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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For
the Fiscal Year Ended December 31, 2006
 OR
 o
    
    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. 31-1274091of incorporation or organization)
 
 
 Title of each class
    
    Name of each exchange on which
registeredCommon Stock, no par value
    
    The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ




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##### 



Kendle International Inc.   Form 10-K Annual Report
For the Fiscal Year Ended December 31, 2006
 Table of Contents
 PagePart IItem 1  Business
    
    
    3Item 1A  Risk Factors
    
    
    5Item 1B  Unresolved Staff Comments
    
    
    8Item 2  Properties
    
    
    8Item 3  Legal Proceedings
    
    
    9Item 4  Submission of Matters to a Vote of Security Holders
    
    
    9Part IIItem 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    9Item 6  Selected Financial Data
    
    
    12Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 7A  Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 8  Financial Statements and Supplementary Data
    
    
    23Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    23Item 9A  Controls and Procedures
    
    
    23Item 9B  Other Information
    
    
    26Part IIIItem 10  Directors, Executive Officers and Corporate Governance
    
    
    26Item 11  Executive Compensation
    
    
    27Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    28Item 13  Certain Relationships and Related Transactions, and Director Independence
    
    
    28Item 14  Principal Accountant Fees and Services
    
    
    29Part IVItem 15  Exhibits and Financial Statement Schedules
    
    
    29SignaturesEX-10.16(A)EX-21EX-23.1EX-24EX-31.1EX-31.2EX-32.1EX-32.2
  2




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BUSINESS
 General
   Acquisition Activity
   Business Strategy
  Customers and Marketing
  3




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##### Table of Contents



Backlog
  Competition
   Government Regulation
   Employees
  Available Information
 www.kendle.com
 http://www.SEC.gov
 4




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##### Table of Contents



RISK FACTORS
    The Company depends on the biopharmaceutical industry for most of its revenue.
  The Companys contracts may be delayed, terminated or reduced in scope with little or no notice.
   The fixed price nature of many of the Companys contracts could result in financial losses.
  If the Company fails to hire, retain and integrate qualified personnel, it will be difficult for
the Company to achieve its goals.
  If the Company is required to write off goodwill or other intangible assets, its financial position
and results of operations would be adversely affected.
  The CRO industry is highly competitive.
 5




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The Company has grown rapidly and its growth has placed, and is expected to continue to place,
significant demands on it.
  The Companys indebtedness could adversely affect its business and financial condition.
    
    
    seek additional financing in the debt or equity markets;
    
    seek to refinance or restructure all or a portion of its indebtedness;
    
    sell selected assets; or
    
    reduce or delay planned capital expenditures.
   Change in government regulation could adversely affect the Company.
  International operations are subject to numerous risks.
 6




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##### Table of Contents



The Companys quarterly operating results may vary.
  
    
    Exchange rate fluctuations;
    
    Timing of contract amendments for changes in scope that could affect the value of
a contract and potentially impact the amount of net service revenue from quarter to quarter;
    
    Commencement, completion or cancellation of large contracts;
    
    Progress of ongoing contracts;
    
    Timing of and charges associated with completed acquisitions or other events; and
    
    Changes in the mix of its services.
  The Companys financial results are exposed to exchange rate fluctuations.
  The Companys business could expose it to potential liability for personal injury claims that could
affect its financial condition.
  The Companys operations might be affected by the occurrence of a natural disaster or other
catastrophic event.
  7




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The Companys business depends on the continued effectiveness and availability of its information
technology infrastructure, and failures of this infrastructure could harm its operations.
  Anti-takeover provisions in the Companys charter documents and under Ohio law may make an
acquisition of it, which may be beneficial to its stockholders, more difficult, which could depress
the Companys stock price.
  
    
    the authorization of undesignated preferred stock, the terms, rights, privileges
and restrictions of which may be established and shares of which may be issued
without shareholder approval;
    
    limitations on persons authorized to call a special meeting of shareholders; and
    
    advance notice procedures required for shareholders to nominate candidates for
election as directors or to bring matters before an annual meeting of shareholders.
  
  UNRESOLVED STAFF COMMENTS
  
  PROPERTIES
  8




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LEGAL PROCEEDINGS
  
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  
  RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 ®
 First
    
    Second
    
    Third
    
    Fourth2006 QuarterlyRanges of stock priceHigh
    
    $
    34.94
    
    
    $
    41.11
    
    
    $
    37.34
    
    
    $
    36.44Low
    
    
    21.40
    
    
    
    29.11
    
    
    
    21.34
    
    
    
    29.25
 First
    
    Second
    
    Third
    
    Fourth2005 QuarterlyRanges of stock priceHigh
    
    $
    13.20
    
    
    $
    16.53
    
    
    $
    28.63
    
    
    $
    29.50Low
    
    
    7.30
    
    
    
    10.20
    
    
    
