002 goodwill
impairment charge.
6
The CRO industry in general continues to be dependent on the research and
development efforts of the principal pharmaceutical and biotechnology companies
as major customers, and the Company believes this dependence will continue. The
loss of business from any of the major customers could have a material adverse
effect on the Company.
The Company's results are subject to volatility due to a variety of factors. The
cancellation or delay of contracts and cost overruns could have short-term
adverse affects on the consolidated financial statements. Fluctuations in the
Company's sales cycle and the ability to maintain large customer contracts or to
enter into new contracts could hinder the Company's long-term growth. In
addition, the Company's aggregate backlog, consisting of signed contracts and
letters of intent, is not necessarily a meaningful indicator of future results.
Accordingly, no assurance can be given that the Company will be able to realize
the net service revenues included in the backlog.
ACQUISITIONS
On October 1, 2003, the Company completed its acquisition of Mexican CRO
Estadisticos y Clinicos Asociados, S.A. (ECA). ECA is a Phase I-IV contract
research organization located in Mexico City, Mexico. With the acquisition, the
Company has expanded its capability to conduct clinical trials in Latin America.
The Company acquired substantially all the assets and assumed certain
liabilities of ECA for a purchase price of approximately $3.6 million in cash,
including acquisition costs.
In 2002, the Company acquired the assets of Clinical and Pharmacologic Research,
Inc. (CPR), located in Morgantown, West Virginia. Further information regarding
the Company's acquisitions is included in Note 13 to the Consolidated Financial
Statements.
In 2001, the Company acquired AAC Consulting Group, a regulatory consulting firm
based in Rockville, Maryland. Further information regarding the Company's
acquisitions is included in Note 13 to the Consolidated Financial Statements.
The results of operations for these three acquisitions are included in the
Company's Consolidated Statements of Operations from the date of acquisition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Net Service Revenues
2001 2002 2003
------ -------- -------
Net Service Revenues ($ millions) $154.3 $ 165.2 $ 156.2
Net service revenues decreased 5% to $156.2 million for 2003 from $165.2 million
in 2002. Excluding the impact of foreign currency exchange rates, net service
revenues decreased 10% in 2003. The 5% decrease in net service revenues is
composed of a decline in organic revenues of 6% offset by growth due to the
Company's acquisitions of 1%. Net service revenues in North America declined by
approximately $18.1 million in 2003 compared to 2002. The decline in North
American net service revenues was partially offset by an increase in net service
revenues in both the European and Asia-Pacific regions, which increased by
approximately $7.5 million and $1.7 million, respectively. The decline in North
American net service revenues is due to an overall slowdown in new business in
the first half of 2003 and in particular, a slowdown in new business from two of
the Company's largest customers, which completed a merger in 2003. In addition,
project delays and cancellations adversely impacted net service revenues in the
first half of 2003 compared to 2002. Finally, in 2003 net service revenues
recorded on contracts where costs paid to investigators and other out-of-pocket
costs are fixed by the contract terms and recorded as direct costs and net
service revenues decreased by approximately $3.6 million.
Approximately 34% of the Company's net service revenues in 2003 were derived
from the Company's operations outside North America compared to 27% in 2002.
Revenues from the top five customers accounted for approximately 47% and 46% of
net service revenues in 2003 and 2002, respectively. Net service revenues from
Pfizer Inc. (including the former Pharmacia Corp.) accounted for approximately
27% of the total 2003 net service revenues compared to 29% for Pfizer and
Pharmacia combined in 2002. The Company's revenues from Pfizer Inc. are derived
from numerous projects that vary in size, duration and therapeutic indication.
No other customer accounted for more than 10% of the Company's net service
revenues in either 2003 or 2002.
Reimbursable Out-of-Pocket Revenues
7
Reimbursable out-of-pocket revenues fluctuate from period to period due
primarily to the level of investigator activity in a particular period.
Reimbursable out-of-pocket revenues increased 9.4% to $53.4 million in 2003 from
$48.8 million in 2002.
Operating Expenses
2001 2002 2003
-------- -------- --------
Operating Expenses
$ Millions
Direct Costs $ 93.7 $ 98.4 $ 91.1
Selling, general &
administrative 44.0 48.6 52.4
Depreciation and
amortization 10.0 8.3 9.1
Employee severance and office
consolidation costs (0.8) 0.4 1.5
Goodwill impairment -- 67.7 --
Direct costs decreased by $7.3 million, or 7%, for 2003 as compared to 2002. The
7% decrease in direct costs is composed of an 8% decline in organic direct costs
offset by a 1% increase in direct costs due to the Company's acquisitions.
Foreign currency exchange rate fluctuations accounted for a 5% increase in
direct costs in 2003 compared to 2002. The decrease in organic direct costs is
due to the reduced usage of outside contractors working on Company contracts as
well as the workforce realignment and other cost containment measures
implemented in 2003. In addition, in 2003 direct costs recorded on contracts
where costs paid to investigators and other out-of-pocket costs are fixed by the
contract terms and recorded as direct costs and net service revenues decreased
by approximately $3.6 million. Direct costs as a percentage of net service
revenues were 58.3% and 59.6% in 2003 and 2002, respectively. The decline in
direct costs as a percentage of net service revenues is primarily attributable
to the mix of direct labor involved in contracts as well as the overall mix of
contracts in 2003 compared to 2002. In addition, a decrease in the number of
contracts in which investigator and other out-of-pocket costs were fixed by the
contract terms and, accordingly, net service revenue was recorded at little or
no margin contributed to the decline.
Reimbursable out-of-pocket costs fluctuate from period to period due primarily
to the level of investigator activity in a particular period. Reimbursable
out-of-pocket costs increased 9.4% to $53.4 million in 2003 from $48.8 million
in 2002.
Selling, general and administrative expenses increased by $3.8 million or 8%
from 2002 to 2003. The 8% increase in selling, general and administrative costs
is composed of a 6% increase in organic SG&A costs and a 2% increase in SG&A
costs due to the Company's acquisition. Foreign currency exchange rate
fluctuations accounted for a 4% increase in selling, general and administrative
expenses in 2003 compared to 2002. The remainder of the increase in organic SG&A
costs is primarily due to broad-based employee incentive compensation amounts
accrued in 2003 that were not present in 2002. Selling, general and
administrative expenses expressed as a percentage of net service revenues were
33.5% for 2003 and 29.5% for 2002. The increase in these costs as a percentage
of net service revenues is primarily due to the increase in SG&A expenses as
discussed above and a smaller net service revenue base.
Depreciation and amortization expense increased by $0.7 million or 9% in 2003
compared to 2002. The increase is primarily due to increased depreciation and
amortization relating to the Company's capital expenditures of $5.6 million
during 2003.
In the first quarter of 2003, in order to bring its cost structure more in line
with the then current revenue projections, the Company recorded a charge of
approximately $690,000 for severance and outplacement benefits relating to a
workforce reduction program which impacted approximately 1 percent of its total
workforce. In the second quarter of 2003, the Company recorded an adjustment to
reduce this charge by approximately $106,000 as a result of lower than expected
severance costs related to the workforce reduction. In the third quarter of
2003, the Company recorded a charge of approximately $897,000 for severance and
outplacement costs in connection with a workforce realignment plan implemented
in August. In the third quarter of 2002, the Company committed to a plan to
consolidate its three New Jersey offices into one central office, located in
Cranford, NJ. The Company had maintained separate offices in Princeton, Cranford
and Ft. Lee, New Jersey. In connection with the office consolidation, the
Company recorded a pre-tax charge of $408,000 in 2002, consisting primarily of
facility lease costs and severance, employee retention and outplacement costs.
In the fourth quarter of 2002, the Company recognized a goodwill impairment
charge of $67.7 million in accordance with SFAS No. 142. The impairment charge
is presented as a separate line item as a component of loss from operations in
the Company's Consolidated Statements of Operations. For more discussion on this
charge, see Note 6 in the Company's Notes to Consolidated Financial Statements.
8
Other Income
Total other income (expense) was expense of $1.3 million in 2003 compared to
expense of approximately $2.7 million in 2002. In the second quarter of 2003,
the Company determined that its investment in KendleWits, its 50% owned
joint-venture in the People's Republic of China was permanently impaired and
recorded a $405,000 non-cash charge to reduce the carrying value of the
investment to zero. Also in the second quarter of 2003, the Company made a
partial early repayment on its $6 million convertible note and recorded a gain
from this early partial debt extinguishment of approximately $558,000. In
addition, in 2003 the Company recorded foreign currency transaction losses of
approximately $449,000 as a result of the British pound and U.S. dollar
weakening against the euro. In the second quarter of 2002, the Company recorded
a $1.9 million non-cash charge to write-off the Company's investment in
Digineer, Inc. (Digineer), a healthcare consulting and software development
company that adopted a plan to cease operations during 2002. Foreign currency
transaction gains amounted to approximately $147,000 in 2002.
Income Taxes
The Company reported a tax expense at an effective rate in excess of 100% in
2003 compared to a tax benefit at an effective rate of 10.3% for 2002. The
Company's effective tax rate in 2003 and 2002 was negatively affected by a
number of factors. In 2003, the Company continued to record valuation allowances
against net operating loss carryforwards in certain European subsidiaries of the
Company. Valuation allowances in 2003 against these net operating loss
carryforwards amounted to approximately $1.4 million. The write-off of the
Digineer investment in 2002 is a capital loss for income tax purposes and is
deductible only to the extent the Company generates capital gains in the future
to offset this loss. The Company recorded a valuation allowance against this
deferred tax asset and accordingly, no income tax benefit was recorded. In
addition, a tax benefit was recorded on only that portion of the goodwill
impairment charge recorded in 2002 which will be deductible in future tax
periods. In 2002, the valuation allowance primarily relating to net operating
loss carryforwards in certain European subsidiaries of the Company amounted to
approximately $3.5 million. Since Kendle operates on a global basis, the
effective tax rate may vary from year to year based on the locations which
generate the pre-tax earnings.
Net Income
Inclusive of the severance and outplacement charges, the write-off of the
KendleWits investment and the gain on early partial extinguishment of debt
(items with an aggregate after-tax impact of approximately $1.1 million, or
$0.08 per share), the net loss for 2003 was $1.7 million or $0.13 per basic and
diluted share. Inclusive of the goodwill impairment charge, the write-off of the
Digineer investment, office consolidation costs and the tax valuation allowance
discussed above (items with an aggregate after-tax impact of approximately $59.9
million, or $4.68 per share), the net loss for 2002 was $ $54.8 million in 2002
or $4.30 per basic and diluted share.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Net Service Revenues
Net service revenues increased 7% to $165.2 million for 2002 from $154.3 million
in 2001. Excluding the impact of foreign currency exchange rates, net service
revenues increased 6% in 2002. The 7% increase in net service revenues is
composed of a decline in organic revenues of 2% offset by growth due to the
Company's acquisitions of 9%. The decline in organic net service revenues is
primarily attributable to the decrease in revenues in 2002 on contracts where
costs paid to investigators and other out-of-pocket costs are fixed by the
contract terms and recorded as direct costs and net service revenues. In
addition, an increased level of project cancellations and delays adversely
impacted net service revenue in the fourth quarter of 2002.
Approximately 27% of the Company's net service revenues in 2002 were derived
from the Company's operations outside North America compared to 31% in 2001.
Revenues from the top five customers accounted for approximately 46% and 45% of
net service revenues in 2002 and 2001, respectively. Net service revenues from
Pharmacia Inc. accounted for approximately 21% of the total 2002 net service
revenues. The Company's revenues from Pharmacia Inc. are derived from numerous
projects that vary in size, duration and therapeutic indication. No other
customer accounted for more than 10% of the Company's net service revenues in
either 2002 or 2001.
Reimbursable Out-of-Pocket Revenues
The Company adopted EITF 01-14 on January 1, 2002 as required. Reimbursable
out-of-pocket revenues fluctuate from period to period primarily due to the
level of investigator activity in a particular period. Reimbursable
out-of-pocket revenues increased 21.5% to $48.8 million in 2002 from $40.2
million in 2001.
9
Operating Expenses
Direct costs increased by $4.7 million, or 5%, for 2002 as compared to 2001. The
5% increase in direct costs is composed of a 3% decline in organic direct costs
offset by an 8% increase in direct costs due to the Company's acquisitions. The
decrease in organic direct costs is primarily related to a decrease in certain
project-related costs. These project-related costs are normally billed back to
the customer as a "pass-through" expense and are excluded from direct costs and
net service revenues. However, in a small number of the Company's contracts,
these costs are fixed by the contract terms, and have been recorded as direct
costs, producing a zero profit margin. In 2001, the Company incurred costs of
this nature of approximately $12.1 million compared to approximately $4.5
million in 2002. Direct costs as a percentage of net service revenues were 59.6%
and 60.7% in 2002 and 2001, respectively. The decline in direct costs as a
percentage of net service revenues is primarily attributable to the decrease in
the number of contracts in which the "pass-through" costs were fixed by the
contract terms and revenue was recorded at little or no margin.
Reimbursable out-of-pocket costs increased 21.5% to $48.8 million in 2002 from
$40.2 million in 2001.
Selling, general and administrative expenses increased by $4.6 million or 10%
from 2001 to 2002. The 10% increase in selling, general and administrative costs
is composed of a 7% increase in organic SG&A costs and a 3% increase in SG&A
costs due to the Company's acquisitions. The increase in organic SG&A costs is
primarily due to increased employee-related costs such as salaries, training
costs and other employee costs incurred. Selling, general and administrative
expenses expressed as a percentage of net service revenues were 29.5% for 2002
and 28.5% for 2001. The increase in these costs as a percentage of net service
revenues is primarily due to lower revenue than anticipated in the fourth
quarter of 2002 due to certain project delays and cancellations.
Depreciation and amortization expense decreased by $1.6 million or 16% in 2002
compared to 2001. The decrease is due to the implementation of SFAS No. 142,
which has eliminated the amortization of goodwill and other indefinite lived
intangible assets. See the discussion of SFAS No. 142 in the New Accounting
Pronouncements section of Management's Discussion and Analysis. Excluding
goodwill amortization in 2001, depreciation expense increased by 19% in 2002
compared to 2001. The increase is primarily due to increased depreciation and
amortization relating to the Company's capital expenditures of $9.0 million
during 2002.
In the third quarter of 2002, the Company committed to a plan to consolidate its
three New Jersey offices into one central office, located in Cranford, NJ. The
Company had maintained separate offices in Princeton, Cranford and Ft. Lee, New
Jersey. In connection with the office consolidation, the Company recorded a
pre-tax charge of $408,000 in 2002, consisting primarily of facility lease costs
and severance, employee retention and outplacement costs. In 2001, the Company
recorded a pre-tax increase in income of approximately $766,000 to reflect
lower-than-anticipated costs associated with the Company's workforce reduction
program that was implemented in 2000.
In the fourth quarter of 2002, the Company recognized a goodwill impairment
charge of $67.7 million in accordance with SFAS No. 142. The impairment charge
is presented as a separate line item as a component of loss from operations in
the Company's Consolidated Statements of Operations. For more discussion on this
charge, see Note 6 in the Company's Notes to Consolidated Financial Statements.