    13.65
    
    
    
    22.25
   9




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##### Table of Contents



(d) Maximum Number(c) Total Number of Shares
    
    of Shares that May Yet(a) Total number of
    
    (b) Average Price Paid
    
    Purchased as Part of Publicly
    
    Be Purchased UnderPeriod
    
    Shares Purchased
    
    per Share
    
    Announced Plans or Programs
    
    the Plans or ProgramsMarch 2006
    
    
    3,155
    
    
    
    31.385
    
    
    
    0
    
    
    
    N/A
 Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    The graph assumes that a $100 investment was mase on December 31, 2001, and the reinvestment of all dividends. Dollar Value of $100 Investment at December 3112/01
    
    12/02
    
    12/03
    
    12/04
    
    12/05
    
    12/06Kendle International Inc.
    
    
    100.00
    
    
    
    43.66
    
    
    
    31.45
    
    
    
    43.65
    
    
    
    127.68
    
    
    
    156.00NASDAQ Composite
    
    
    100.00
    
    
    
    71.97
    
    
    
    107.18
    
    
    
    117.07
    
    
    
    120.50
    
    
    
    137.02NASDAQ Health Services
    
    
    100.00
    
    
    
    85.52
    
    
    
    118.76
    
    
    
    149.32
    
    
    
    164.82
    
    
    
    164.88
 10




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##### Table of Contents



Securities Authorized Under Equity Compensation Plans:
  11




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##### Table of Contents



SELECTED FINANCIAL DATA
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the years ended December 31,(in thousands except per share data)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Net service revenues
    
    $
    283,471
    
    
    $
    202,032
    
    
    $
    172,888
    
    
    $
    156,221
    
    
    $
    165,173Reimbursable out-of-pocket revenues
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980
    
    
    
    53,436
    
    
    
    48,841Total revenues
    
    
    373,936
    
    
    
    250,639
    
    
    
    215,868
    
    
    
    209,657
    
    
    
    214,014Cost and expenses:Direct costs
    
    
    152,826
    
    
    
    108,582
    
    
    
    96,909
    
    
    
    91,133
    
    
    
    98,438Reimbursable out-of-pocket costs
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980
    
    
    
    53,436
    
    
    
    48,841Selling, general and administrative
    
    
    91,796
    
    
    
    68,216
    
    
    
    59,797
    
    
    
    52,402
    
    
    
    48,646Depreciation and amortization
    
    
    10,403
    
    
    
    7,991
    
    
    
    9,175
    
    
    
    9,057
    
    
    
    8,347Employee severance and office consolidation costs
    
    
    236
    
    
    
    
    
    
    
    302
    
    
    
    1,468
    
    
    
    408Intangible impairment charge
    
    
    8,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,745Total costs and expenses
    
    
    353,926
    
    
    
    233,396
    
    
    
    209,163
    
    
    
    207,496
    
    
    
    272,425Income (loss) from operations
    
    
    20,010
    
    
    
    17,243
    
    
    
    6,705
    
    
    
    2,161
    
    
    
    (58,411
    )Other income (expense):Interest income
    
    
    1,939
    
    
    
    1,019
    
    
    
    400
    
    
    
    334
    
    
    
    534Interest expense
    
    
    (6,781
    )
    
    
    (460
    )
    
    
    (776
    )
    
    
    (1,039
    )
    
    
    (1,219
    )Other
    
    
    (1,795
    )
    
    
    (287
    )
    
    
    (873
    )
    
    
    (725
    )
    
    
    (61
    )Investment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    (1,938
    )Gain on debt extinguishment
    
    
    
    
    
    
    300
    
    
    
    597
    
    
    
    558
    
    
    
    Total other income (expenses)
    
    
    (6,637
    )
    
    
    572
    
    
    
    (652
    )
    
    
    (1,277
    )
    
    
    (2,684
    )Income (loss) before income taxes
    
    
    13,373
    
    
    
    17,815
    
    
    
    6,053
    
    
    
    884
    
    
    
    (61,095
    )Income taxes
    
    
    4,843
    
    
    
    7,141
    
    
    
    2,481
    
    
    
    2,574
    
    
    
    (6,295
    )Net income (loss)
    
    $
    8,530
    
    
    $
    10,674
    
    
    $
    3,572
    
    
    $
    (1,690
    )
    
    $
    (54,800
    )INCOME (LOSS) PER SHARE DATABasic:Net income (loss) per share
    
    $
    0.60
    
    
    $
    0.79
    
    
    $
    0.27
    
    
    $
    (0.13
    )
    
    $
    (4.30
    )Weighted average shares
    
    
    14,323
    
    
    
    13,572
    
    
    
    13,166
    
    
    
    12,973
    
    
    
    12,734Diluted:Net income (loss) per share
    
    $
    0.58
    
    
    $
    0.76
    
    
    $
    0.27
    
    
    $
    (0.13
    )
    