Other Income (Expense)
Total other income (expense) was expense of $2.7 million in 2002 compared to
income of approximately $49,000 in 2001. The primary reason for this decrease is
a $1.9 million non-cash charge recorded in the second quarter of 2002 to
write-off the Company's investment in Digineer, a healthcare consulting and
software development company that adopted a plan to cease operations
during 2002.
Other income (expense) was also negatively impacted by increased interest
expense in 2002 due to the Company's $15.0 million term loan that began in June
of 2002 and $6.0 million of convertible debt that was issued in conjunction with
the Company's January 2002 acquisition of CPR. In addition, lower worldwide
interest rates on investments contributed to the decline.
Income Taxes
The Company reported a tax benefit at an effective rate of 10.3% in 2002
compared to tax expense at an effective rate of 42.8% for 2001. The Company's
effective tax rate in 2002 was negatively affected by a number of factors. The
write-off of the Digineer investment is a capital loss for income tax purposes
and is deductible only to the extent the Company generates capital gains in the
future to offset this loss. The Company recorded a valuation allowance against
this deferred tax asset and accordingly, no income tax benefit was recorded. In
addition, a tax benefit was recorded on only that portion of the goodwill
impairment charge that will be deductible in future tax periods. Finally, in the
fourth quarter the Company recorded a valuation allowance of approximately $3.5
million for certain tax benefit carryforwards primarily relating to net
operating loss carryforwards in certain European subsidiaries of the Company.
Since Kendle operates on a global basis, the effective tax rate may vary from
year to year based on the locations which generate the pre-tax earnings.
10
Inclusive of the goodwill impairment charge, the write-off of the Digineer
investment, office consolidation costs and the tax valuation allowances
discussed above, (items with an aggregate after-tax impact of approximately
$59.9 million, or $4.68 per share), the net loss for 2002 was $54.8 million
in 2002 or $4.30 per basic and diluted share.
Inclusive of the adjustment to the workforce reduction reserve in 2001 (an
aggregate after-tax impact of approximately $460,000 or $0.04 per diluted
share), net income for 2001 was $4.2 million, or $0.33 per basic share and $0.34
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
2001 2002 2003
-------- -------- --------
Working Capital ($ millions) $ 36.7 $ 41.5 $ 38.5
In 2003, cash and cash equivalents increased by $9.1 million as a result of cash
provided by operating activities of $14.2 million offset by cash used in
investing activities of $0.7 million and cash used in financing activities of
$5.2 million. In addition, the Company has $1.8 million in restricted cash that
represents cash received from customers that is segregated in a separate Company
bank account and available for use only for specific project related expenses,
primarily investigator fees, upon authorization from the customer. Net cash
provided by operating activities consisted primarily of the net loss increased
by non-cash adjustments (primarily depreciation and amortization) and a decrease
in net accounts receivable. Fluctuations in accounts receivable and advance
billings occur on a regular basis as services are performed, milestones or other
billing criteria are achieved, invoices are sent to customers and payments for
outstanding accounts receivable are collected from customers. Such activity
varies by individual customer. Accounts receivable, net of advance billings,
decreased from $24.7 million at December 31, 2002 to $20.3 million at December
31, 2003.
Cash flows from investing activities for the year ended December 31, 2003
consisted primarily of capital expenditures of $5.6 million, costs related to
the acquisition of ECA of $3.6 million (net of cash acquired), offset by net
proceeds from the sale of available for sale securities of $8.4 million.
Cash flows from financing activities for the year ended December 31, 2003
consisted primarily of net payments under the Company's credit facility of $3.0
million, a partial repayment of the Company's convertible debt of $1.4 million
and payments on capital lease obligations of approximately $850,000.
In 2002, cash and cash equivalents increased by $6.7 million as a result of cash
provided by operating activities of $27.0 million offset by cash used in
investing activities of $18.0 million and cash used in financing activities of
$2.8 million. There was no restriction on cash and cash equivalents in 2002. Net
cash provided by operating activities consisted primarily of the net loss
increased by non-cash adjustments (the goodwill impairment charge, loss on
Digineer investment and depreciation and amortization) and a decrease in net
accounts receivable. Fluctuations in accounts receivable and advance billings
occur on a regular basis as services are performed, milestones or other billing
criteria are achieved, invoices are sent to customers and payments for
outstanding accounts receivable are collected from customers. Such activity
varies by individual customer. Accounts receivable, net of advance billings,
decreased from $40.7 million at December 31, 2001 to $24.7 million at December
31, 2002.
Cash flows from investing activities for the year ended December 31, 2002
consisted primarily of capital expenditures of $9.0 million, costs related to
the acquisition of CPR of $7.9 million (net of cash acquired), and additional
purchase price of $2.7 million paid in relation to the Company's 1999
acquisition of Health Care Communications, Inc. (HCC) offset by net proceeds
from the sale of available for sale securities of $1.7 million.
Cash flows from financing activities for the year ended December 31, 2002
consisted primarily of net payments under the Company's credit facility of $1.9
million and payments on capital lease obligations of approximately $800,000.
In 2001, cash and cash equivalents decreased by $0.7 million as a result of cash
provided by operating activities of $9.6 million and cash provided by financing
activities of $11.8 million offset by cash used in investing activities of $21.8
million. There was no restriction on cash and cash equivalents in 2001. Net cash
provided by operating activities consisted primarily of net income increased by
non-cash adjustments (primarily depreciation and amortization) offset primarily
by an increase in net accounts receivable.
Cash flows from investing activities for the year ended December 31, 2001
consisted primarily of capital expenditures of $7.5 million, costs related to
the acquisition of AAC Consulting Group of $10.8 million (net of cash acquired),
and additional purchase price of $2.1 million paid in relation to the Company's
1999 acquisition of HCC. Net purchases of available for sale securities totaled
$1.3 million.
11
Cash flows from financing activities for the year ended December 31, 2001
consisted primarily of net borrowings under the Company's credit facility of
$12.6 million.
2001 2002 2003
------ ------ ------
Cash, (including Restricted Cash), Cash Equivalents
& Available for Sale Securities ($ millions) $ 25.5 $ 30.0 $ 32.4
The Company had available for sale securities totaling $8.9 million and $17.3
million at December 31, 2003 and 2002, respectively.
Cash used for capital expenditures was $5.6 million, $9.0 million and $7.5
million in 2003, 2002 and 2001, respectively.
In June 2002, the Company entered into an Amended and Restated Credit Agreement
(the "Facility") that replaced the previous credit facility that would have
expired in October 2003. The Facility is composed of a revolving credit loan
that expires in three years and a $15.0 million term loan that matures in five
years. The Facility is in addition to an existing $5.0 million Multicurrency
Facility that is renewable annually and is used in connection with the Company's
European operations. The revolving credit loan bears interest at a rate equal to
either (a) The Eurodollar Rate plus the Applicable Percentage (as defined) or
(b) the higher of the Federal Fund's Rate plus 0.5% or the Bank's Prime Rate.
The $15.0 million term loan bears interest at a rate equal to the higher of the
Federal Funds Rate plus 0.5% and the Prime Rate or an Adjusted Eurodollar Rate.
Under terms of the Facility, revolving loans are convertible into term loans
within the Facility if used for acquisitions. The Facility contains various
restrictive financial covenants, including the maintenance of certain fixed
coverage and leverage ratios.