    $
    (4.30
    )Weighted average shares
    
    
    14,762
    
    
    
    14,120
    
    
    
    13,391
    
    
    
    12,973
    
    
    
    12,734CONSOLIDATED BALANCE SHEET DATA (1)Working capital
    
    $
    56,404
    
    
    $
    63,992
    
    
    $
    40,714
    
    
    $
    38,523
    
    
    $
    41,451Total assets
    
    
    455,072
    
    
    
    184,759
    
    
    
    162,680
    
    
    
    154,415
    
    
    
    155,397Total short and long-term debt
    
    
    200,099
    
    
    
    4,572
    
    
    
    9,853
    
    
    
    15,503
    
    
    
    21,236Total shareholders equity
    
    
    140,112
    
    
    
    122,504
    
    
    
    102,775
    
    
    
    96,369
    
    
    
    94,360
 
 (1)
    
    From 2002 to 2006, the Company made four acquisitions. See Note 13 to the Consolidated Financial Statements. 12




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CONDITION AND RESULTS OF OPERATIONS
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Company Overview
      13




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Acquisitions
    Results of Operations
 Year Ended December 31, 2006, Compared With Year Ended December 31, 2005
     Reimbursable Out-of-Pocket Revenues
 14




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Operating Expenses
        15




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Other Income
  Income Taxes
  Net Income
  Year Ended December 31, 2005, Compared With Year Ended December 31, 2004
    16




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Reimbursable Out-of-Pocket Revenues
  Operating Expenses
       Other Income
  17




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Income Taxes
  Net Income
  Liquidity and Capital Resources
        18




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Contractual Obligations
  19




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Year
    
    
    Years
    
    
    Years
    
    
    Years(in thousands)
    
    2007
    
    
    2008-2009
    
    
    2010-2011
    
    
    After 2011
    
    
    TotalCapital lease
obligations
(including
interest)
    
    $
    219
    
    
    $
    350
    
    
    $
    80
    
    
    $
    
    
    
    $
    649Operating Leases
    
    
    14,370
    
    
    
    22,269
    
    
    
    12,349
    
    
    
    10,959
    
    
    
    59,947Purchase Obligations
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535Debt payments*
    
    
    2,000
    
    
    
    20,500
    
    
    
    33,500
    
    
    
    143,500
    
    
    
    199,500Interest on debt*
    
    
    15,650
    
    
    
    27,810
    
    
    
    23,475
    
    
    
    6,079
    
    
    
    73,014Total
    
    $
    32,774
    
    
    $
    70,929
    
    
    $
    69,404
    
    
    $
    160,538
    
    
    $
    333,645
  
 *
    
    Under the terms of the Companys credit agreement, the term loan has mandatory prepayments of
$500,000 per quarter. In addition, at the end of each fiscal year commencing with the year ended December 31, 2007, the
Company must prepay 50% of its excess cash flow for the year (as defined in the Facility). Excess cash flow payments
on the debt are estimated for purposes of the above table.  Critical Accounting Polices and Estimates
  Revenue Recognition
     Business Combinations
  20




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Accounts Receivable/Allowance for Doubtful Accounts
  Long-Lived Assets
   Internally Developed Software
  Tax Valuation Allowance
  New Accounting Pronouncements
  21




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Cautionary Statement for Forward-Looking Information
    22




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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
  ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 CONTROLS AND PROCEDURES
 Managements Evaluation of Disclosure Controls and Procedures
 23




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Managements Report on Internal Control over Financial Reporting
   Internal ControlIntegrated
Framework.
  /s/ Candace Kendle
Candace Kendle, PharmD
    
    Chairman of the Board of
Directors, Chief Executive
Officer and Principal Executive
Officer
    
    March 16, 2007/s/ Karl Brenkert III

Karl Brenkert III
    
    Senior Vice President,
Chief Financial Officer
and Principal Financial
Accounting Officer
    
    March 16, 2007
 Report of Independent Registered Public Accounting Firm
 
 Internal ControlIntegrated Framework
 24




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Internal ControlIntegrated Framework Internal ControlIntegrated Framework
   
 25




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##### Table of Contents



OTHER INFORMATION
  
  
 ITEM 10.
 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
       26




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EXECUTIVENAME
    
    AGE
    
    POSITION
    
    OFFICER SINCECandace Kendle, PharmD
    
    60
    
    Chief Executive Officer and Chairman of the Board of Directors
    
    1989Christopher C. Bergen
    
    56
    
    President, Chief Operating Officer and Director
    
    1989Simon S. Higginbotham
    
    46
    
    Vice President and Chief Marketing Officer
    
    2004Karl Brenkert III
    
    59
    
    Senior Vice President, Chief Financial Officer
    
    2002Martha R. Feller
    
    58
    
    Senior Vice President, Global Clinical Development
    
    2007
      
  EXECUTIVE COMPENSATION
  
    
    Compensation Committee Interlocks and Insider Participation; and
    
    Compensation of Directors.
  