At March 31, 2003, the Company fell below the minimum permitted Fixed Charge
coverage ratio. The Company and the banks amended the minimum permitted Fixed
Charge coverage ratio for the first quarter of 2003 and future periods. In
addition, changes as part of the amendment include, but are not limited to, the
following:
- The amount available under the revolving credit loan is reduced
from $23 million to the lesser of $10 million or 50% of the
Company's Eligible Receivables, as defined.
- Until the Company's Fixed Charge Coverage Ratio returns to levels
specified in the original agreement, the applicable percentage
applied to the interest rate on the Company's borrowing under the
Facility is increased by 0.75%.
- The term loan is collateralized by a pledge of the Company's
domestic cash and cash equivalents and any amounts outstanding
under the revolving credit loan are collateralized by the
Company's Eligible Receivables, as defined, and any remaining
domestic cash and cash equivalents above the amounts pledged as
security under the term loan.
- The Company must maintain a ratio of cash, cash equivalents and
available for sale securities held in the United States to
principal amounts outstanding under the Company's term loan of at
least 1.1 to 1.0.
In the third quarter of 2003, the Company reached an agreement in principle with
the banks to amend the Fixed Charge Coverage ratio from a rolling four quarters
calculation to a calculation based on the results of each individual quarter.
The amendment was fully executed in the fourth quarter. The Company is in
compliance with the financial covenants contained in the Facility (as amended)
as of December 31, 2003.
The $5.0 million Multicurrency Facility is composed of a euro overdraft facility
up to the equivalent of $3.0 million and a pound sterling overdraft facility up
to the equivalent of $2.0 million. This Multicurrency Facility bears interest at
a rate equal to either (a) the rate published by the European Central Bank plus
a margin (as defined) or (b) the Bank's Base Rate (as determined by the bank
having regard to prevailing market rates) plus a margin (as defined).
At December 31, 2003, no amounts were outstanding under the Company's revolving
credit loan, $9.8 million was outstanding under the term loan, and no amounts
were outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the term loan at a rate of 6.57%. Principal payments of $750,000 are
due on the term loan on the last business day of each quarter through March
2007.
Effective July 1, 2002, the Company entered into an interest rate swap agreement
to fix the interest rate on the $15.0 million term loan. The swap is designated
as a cash flow hedge under the guidelines of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Under the swap agreement, the
interest rate on the term loan is fixed at 4.32% plus the applicable margin
(currently 2.25%). The swap is in place through the life of the term loan,
ending on March 31, 2007. Changes in fair market value of the swap are recorded
in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheet. At
December 31, 2003, approximately $351,000 has been recorded in Accumulated Other
Comprehensive Loss to reflect a decrease in the fair market value of the swap
compared to approximately $566,000 at December 31, 2002.
12
With the acquisition of CPR, the Company entered into a $6.0 million convertible
note payable to the shareholders of CPR. The principal balance is convertible at
the holders' option into 314,243 shares of the Company's Common Stock at any
time through January 29, 2005 (the Maturity Date). If the note has not been
converted at the Maturity Date, the Company has the option to extend the
Maturity Date of the note for another three years. The note bears interest at an
annual rate of 3.80% from January 29, 2002 through the Maturity Date. Interest
is payable semi-annually. If the Maturity Date is extended, the interest rate
will be reset on January 29, 2005 at an annual rate of interest equal to the
yield of a three-year United States Treasury Note.
In June 2003, the Company and the shareholders of CPR entered into Note
Prepayment Agreements. Under the Note Prepayment Agreements, the Company agreed
to satisfy its payment obligations under the $6.0 million convertible note by
making a series of four payments between June 30, 2003 and January 10, 2005. The
four payments are to be initiated either by the Company through the exercise of
a "call" option or by the CPR shareholders through the exercise of a "put"
option. If the four put or call options are exercised, the Company would pay
$4.5 million to fully settle the $6.0 million note. Gains resulting from this
early extinguishment of debt will be recorded when paid as a gain in the
Company's Consolidated Statements of Operations. At June 30, 2003, the CPR
shareholders exercised their put option and the Company paid approximately $1.4
million to settle $2.0 million of the $6.0 million convertible note. A gain of
$558,000 has been recorded in the second quarter of 2003 in the Company's
Consolidated Statements of Operations. In the first quarter of 2004, the CPR
shareholders again exercised their put option and the Company paid approximately
$750,000 to settle $1.0 million of the remaining note amount. A gain of
approximately $250,000 will be recorded in the first quarter of 2004 in the
Company's Consolidated Statements of Operations.
The Company's primary cash needs on both a short-term and long-term basis are
for the payment of salaries and fringe benefits, hiring and recruiting expenses,
business development costs, capital expenditures, acquisitions and
facility-related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
the Facility and the Multicurrency Facility, will be sufficient to meet its
foreseeable cash needs. In the future, the Company will continue to consider
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.
CONTRACTUAL OBLIGATIONS
Future minimum payments for all contractual obligations for years subsequent to
December 31, 2003 are as follows:
(in thousands) 2004 2005-2006 2007-2008 After 2008 Total
- -------------------------- ------- --------- --------- ---------- --------
Capital lease obligations,
including interest $ 879 $ 907 $ 48 $ -- $ 1,834
Operating leases 6,721 12,174 10,359 4,880 34,134
Debt payments 3,000 6,000 750 -- 9,750
Convertible note -- 4,000 -- -- 4,000
------- --------- --------- ---------- --------
Total $10,600 $ 23,081 $ 11,157 $ 4,880 $ 49,718
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make significant
estimates and assumptions that affect the reported Consolidated Financial
Statements for a particular period. Actual results could differ from those
estimates.
Revenue Recognition
The majority of the Company's net service revenues are based on fixed-price
contracts calculated on a percentage-of-completion basis based upon assumptions
regarding the estimated total costs for each contract. Costs are incurred for
each project and compared to the estimated budgeted costs for each contract to
determine a percentage of completion on the project. The percentage of
completion is multiplied by the total contract value to determine the amount of
revenue recognized. Management periodically reviews the budget on each contract
to determine if the budgeted amounts are correct, and budgets are adjusted as
needed. As the work progresses, original estimates might be changed due to
changes in the scope of the work. When estimates indicate a loss, such loss is
provided in the current period in its entirety. The Company attempts to
negotiate contract amendments with the sponsor to cover services provided
outside the terms of the original contract. However, there can be no guarantee
that the sponsor will agree to proposed amendments, and the Company ultimately
bears the risk of cost overruns.
13
Amendments to contracts resulting in revisions to revenues and costs are
recognized in the period in which the revisions are negotiated. Included in
accounts receivable are unbilled accounts receivable, which represent revenue
recognized in excess of amounts billed.
As the Company provides services on projects, the Company also incurs
third-party and other pass-through costs, which are typically reimbursable by
its customers pursuant to the contract. In certain contracts, however, these
costs are fixed by the contract terms. In these contracts, the Company is at
risk for costs incurred in excess of the amounts fixed by the contract terms. In
these instances, the Company recognizes these costs as direct costs with
corresponding net service revenues. Excess costs incurred above the contract
terms would negatively affect the Company's gross margin.
Accounts Receivable/Allowance for Doubtful Accounts
Billed accounts receivable represent amounts for which invoices have been sent
to customers. Unbilled accounts receivable are amounts recognized as revenue for
which invoices have not yet been sent to customers. Advance billings represent
amounts billed or payment received for which revenues have not yet been earned.
The Company maintains an allowance for doubtful accounts receivable based on
historical evidence of accounts receivable collections and specific
identification of accounts receivable that might pose collection problems. If
the Company is unable to collect all or part of its outstanding receivables,
there could be a material impact to the Company's Consolidated Results of
Operations or financial position.