    
    Compensation Discussion and Analysis:;
    
    Compensation Committee Report;
    
    Summary Compensation Table;
    
    Grants of Plan-Based Awards;
    
    Outstanding Equity Awards at Fiscal Year End:;
    
    Option Exercises and Stock Vested; and
    
    Potential Payments Upon Termination or Change-in-Control.
 27




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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
     (a)
    
    (b)
    
    (c)Number of securitiesremaining available forNumber of Securities to be
    
    
    
    
    
    future issuanceissued upon exercise of
    
    Weighted-average exercise
    
    under equity compensationoutstanding options, warrants
    
    price of outstanding options,
    
    plans (excluding securitiesPlan Category
    
    and rights (1)
    
    warrants and rights (1)
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    797,597
    
    
    $
    11.55
    
    
    
    1,216,975Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    797,597
    
    
    $
    11.55
    
    
    
    1,216,975
 
 (1)
    
    Excludes the 2003 Directors Compensation Plan under which no options, warrants or rights are granted. This plan has been approved by shareholders for up to 75,000 shares. 
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
     28




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PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
  
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    (1) and (2)  All financial statements and schedules required to be filed by
Item 8 of this Form 10-K and included in this report are listed beginning on page F-1.
No additional financial statements or schedules are being filed as the required
information is not applicable or because the information is required and is included in
the respective financial statements or notes thereto.(3)
    
    Exhibits  Exhibits set forth below that are on file with the Securities and Exchange
Commission are incorporated by reference as exhibits hereto.
 ExhibitNumber
    
    Description of Exhibit
    
    Filing Status2.1
    
    Stock Purchase Agreement dated July 1, 1997 by and among the Company and Shareholders of
U-Gene Research B.V.
    
    A2.2
    
    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
    
    A2.3
    
    Share Purchase Agreement dated July 2, 1997 by and among the Company and the Shareholders of
GMI Gescellschaft für Angewandte Mathematick und Informatik mbH
    
    A2.4
    
    Stock Purchase Agreement dated February 11, 1998 by and among the Company and the Shareholders
of ACER/EXCEL Inc.
    
    B2.5
    
    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
    
    C2.6
    
    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
 29




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status2.7
    
    Share Purchase Agreement dated December 23, 1998 by and among the Company and the Shareholders
of Research Consultants (International) Holdings Limited
    
    D2.8
    
    Escrow Agreement dated January 5, 1999 among the Company, John Glasby, Gillian Gregory,
Michael Roy Broomby and Peter Nightingale
    
    D2.9
    
    Option Agreement dated September 9, 1998 by and between the Company and Component
Software International, Inc.
    
    D2.10
    
    Notice of Option Exercise dated January 11, 1999 of the Option Agreement dated September 9, 1998
    
    D2.11
    
    Multi-Year Strategic Services Agreement dated January 20, 1999 by and between the Company and
Component Software International, Inc.
    
    D2.12
    
    Asset Purchase Agreement dated June 27, 1999 by and among the Company and the Shareholders of
Health Care Communications, Inc.
    
    F2.13
    
    Stock Purchase Agreement dated June 4, 1999 by and among the Company and the Shareholders of
ESCLI S.A.
    
    G2.14
    
    Asset Purchase Agreement dated July 13, 1999 by and among the Company and the Shareholders of
HCC Health Care Communications (1991), Ltd.
    
    G2.15
    
    Share Purchase Agreement dated August 31, 1999 by and among the Company and the Shareholder
of Specialist Monitoring Services Limited
    
    G2.16
    
    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
    
    I2.17
    
    Escrow Agreement dated August 31, 1999 by and among the Company, Paul Martin, and The
Fifth Third Bank, as Escrow Agent
    
    I2.18
    
    Units Purchase Agreement dated April 7, 2000 by and among the Company and the Shareholders of
SYNERmedica PTY Limited and SYNERmedica Unit Trust
    
    J2.19
    
    Stock Purchase Agreement dated February 27, 2001 by and among the Company and the Shareholders
of AAC Consulting Group, Inc.
    
    L2.20
    
    Form of Note Prepayment Agreement
    
    O2(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
    
    M2(b)
    
    Convertible Subordinated Note, dated January 29, 2002 issued by Kendle International Inc. to Clinical
and Pharmacologic Research, Inc.
    