Long-Lived Assets
The Company analyzes goodwill and other indefinite-lived intangible assets to
determine any potential impairment loss on an annual basis, unless conditions
exist that require an updated analysis on an interim basis. A fair value
approach is used to test goodwill for impairment. The goodwill impairment
testing involves the use of estimates related to the fair market value of the
reporting unit and is inherently subjective. An impairment charge is recognized
for the amount, if any, by which the carrying amount of goodwill exceeds fair
value. In 2002, the Company recorded a goodwill impairment charge of $67.7
million. At December 31, 2003 the fair value of the Company exceeded the
carrying value, resulting in no goodwill impairment charge. In addition, the
Company has a $15 million indefinite lived intangible asset representing one
customer relationship acquired in the Company's acquisition of CPR. The
intangible asset is evaluated each reporting period to determine whether events
or circumstances continue to support an indefinite useful life.
Internally Developed Software
The Company capitalizes costs incurred to internally develop software used
primarily in the Company's proprietary clinical trial and data management
systems, and amortizes these costs over the useful life of the product, not to
exceed five years. Internally developed software represents software in the
application development stage, and there is no assurance that the software
development process will produce a final product for which the fair value
exceeds its carrying value. Internally developed software is an intangible asset
subject to impairment write-downs whenever events indicate that the carrying
value of the software may not be recoverable. As with other long-lived assets,
this asset is reviewed at least annually to determine the appropriateness of the
carrying value of the asset. Assessing the fair value of the internally
developed software requires estimates and judgment on the part of management.
Tax Valuation Allowance
The Company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. Because the Company conducts
business on a global basis, its effective tax rate has and will continue to
depend upon the geographic distribution of its pre-tax earnings (losses) among
jurisdictions with varying tax rates. These estimates include judgments about
deferred tax assets and liabilities resulting from temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. The Company has assessed the realization of
deferred tax assets and a valuation allowance has been established based on an
assessment that it is more likely than not that realization cannot be assured.
The ultimate realization of this tax benefit is dependent upon the generation of
sufficient operating income in the respective tax jurisdictions. If estimates
prove inaccurate or if the tax laws change unfavorably, significant revisions in
the valuation allowance may be required in the future.
ADDITIONAL CONSIDERATIONS
On July 15, 2002, two of the Company's major customers, Pharmacia Corp. and
Pfizer Inc., announced plans to merge in a stock-for-stock transaction. The
merger closed in the second quarter of 2003. Pharmacia and Pfizer combined
represent approximately 27% and 29% of the Company's net service revenues for
the years ended December 31, 2003 and 2002, respectively, and approximately 35%
and 31% of the Company's December 31, 2003 and 2002, signed backlog. During the
second quarter of 2003, the Company identified a change, coinciding with the
completion of the announced merger, in the levels of business received from the
combined Pfizer company. Although the level of new business awards from Pfizer
increased during the second half of 2003 compared to the first half,
particularly the second quarter of 2003, the level of awards received has not
reached pre-merger levels. The Company believes that the
14
level of business from Pfizer will continue to increase in 2004, but there is no
assurance that the level of business received will meet or exceed the business
amounts the Company received from Pharmacia Corp. and Pfizer Inc. in periods
prior to the merger. If the level of business does not return to levels
experienced prior to the merger, failure to replace this business would have a
negative impact on the Company's results of operations and financial position in
future years.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures certain types of
financial instruments that have characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company adopted the standard on July 1, 2003. The adoption of SFAS
No. 150 had no material effect on the Company's Consolidated Balance Sheet or
Statements of Operations.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
will require the consolidation of a variable interest entity whereby an
enterprise will absorb a majority of the entity's expected losses if they occur,
receive a majority of the entity's expected residual returns if they occur, or
both. In December 2003, the FASB issued FIN 46R, Consolidation of Variable
Interest Entities, an interpretation of ARB 51 (as revised December 2003). The
primary objectives of FIN 46R are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights (Variable Interest Entities) and how to determine when and which business
enterprise should consolidate the Variable Interest Entity (the Primary
Beneficiary). The disclosure requirements of FIN 46R are required in all
financial statements issued after March 15, 2004, if certain conditions are met.
The Company does not have any variable interest entities and therefore, FIN 46R
did not impact its financial statements.
In November 2002, the FASB issued Interpretation No. 45 or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statement Nos.
5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies
the requirements of FASB Statement No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 requires that upon issuance of a guarantee,
the guarantor, must recognize a liability for the fair value of the obligation
it assumes under that guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002. FIN 45's provisions for initial recognition and measurement
should be applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
guarantor's previous accounting for guarantees that were issued before the date
of FIN 45's initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of FIN 45. The adoption FIN
45 had no material effect on the Company's Consolidated Financial Statements.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-K that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, changes in the financial conditions of the Company's customers,
potential mergers and acquisitions in the pharmaceutical industry, the Company's
ability to manage growth, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint venture businesses to be integrated with the Company's
operations, the fixed price nature of contracts or the loss of large contracts,
cancellation or delay of contracts, the progress of ongoing projects, cost
overruns, fluctuations in the Company's sales cycle, the ability to maintain
large customer contracts or to enter into new contracts, the effects of exchange
rate fluctuations, the carrying value of and impairment of the Company's
investments and the other risk factors set forth in
15
the Company's filings with the Securities and Exchange Commission, copies of
which are available upon request from the Company's investor relations
department. The Company's growth and ability to achieve operational and
financial goals is dependent upon its ability to attract and retain qualified
personnel. If the Company fails to hire, retain and integrate qualified
personnel, it will be difficult for the Company to achieve its financial and
operational goals. No assurance can be given that the Company will be able to
realize the net service revenues included in backlog and verbal awards. The
Company believes that its aggregate backlog and verbal awards are not
necessarily meaningful indicators of future results.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
The Company operates on a global basis and is therefore exposed to various types
of currency risks. Two specific transaction risks arise from the nature of the
contracts the Company executes with its customers. From time to time contracts
are denominated in a currency different than the particular local currency. This
contract currency denomination issue is applicable only to a portion of the
contracts executed by the Company. The first risk occurs as revenue recognized
for services rendered is denominated in a currency different from the currency
in which the subsidiary's expenses are incurred. As a result, the subsidiary's
net service revenues and resultant net income can be affected by fluctuations in
exchange rates. Historically, fluctuations in exchange rates from those in
effect at the time contracts were executed have not had a material effect upon
the Company's consolidated financial results.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, the Company recognizes a receivable at the
time of invoicing at the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
until the payment from the customer is received will result in the Company
receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by the Company as a
foreign currency transaction gain or loss, as applicable, and is reported in
Other Income (Expense) in the Consolidated Statements of Operations.
The Company's consolidated financial statements are denominated in U.S. dollars.
Accordingly, changes in exchange rates between the applicable foreign currency
and the U.S. dollar will affect the translation of each foreign subsidiary's
financial results into U.S. dollars for purposes of reporting consolidated
financial statements. The Company's foreign subsidiaries translate their
financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account referred to as the foreign currency translation adjustment account. This
account exists only in the foreign subsidiaries' U.S. dollar balance sheet and
is necessary to keep the foreign subsidiaries' balance sheet stated in U.S.
dollars in balance. Foreign currency translation adjustments, reported as a
separate component of shareholders' equity were $1.2 million at December 31,
2003 compared to ($1.5) million at December 31, 2002.
Interest Rates
The Company is exposed to changes in interest rates on its available for sale
securities and amounts outstanding under the Facility and Multicurrency
Facility. Available for sale securities are recorded at fair value in the
consolidated financial statements. These securities are exposed to market price
risk, which also takes into account interest rate risk. At December 31, 2003,
the potential loss in fair value resulting from a hypothetical decrease of 10%
in quoted market price would be approximately $888,000.
In July 2002, the Company entered into an interest rate swap agreement with the
intent of managing the interest rate risk on its five-year term loan. Interest
rate swap agreements are contractual agreements between two parties for the
exchange of interest payment streams on a principal amount and an agreed-upon
fixed or floating rate, for a defined period of time. See discussion of debt in
the Liquidity and Capital Resources section of the Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
16
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data called for by this Item are
incorporated herein from page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 9, 2003, the Company dismissed its independent accountant,
PricewaterhouseCoopers LLP ("PwC"), and engaged Deloitte & Touche LLP as our new
independent accountant for the fiscal year ending December 31, 2003. The
decision to change independent accountants was recommended by the Audit
Committee of the Board of Directors and approved by the Board of Directors.
During the two most recent fiscal years, neither of the PwC's reports on the
Company's consolidated financial statements contained an adverse opinion or a
disclaimer of opinion or was qualified or modified as to uncertainty,
audit scope or accounting principles. During the Company's two most recent
fiscal years and through the date of PwC's dismissal, there have been no
disagreements between the Company and PwC on any matter of accounting
priniciples or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of PwC, would have caused
them to make a reference to the subject matter of the disagreements in
connection with their reports onthe consolidated financial statements for
such years.
ITEM 9A.
CONTROLS AND PROCEDURES
Based on the Company's most recent evaluation, which was completed as of the end
of the period covered by this Form 10-K, our Chairman (principal executive
officer) and Chief Financial Officer (principal financial and accounting
officer) believe the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are
effective. No change in the Company's internal control over financial reporting
occurred during the Company's last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
The name, age and background information for each of the Company's Directors is
set forth in the section entitled "Information about Nominees" contained in the
Company's Proxy Statement for its 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
BOARD COMMITTEES:
Information regarding the members of the audit committee and the audit committee
financial expert is set forth in the section entitled "Committees of the Board
of Directors" contained in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders and is incorporated herein by reference.
Notwithstanding anything to the contrary set forth herein or in any of the
Company's previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this Form 10-K, the sections entitled "Management Development
and Compensation Committee Report on Executive Compensation" and "Report of the
Audit Committee" and the Performance Graph, which are set forth in the Company's
Proxy Statement for its 2004 Annual Meeting of Shareholders, are not deemed to
be incorporated by reference in this Form 10-K.
17
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers of the Company at March 1, 2004 were as follows:
NAME AGE POSITION OFFICER SINCE
- --------------------- --- -------------------------------------- -------------
Candace Kendle 57 Chief Executive Officer and Chairman 1981
of the Board of Directors
Christopher C. Bergen 53 President, Chief Operating 1981
Officer and Director
Simon Higginbotham 43 Vice President and Chief 2004
Marketing Officer
Karl Brenkert III 56 Senior Vice President, Chief Financial 2002
Officer and Treasurer
Background information regarding Dr. Kendle and Mr. Bergen is set forth in a
section entitled "Information about Nominees." Background information regarding
Mr. Higginbotham and Mr. Brenkert is set forth in a section entitled "Securities
Ownership of Management." Both sections are contained in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders, and the information in
those sections is incorporated herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information on compliance with Section 16(a) of the Exchange Act set forth in
the sections entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
is contained in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders and is incorporated herein by reference.
CODE OF ETHICS
Information pertaining to the Company's Code of Ethics, referred to by the
Company as its Code of Ethics and Conduct, is set forth in the section entitled
"Nominating and Corporate Governance Committee" contained in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders and is incorporated herein
by reference. The Company will make available, free of charge, to any person, a
copy of its Code of Ethics and Conduct upon written request submitted to the
Company. This written request should be addressed to the General Counsel at the
Company's principal executive offices.
ITEM 11.
EXECUTIVE COMPENSATION
Information on executive compensation set forth in the sections entitled
"Executive Compensation and "Stock Options" and the tables therein is contained
in the Company's Proxy Statement for its 2004 Annual Meeting of Shareholders and
is incorporated herein by reference.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
Information on the number of shares beneficially owned by each Director and by
all Directors and Executive Officers as a group set forth in the section
entitled "Securities Ownership of Management" and the table therein is contained
in the Company's Proxy Statement for its 2004 Annual Meeting of Shareholders and
is incorporated herein by reference.
18
Information on the number of shares beneficially owned by any person who is
known to the Company to be the beneficial owner of more than five percent of the
Company's Common Stock set for in the section entitled "Principal Shareholders"
and the table therein is contained in the Company's Proxy Statement for its 2004
Annual Meeting of Shareholders and is incorporated herein by reference.
The following table presents summary information at December 31, 2003 with
respect to all the Company's equity compensation plans, except the 2003
Directors' Compensation Plan under which shares issued to Directors are not
subject to forfeiture and are not appropriate for inclusion in the table below.
Equity Compensation Plan Information
(a) (b) (c)
- ---------------------------- ----------------------------- ----------------------------- -------------------------------
Number of securities remaining
Number of Securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation plans
outstanding options, warrants price of outstanding options, (excluding securities reflected
Plan Category and rights warrants and rights in column (a))
- ---------------------------- ----------------------------- ----------------------------- -------------------------------
Equity compensation plans 2,072,303 $11.24 1,058,376
approved by security holders
Equity compensation plans not * * *
approved by security holders
--------- ------ ---------
Total 2,072,303 $11.24 1,058,376
* Excludes shares of Common Stock issued under the 2003 Directors' Compensation
Plan. Shares issued under that plan are not subject to risk of forfeiture.
DESCRIPTION OF THE 2003 DIRECTORS' COMPENSATION PLAN
The 2003 Directors' Compensation Plan (the "Plan") provides for the compensation
of cash retainer fees to the Company's directors who are not employees of the
Company and an issuance of shares of Common Stock in lieu of portions of these
cash retainer fees. The Board of Directors approved the Plan, which authorizes
up to 25,000 shares of Common Stock to be issued to non-employee directors.
Pursuant to the terms and conditions of the Plan, the number of authorized
shares available under the Plan will increase to 75,000 upon shareholder
approval of this increase.
THE MATERIAL TERMS AND CONDITIONS OF THE PLAN ARE SUMMARIZED BELOW, AND THE
FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN.
ADMINISTRATION. The Plan is administered by the Management Development and
Compensation Committee of the Board of Directors consisting solely of
non-employee directors.
PAYMENT TERMS. The Plan entitles each non-employee director to a retainer of
$3,000 for each meeting of the Board of Directors attended and a retainer of
$1,500 for each Board committee meeting attended. The Plan specifies that
directors will receive shares of Common Stock in lieu of cash to the extent of
fifty percent (50%) of the cash retainer. The Company pays the cash retainer and
issues the shares of Common Stock in lieu of a portion of the cash retainer
quarterly, in arrears, as soon as practicable following the end of each quarter.
ISSUANCE OF SHARES IN LIEU OF CASH RETAINER. The number of shares of Common
Stock to be issued is determined by dividing fifty percent (50%) of the total
retainer owed to a director for a fiscal quarter by the average of the fair
market value per share of Common Stock for the ten trading days prior to the end
of that quarter. Any fractional shares resulting from the calculation are
rounded up to the nearest share. The Plan defines fair market value as the last
sale price reported on any stock exchange or over-the-counter trading system on
which such shares of Common Stock are trading.