    M2.21
    
    Stock Purchase Agreement between the Company and Charles River Laboratories International, Inc.
dated as of May 9, 2006
    
    U3.1
    
    Restated and Amended Articles of Incorporation
    
    A3.2
    
    Amended and Restated Code of Regulations
    
    A3.3
    
    Amendment of the Restated and Amended Articles of Incorporation to Increase the Authorized Shares
    
    E4
    
    Specimen Common Stock Certificate
    
    A4.1
    
    Shareholder Rights Agreement dated August 13, 1999 between the Company and The Fifth Third
Bank, as Rights Agent
    
    H10.1
    
    Amended and Restated Shareholders Agreement dated June 26, 1997
    
    A10.2
    
    Master Lease Agreement dated November 27, 1996 by and between the Company and Bank One
Leasing Corporation, as amended on April 18, 1997
    
    A10.6
    
    Master Equipment Lease dated August 16, 1996 by and between the Company and The Fifth Third
Leasing Company
    
    A10.7
    
    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
    
    D10.8
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Candace Kendle Bryan
    
    A10.9
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Christopher C. Bergen
    
    A10.10
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Timothy M. Mooney
    
    A10.11
    
    Indemnity Agreement dated May 14, 1997 by and between the Company and Charles A. Sanders
    
    C10.12
    
    Indemnity Agreement dated May 14, 1997 by and between the Company and Philip E. Beekman
    
    C10.13
    
    Indemnity Agreement dated December 10, 1998 by and between the Company and Robert Buck
    
    D10.14
    
    Indemnity Agreement dated December 10, 1998 by and between the Company and Mary Beth Price
    
    D10.15
    
    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.
    
    P10.16
    
    Credit Agreement dated as of August 16, 2006 by and among the Company, certain subsidiary Guarantors,
various Lenders, UBS Securities LLC, as Sole Lead Arranger and Sole Bookrunner, UBS AG, Stamford
Branch, as Issuing Bank, Administrative Agent and Collateral Agent, UBS Loan Finance LLC, as Swingline
Lender, JPMorgan Chase Bank, N.A., as Syndication Agent, and KeyBank National Association, LaSalle
Bank N.A. and National City Bank, as Co-Documentation Agents.
    
    V
 30




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##### Table of Contents



ExhibitNumber
    
    
    
    
    
    Description of Exhibit
    
    Filing Status(a)
    
    First Amended and Restated Credit Agreement dated as of December 11, 2006 among
Kendle International Inc., the several lenders from time to time party thereto and
UBS AG, Stamford Branch, as administrative agent
    
    W10.17
    
    
    
    First Amendment to the Stock Purchase Agreement dated as of August 16, 2006 between the Company and Charles River Laboratories, Inc.
    
    V
 10.20
    
    
    
    MANAGEMENT CONTRACTS AND COMPENSATION PLANS(a)
    
    1995 Stock Option and Stock Incentive Plan
    
    A(b)
    
    1995 Stock Option and Stock Incentive Plan Individual Stock Option Agreement
for Incentive Stock Option (contained in Exhibit 10.20(a))
    
    A(c)
    
    1997 Stock Option and Stock Incentive Plan
    
    A(c)(1)
    
    Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan
    
    N(c)(2)
    
    Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan
    
    K(c)(3)
    
    Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan
    
    N(c)(4)
    
    Form of Restricted Stock Award Agreement
    
    S(d)
    
    Form of Protective Compensation and Benefit Agreement
    
    A(e)
    
    1998 Employee Stock Purchase Plan
    
    D(e)(1)
    
    Amendment No. 1 to 1998 Employee Stock Purchase Plan
    
    N(e)(2)
    
    Amendment No. 2 to 1998 Employee Stock Purchase Plan
    
    N(e)(3)
    
    Amendment No. 3 to 1998 Employee Stock Purchase Plan
    
    N(e)(4)
    
    Amendment No. 4 to 1998 Employee Stock Purchase Plan
    
    Q(e)(5)
    
    Amendment No. 5 to 1998 Employee Stock Purchase Plan
    
    R(n)
    
    2003 Directors Compensation Plan
    
    O14
    
    Code of Ethics
    
    Y21
    
    List of Subsidiaries
    
    W23.1
    
    Consent of Deloitte & Touche LLP
    
    W24
    
    Powers of Attorney
    
    W31.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
    
    W31.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
    
    W32.1
    
    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
    
    W32.2
    
    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
    
    W
 FilingStatus
    
    Description of Filing StatusA
    
    Incorporated by reference to the Companys Registration Statement No. 333-30581 filed under the
Securities Act of 1933B
    
    Filed as an exhibit to the Companys Current Report on Form 8-K dated November 13, 1997C
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 1997D
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 1998E
    
    Incorporated by reference to the Companys Proxy Statement for its 1999 Annual Shareholders MeetingF
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999G
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999H
    
    Incorporated by reference to the Companys filing on Form 8-A dated September 7, 1999I
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 1999
 31




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##### Table of Contents



FilingStatus
    
    Description of Filing StatusJ
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000K
    
    Incorporated by reference to the Companys Proxy Statement for its 2000 Annual Shareholders MeetingL
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 2000M
    
    Filed as an exhibit to the Companys Current Report on Form 8-K dated January 29, 2002N
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2002O
    
    Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003P
    
    Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003Q
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005R
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated June 3, 2005.S
    
    Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2004T
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003U
    
    Incorporated herein by reference to Exhibit 2.1 to the Form 8-K filed with the Commission on May 12, 2006V
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated August 18, 2006W
    
    Filed herewithY
    
    Available on the Companys Web site at www.kendle.com
      32




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##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004.
    
    
    F-3Consolidated Balance Sheets as of December 31, 2006 and 2005.
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004.
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.
    
    
    F-6Notes to Consolidated Financial Statements.
    
    
    F-7
 F-1




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DELOITTE & TOUCHE LLP
 
 F-2




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands except per share data)For the Years Ended December 31,
    
    2006
    
    
    2005
    
    
    2004Net service revenues
    
    $
    283,471
    
    
    $
    202,032
    
    
    $
    172,888Reimbursable out-of-pocket revenues
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980Total revenues
    
    
    373,936
    
    
    
    250,639
    
    
    
    215,868Cost and expenses:Direct costs
    
    
    152,826
    
    
    
    108,582
    
    
    
    96,909Reimbursable out-of-pocket costs
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980Selling, general and administrative
    
    
    91,796
    
    
    
    68,216
    
    
    
    59,797Depreciation and amortization
    
    
    10,403
    
    
    
    7,991
    
    
    
    9,175Employee severance and office consolidation costs
    
    
    236
    
    
    
    
    
    
    
    302Intangible impairment charge
    
    
    8,200
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    353,926
    
    
    
    233,396
    
    
    
    209,163Income from operations
    
    
    20,010
    
    
    
    17,243
    
    
    
    6,705Other income (expense):Interest income
    
    
    1,939
    
    
    
    1,019
    
    
    
    400Interest expense
    
    
    (6,781
    )
    
    
    (460
    )
    
    
    (776
    )Other
    
    
    (1,795
    )
    
    
    (287
    )
    
    
    (873
    )Gain on debt extinguishment
    
    
    
    
    
    
    300
    
    
    
    597Total other income (expenses)
    
    
    (6,637
    )
    
    
    572
    
    
    
    (652
    )Income before income taxes
    
    
    13,373
    
    
    
    17,815
    
    
    
    6,053Income taxes
    
    
    4,843
    
    
    
    7,141
    
    
    
    2,481Net income
    
    $
    8,530
    
    
    $
    10,674
    
    
    $
    3,572Income per share data:Basic:Net income per share
    
    $
    0.60
    
    
    $
    0.79
    
    
    $
    0.27Weighted average shares
    
    
    14,323
    
    
    
    13,572
    
    
    
    13,166Diluted:Net income per share
    
    $
    0.58
    
    
    $
    0.76
    
    
    $
    0.27Weighted average shares
    
    
    14,762
    
    
    
    14,120
    
    
    
    13,391
  F-3




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 (in thousands except share data)December 31,
    
    2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    19,917
    
    
    $
    37,437Restricted cash
    
    
    2,395
    
    
    
    592Available-for-sale securities
    
    
    
    
    
    
    10,726Accounts receivable
    
    
    122,680
    
    
    
    65,112Other current assets
    
    
    21,684
    
    
    
    10,083Total current assets
    
    
    166,676
    
    
    
    123,950Property and equipment, net
    
    
    23,024
    
    
    
    15,084Goodwill
    
    
    229,598
    
    
    
    24,075Other finite-lived intangible assets
    
    
    24,227
    
    
    
    511Other indefinite-lived intangible assets
    
    
    
    
    
    
    15,000Long-term deferred tax asset
    
    
    3,181
    
    
    
    2,213Other assets
    
    
    8,366
    
    
    
    3,926Total assets
    
    $
    455,072
    
    
    $
    184,759Liabilities and Shareholders EquityCurrent liabilities:Current portion of obligations under capital leases
    
    $
    195
    
    
    $
    391Current portion of amounts outstanding under credit facilities
    
    
    2,000
    
    
    
    3,000Trade payables
    
    
    15,150
    
    
    
    9,174Advance billings
    
    
    62,427
    
    
    
    31,958Other accrued liabilities
    
    
    30,500
    
    
    
    15,435Total current liabilities
    
    
    110,272
    
    
    
    59,958Obligations under capital leases, less current portion
    
    
    404
    
    
    
    431Long-term debt
    
    
    197,500
    
    
    
    750Deferred income taxes payable
    
    
    760
    
    
    
    484Other liabilities
    
    
    6,024
    
    
    
    632Total liabilities
    
    
    314,960
    
    
    