AMENDMENT AND TERMINATION. The Plan grants authority to the Board of Directors
to amend, suspend or terminate the Plan, provided that an amendment, without
shareholder approval, does not:
19
- increase the number of shares of Common Stock authorized to be
issued under the Plan,
- materially increase the benefits accruing to the directors under
the Plan,
- materially modify the eligibility requirements for participating
in the Plan, or
- extend the termination date of the Plan.
Amendments related to the amount, pricing and timing of issuances of shares of
Common Stock may not be made more than once every six months, except to the
extent necessary to address changes in applicable laws and regulations.
FEDERAL INCOME TAX CONSEQUENCES. Under the terms and conditions of the Plan,
shares of Common Stock granted to participants are not subject to forfeiture.
Accordingly, at the time a participant receives shares of Common Stock under the
Plan, the participant recognizes compensation taxable as ordinary income in an
amount equal to the fair market value of such shares of Common Stock.
The foregoing is a brief summary of the current federal income tax rules
generally applicable to the non-employee directors receiving shares of Common
Stock under the Plan. This summary is based on federal tax laws and regulations
in effect on the date of this Proxy Statement and does not purport to be a
complete description of the federal income tax aspects of the Plan or to address
the effects of foreign, state or local law or wage withholding requirements.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" is contained in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is contained in the sections entitled "Audit
Committee's Pre-Approval Policies and Procedures" and "Fees Paid to Independent
Public Accountant" in the Company's Proxy Statement for its 2004 Annual Meeting
of Shareholders and is incorporated herein by reference.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - All financial statements and schedules required to
be filed by Item 8 of this Form 10-K and included in this report
are listed beginning on page F-1. No additional financial
statements or schedules are being filed as the requirements of
paragraph (d) of Item 14 are not applicable to the Company.
(3) Exhibits - Exhibits set forth below that are on file with the
Securities and Exchange Commission are incorporated by reference
as exhibits hereto.
Exhibit
Number Description of Exhibit Filing Status
- ------ ----------------------------------------------------------------------- -------------
2.1 Stock Purchase Agreement dated July 1, 1997 by and among the Company
and Shareholders of U-Gene Research B.V. A
2.2 Escrow Agreement dated June 27, 1997 among the Company, Keating,
Muething & Klekamp, P.L.L., Bio-Medical Research Holdings, B.V.,
Utrechtse Particatiemaatschappij B.V., P.J. Morrison, T.S. Schwarz,
I.M. Hoepelman , Ph.K. Peterson, J. Remington, M. Rozenberg-Arska and
L.G.W. Sterkman A
2.3 Share Purchase Agreement dated July 2, 1997 by and among the Company
and the Shareholders of
20
GMI Gescellschaft fur Angewandte Mathematick und Informatik mbH A
2.4 Stock Purchase Agreement dated February 11, 1998 by and among the
Company and the Shareholders of ACER/EXCEL Inc. B
2.5 Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan
Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee,
as Trustee under a Trust dated March 8, 1991 fbo Jennifer Lee, Citicorp
Trust-South Dakota and The Fifth Third Bank C
2.6 Registration Rights Agreement dated February 11, 1998 among the Company
and Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee,
Jean C. Lee, as Trustee under a Trust dated March 8, 1991 fbo Jennifer
Lee, Citicorp Trust-South Dakota C
2.7 Share Purchase Agreement dated December 23, 1998 by and among the
Company and the Shareholders of Research Consultants (International)
Holdings Limited D
2.8 Escrow Agreement dated January 5, 1999 among the Company, John Glasby,
Gillian Gregory, Michael Roy Broomby and Peter Nightingale D
2.9 Option Agreement dated September 9, 1998 by and between the Company and
Component Software International, Inc. D
2.10 Notice of Option Exercise dated January 11, 1999 of the Option
Agreement dated September 9, 1998 D
2.11 Multi-Year Strategic Services Agreement dated January 20,1999 by and
between the Company and Component Software International, Inc. D
2.12 Asset Purchase Agreement dated June 27, 1999 by and among the Company
and the Shareholders of Health Care Communications, Inc. F
2.13 Stock Purchase Agreement dated June 4, 1999 by and among the Company
and the Shareholders of ESCLI S.A. G
2.14 Asset Purchase Agreement dated July 13, 1999 by and among the Company
and the Shareholders of HCC Health Care Communications (1991), Ltd. G
2.15 Share Purchase Agreement dated August 31, 1999 by and among the Company
and the Shareholder of Specialist Monitoring Services Limited G
2.16 Escrow Agreement dated July 13, 1999 by and among the Company, Geoffrey
H. Kalish, M.D., Bradley D. Kalish, Jill Kalish, and The Fifth Third
Bank, as Escrow Agent I
2.17 Escrow Agreement dated August 31, 1999 by and among the Company, Paul
Martin, and The Fifth Third Bank, as Escrow Agent I
2.18 Units Purchase Agreement dated April 7, 2000 by and among the Company
and the Shareholders of SYNERmedica PTY Limited and SYNERmedica Unit
Trust J
2.19 Stock Purchase Agreement dated February 27, 2001 by and among the
Company and the Shareholders of AAC Consulting Group, Inc. M
2.20 Form of Note Prepayment Agreement R
2(a) Asset Purchase Agreement dated January 29, 2002 among Kendle
International Inc., Clinical and Pharmacologic Research, Inc., Thomas
S. Clark, M.D., Charles T. Clark, and E. Stuart Clark N
2(b) Convertible Subordinated Note, dated January 29, 2002 issued by Kendle
International Inc. to Clinical and Pharmacologic Research, Inc. N
3.1 Restated and Amended Articles of Incorporation A
3.2 Amended and Restated Code of Regulations A
3.3 Amendment of the Restated and Amended Articles of Incorporation to
Increase the Authorized Shares E
4 Specimen Common Stock Certificate A
4.1 Shareholder Rights Agreement dated August 13, 1999 between the Company
and The Fifth Third Bank, as Rights Agent H
10.1 Amended and Restated Shareholders' Agreement dated June 26, 1997 A
10.2 Master Lease Agreement dated November 27, 1996 by and between the
Company and Bank One Leasing Corporation, as amended on April 18, 1997 A
10.6 Master Equipment Lease dated August 16, 1996 by and between the Company
and The Fifth Third Leasing Company A
10.7 Lease Agreement dated December 9, 1991 by and between the Company and
Carew Realty, Inc., as amended on December 30, 1991, March 18, 1996,
October 8, 1996, January 29, 1997, and February 16, 1999 D
10.8 Indemnity Agreement dated June 21, 1996 by and between the Company and
Candace Kendle Bryan A
10.9 Indemnity Agreement dated June 21, 1996 by and between the Company and
Christopher C. Bergen A
10.10 Indemnity Agreement dated June 21, 1996 by and between the Company and
Timothy M. Mooney A
10.11 Indemnity Agreement dated May 14, 1997 by and between the Company and
Charles A. Sanders C
21
10.12 Indemnity Agreement dated May 14, 1997 by and between the Company and
Philip E. Beekman C
10.13 Indemnity Agreement dated December 10, 1998 by and between the Company
and Robert Buck D
10.14 Indemnity Agreement dated December 10, 1998 by and between the Company
and Mary Beth Price D
10.15 Form of Indemnity Agreement by and between the Company and each member
of the Company's Board of Directors, except for those Indemnity
Agreements noted above and filed previously. S
10.17 Clinical Trial Service Agreement between the Company and G.D. Searle &
Company dated September 23, 1997 C
10.19 Amended and Restated Credit Agreement dated as of February 26, 1998 by
and between the Company and NationsBank, N.A. C
10.21 First Amendment to the Amended and Restated Credit Agreement dated as
of November 25, 1998 by and between the Company and NationsBank, N.A. D
10.22 Credit Agreement dated as of October 13, 2000 among the Company, the
Several Lenders from Time to Time Party Hereto, and Bank One, NA, as
Agent K
10.23 Amended and Restated Credit Agreement dated as of June 3, 2002 among
Kendle International Inc., The Several Lenders from Time to Time Party
Hereto and Bank One, NA as Agent O
10.24 Third Amendment to Amended and Restated Credit Agreement Q
10.25 Fourth Amendment to Amended and Restated Credit Agreement S
10.20 MANAGEMENT CONTRACTS AND COMPENSATION PLANS
(a) 1995 Stock Option and Stock Incentive Plan A
(b) 1995 Stock Option and Stock Incentive Plan -- Individual Stock
Option Agreement for Incentive Stock Option (contained in
Exhibit 10.20(a)) A
(c) 1997 Stock Option and Stock Incentive Plan A
(d) Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan L
(d) Form of Protective Compensation and Benefit Agreement A
(e) 1998 Employee Stock Purchase Plan D
(f) 1997 Directors' Compensation Plan D
(g) Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan P
(h) Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan P
(i) Amendment No. 1 to 1997 Directors Compensation Plan P
(j) Amendment No. 2 to 1997 Directors Compensation Plan P
(k) Amendment No. 1 to 1998 Employee Stock Purchase Plan P
(l) Amendment No. 2 to 1998 Employee Stock Purchase Plan P
(m) Amendment No. 3 to 1998 Employee Stock Purchase Plan P
(n) 2003 Directors Compensation Plan R
14 Code of Ethics S
23.1 Consent of PricewaterhouseCoopers LLP S
23.2 Consent of Deloitte & Touche LLP S
24 Powers of Attorney S
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) S
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) S
32.1 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002- Chief Executive Officer S
32.2 Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002 - Chief Financial
Officer S
Filing
Status Description of Filing Status
- ----- -----------------------------------------------------------------------
A Incorporated by reference to the Company's Registration Statement No.