    62,255Commitments and contingenciesShareholders equity:Preferred stockno par value; 100,000 shares
authorized; none issued and outstanding,
Common stockno par value; 45,000,000
shares authorized;
14,445,393 and 14,105,653 shares issued and
14,422,341 and 14,085,756
outstanding at December 31, 2006 and 2005, respectively
    
    
    75
    
    
    
    75Additional paid-in capital
    
    
    154,641
    
    
    
    147,712Accumulated deficit
    
    
    (16,392
    )
    
    
    (24,922
    )Accumulated other comprehensive income:Net unrealized holding loss on available-for-sale securities
    
    
    
    
    
    
    (39
    )Unrealized gain on interest rate swap
    
    
    
    
    
    
    7Foreign currency translation adjustment
    
    
    2,280
    
    
    
    64Total accumulated other comprehensive income
    
    
    2,280
    
    
    
    32Less: Cost of Common Stock held in treasury,
23,052 and 19,897
shares at December 31, 2006 and 2005, respectively
    
    
    (492
    )
    
    
    (393
    )Total shareholders equity
    
    
    140,112
    
    
    
    122,504Total liabilities and shareholders equity
    
    $
    455,072
    
    
    $
    184,759
  F-4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Common
    
    
    
    
    
    
    
    
    
    (Accumulated
    
    Accumulated OtherCommon Stock
    
    Stock
    
    Additional Paid-
    
    Treasury
    
    Deficit) Retained
    
    Comprehensive
    
    Total Shareholders'
    
    Comprehensive(in thousands except share data)
    
    Number of Shares
    
    Amount
    
    in Capital
    
    Stock
    
    Earnings
    
    Income (Loss)
    
    Equity
    
    Income (Loss)Balance at January 1, 2004
    
    
    13,060,015
    
    
    $
    75
    
    
    $
    135,034
    
    
    $
    (393
    )
    
    $
    (39,168
    )
    
    $
    821
    
    
    $
    96,369Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,572
    
    
    
    
    
    
    
    3,572
    
    
    
    3,572Other comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,549
    
    
    
    1,549
    
    
    
    1,549Net unrealized holding losses on
available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )
    
    
    (50
    )Net unrealized holding gains on
interest rate swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    258
    
    
    
    258Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,329Shares issued under stock plans
    
    
    182,914
    
    
    
    
    
    
    
    985
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    985Deferred compensation  restricted stock
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116
    )Income tax benefit from exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208Balance at December 31, 2004
    
    
    13,242,929
    
    
    $
    75
    
    
    $
    136,111
    
    
    $
    (393
    )
    
    $
    (35,596
    )
    
    $
    2,578
    
    
    $
    102,775Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,674
    
    
    
    
    
    
    
    10,674
    
    
    
    10,674Other comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,655
    )
    
    
    (2,655
    )
    
    
    (2,655
    )Net unrealized holding gains on
available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10
    
    
    
    10Net unrealized holding gains on
interest rate swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    99
    
    
    
    99Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,128Shares issued under stock plans
    
    
    842,827
    
    
    
    
    
    
    
    9,633
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,633Deferred compensation  restricted stock
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )Income tax benefit from exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    2,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034Balance at December 31, 2005
    
    
    14,085,756
    
    
    $
    75
    
    
    $
    147,712
    
    
    $
    (393
    )
    
    $
    (24,922
    )
    
    $
    32
    
    
    $
    122,504Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,530
    
    
    
    
    
    
    
    8,530
    
    
    
    8,530Other comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,217
    
    
    
    2,217
    
    
    
    2,217Portion of prior year unrealized loss
recognized in current year, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34
    
    
    
    34Realized holding loss on
available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5
    
    
    
    5Net unrealized holding gains on
interest rate swap agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )
    
    
    (8
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,778Shares issued under stock plans
    
    
    336,585
    
    
    
    
    
    
    
    4,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,271Stock option expense
    
    
    
    
    
    
    
    
    
    
    1,490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,490Deferred compensation  restricted stock
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Income tax benefit from exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    1,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,187Treasury stock transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    
    
    
    
    (99
    )Balance at December 31, 2006
    
    
    14,422,341
    
    
    $
    75
    
    
    $
    154,641
    
    
    $
    (492
    )
    
    $
    (16,392
    )
    
    $
    2,280
    
    
    $
    140,112
  F-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)For the Years Ended December 31,
    
    2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    8,530
    
    
    $
    10,674
    
    
    $
    3,572Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    10,403
    
    
    
    7,991
    
    
    
    9,175Goodwill and investment impairment
    
    
    8,200
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (3,967
    )
    
    
    1,416
    
    
    
    514Income tax benefit from stock option exercises
    
    
    (898
    )
    
    
    
    
    
    
    Compensation expense on stock grants
    
    
    1,879
    
    
    
    78
    
    
    
    71Other
    
    
    522
    
    
    
    91
    
    
    