333-30581 filed under the Securities Act of 1933
B Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 13, 1997
C Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997
D Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended
22
December 31, 1998
E Incorporated by reference to the Company's Proxy Statement for its 1999
Annual Shareholders' Meeting
F Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999
G Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999
H Incorporated by reference to the Company's filing on Form 8-A dated
September 7, 1999
I Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999
J Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2000
K Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000
L Incorporated by reference to the Company's Proxy Statement for its 2000
Annual Shareholders' Meeting
M Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000
N Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 29, 2002
O Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2002
P Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2002
Q Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2003
R Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003
S Filed herewith.
The Company will furnish, without charge, to a security holder upon request a
copy of the documents, portions of which are incorporated by reference (Annual
Report to Shareholders and Proxy Statement), and will furnish any other Exhibit
upon payment of reproduction charges.
(b) Reports on Form 8-K:
On November 3, 2003 the Company filed a Form 8-K to disclose the
non-GAAP financial measures included in its press release announcing
its third quarter results of operations and financial condition and the
reasons for including the non- GAAP financial measures.
(c) Exhibits required by this Form 10-K:
See (a)(3) above.
(d) Financial Statements and Schedules
See (a)(2) above.
23
Kendle International Inc.
Index to Consolidated Financial Statements
Page
Independent Auditors Report F-2
Consolidated Statements of Operations for the years
ended December 31, 2003, 2002 and 2001. F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002. F-4
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2003, 2002, and 2001. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001. F-7
Notes to Consolidated Financial Statements. F-9
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of Kendle International Inc.
Cincinnati,Ohio
We have audited the accompanying consolidated balance sheet of Kendle
International Inc. as of December 31,2003,and the related consolidated
statements of operations,shareholders equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion,such 2003 consolidated financial statements present fairly,in all
material respects,the financial position of the Company as of December 31,2003,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
March 14,2004
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Kendle International Inc:
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly,in all material respects,the financial
position of Kendle International Inc.and its subsidiaries (the Company ) at
December 31,2002,and the results of their operations and their cash flows for
each of the two years in the period ended December 31,2002,in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management;our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America,which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining,on a test basis, evidence supporting the amounts and
disclosures in the financial statements,assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 6 of the Notes to Consolidated Financial Statements,the
Company adopted Statement of Financial Accounting Standards No.142, "Goodwill
and Other Intangible Assets", effective January 1, 2002.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Cincinnati,Ohio
February 11,2003
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,except per share data)
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- --------- ---------
NET SERVICE REVENUES $ 156,221 $ 165,173 $ 154,302
Reimbursable out-of-pocket revenues 53,436 48,841 40,197
--------- --------- ---------
Total revenues 209,657 214,014 194,499
Cost and expenses:
Direct costs 91,133 98,438 93,729
Reimbursable out-of-pocket costs 53,436 48,841 40,197
Selling,general and administrative 52,402 48,646 44,047
Depreciation and amortization 9,057 8,347 9,988
Employee severance and office consolidation costs 1,468 408 (766)
Goodwill impairment -- 67,745 --
--------- --------- ---------
Total costs and expenses 207,496 272,425 187,195
Income (loss) from operations 2,161 (58,411) 7,304
Other income (expense):
Interest income 334 534 903
Interest expense (1,039) (1,219) (877)
Other (725) (61) 23
Investment impairment (405) (1,938) --
Gain on debt extinguishment 558 -- --
--------- --------- ---------
Total other income (expenses) (1,277) (2,684) 49
Income (loss) before income taxes 884 (61,095) 7,353
Income taxes 2,574 (6,295) 3,147
--------- --------- ---------
Net income (loss) $ (1,690) $ (54,800) $ 4,206
========= ========= =========
Income (loss) per share data:
Basic:
Net income (loss) per share $ (0.13) $ (4.30) $ 0.34
--------- --------- ---------
Weighted average shares 12,973 12,734 12,251
Diluted:
Net income (loss) per share $ (0.13) $ (4.30) $ 0.33
--------- --------- ---------
Weighted average shares 12,973 12,734 12,858
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED BALANCE SHEETS
(In thousands,except per share data)
DECEMBER 31,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 21,750 $ 12,671
Restricted cash 1,777 ---
Available for sale securities 8,881 17,304
Accounts receivable 41,573 47,050
Other current assets 9,947 7,343
--------- ---------
Total current assets 83,928 84,368
Property and equipment,net 17,607 19,028
Goodwill 25,404 22,033
Other finite-lived intangible assets 821 ---
Other indefinite-lived intangible assets 15,000 15,000
Long-term deferred tax asset 3,706 5,933
Other assets 7,949 9,035
--------- ---------
TOTAL ASSETS $ 154,415 $ 155,397
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 827 $ 843
Current portion of amounts outstanding under credit facilities 3,000 3,000
Trade payables 5,601 5,883
Advance billings 21,243 22,313
Other accrued liabilities 14,734 10,878
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Total current liabilities 45,405 42,917
Obligations under capital leases,less current portion 926 1,643
Convertible note 4,000 6,000
Long-term debt 6,750 9,750
Deferred income taxes payable 531 33
Other liabilities 434 694
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Total liabilities 58,046 61,037
Commitments and contingencies
Shareholders equity:
Preferred stock no par value;100,000 shares authorized;none issued and
outstanding Common stock no par value;45,000,000 shares authorized;
13,079,912 and 12,861,510 shares issued and 13,060,015 and
12,841,613 outstanding at December 31,2003 and 2002,respectively 75 75
Additional paid-in capital 135,034 134,266
Accumulated deficit (39,168) (37,478)
Accumulated other comprehensive income (loss):
Net unrealized holding gains (losses) on available for sale
securities 1 (6)
Unrealized loss on interest rate swap (350) (56