    518Gain on convertible note repayment
    
    
    
    
    
    
    (300
    )
    
    
    (597
    )Changes in operating assets and liabilities, net of effects from acquisitions:Restricted cash
    
    
    (441
    )
    
    
    293
    
    
    
    804Accounts receivable
    
    
    (18,995
    )
    
    
    (9,562
    )
    
    
    (10,727
    )Other current assets
    
    
    (1,262
    )
    
    
    (385
    )
    
    
    (225
    )Other assets
    
    
    (207
    )
    
    
    256
    
    
    
    (58
    )Investigator and project costs
    
    
    (8,564
    )
    
    
    (766
    )
    
    
    131Trade payables
    
    
    2,806
    
    
    
    355
    
    
    
    3,302Advance billings
    
    
    15,895
    
    
    
    7,471
    
    
    
    786Accrued liabilities and other
    
    
    3,650
    
    
    
    5,707
    
    
    
    616Net cash provided by operating activities
    
    
    17,551
    
    
    
    23,319
    
    
    
    7,882Cash flows from investing activitiesPurchase of available-for-sale securities
    
    
    (7,027
    )
    
    
    (9,552
    )
    
    
    (9,419
    )Proceeds from sale and maturity of available-for-sale securities
    
    
    17,868
    
    
    
    9,050
    
    
    
    7,889Acquisitions of property and equipment
    
    
    (8,725
    )
    
    
    (4,732
    )
    
    
    (3,663
    )Additions to internally developed software
    
    
    (91
    )
    
    
    (233
    )
    
    
    (1,651
    )Acquisitions of businesses, less cash acquired
    
    
    (231,879
    )
    
    
    
    
    
    
    Other
    
    
    (153
    )
    
    
    20
    
    
    
    17Net cash used in investing activities
    
    
    (230,007
    )
    
    
    (5,447
    )
    
    
    (6,827
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    200,000
    
    
    
    
    
    
    
    Payments of long-term debt
    
    
    (4,250
    )
    
    
    (2,937
    )
    
    
    (3,024
    )Payment of convertible note
    
    
    
    
    
    
    (1,200
    )
    
    
    (1,903
    )Proceeds from issuance of Common Stock
    
    
    3,505
    
    
    
    7,422
    
    
    
    141Income tax benefit from stock option exercises
    
    
    898
    
    
    
    
    
    
    
    Amounts payable  book overdraft
    
    
    (65
    )
    
    
    (353
    )
    
    
    327Payments on capital lease obligations
    
    
    (382
    )
    
    
    (691
    )
    
    
    (975
    )Purchase of treasury stock
    
    
    (99
    )
    
    
    
    
    
    
    Debt issue costs
    
    
    (5,568
    )
    
    
    (30
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    194,039
    
    
    
    2,211
    
    
    
    (5,434
    )Effects of exchange rates on cash and cash equivalents
    
    
    897
    
    
    
    (311
    )
    
    
    294Net increase (decrease) in cash and cash equivalents
    
    
    (17,520
    )
    
    
    19,772
    
    
    
    (4,085
    )Cash and cash equivalentsBeginning of year
    
    
    37,437
    
    
    
    17,665
    
    
    
    21,750End of year
    
    $
    19,917
    
    
    $
    37,437
    
    
    $
    17,665Supplemental disclosure of cash flow informationCash paid during the year for interest
    
    $
    6,198
    
    
    $
    489
    
    
    $
    805Cash paid (received) during the year for income taxes
    
    $
    7,698
    
    
    $
    3,154
    
    
    $
    (90
    )Supplemental schedule of noncash investing and financing activitiesAcquisition of equipment under capital leases
    
    $
    184
    
    
    $
    
    
    
    $
    938Acquisitions of businesses:Fair value of assets acquired via cash
    
    $
    266,850
    
    
    $
    
    
    
    $
    Fair value of liabilities assumed or incurred
    
    $
    (34,971
    )
    
    $
    
    
    
    $
    Stock issued
    
    $
    
    
    
    $
    
    
    
    $
    Net cash payments
    
    $
    231,879
    
    
    $
    
    
    
    $
    -
  F-6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
 Nature of Business
  Principles of Consolidation and Organization
   Business Combinations
   Foreign Currency Translation
  Cash and Cash Equivalents, Including Restricted Cash
     F-7




---



##### Table of Contents



Available-for-Sale Securities
  Revenue Recognition
    Concentration of Credit Risk
  Long-Lived Assets
   Furniture and Fixtures
    
    10 yearsEquipment and Software
    
    5 yearsLeasehold Improvements
    
    Lesser of estimated life of asset or lease termBuildings
    
    50 yearsCapital Lease Assets
    
    Lesser of estimated life of asset or lease term
 F-8




---



##### Table of Contents



Derivatives
  Marketing and Advertising Costs
  Investigator and Project Costs
  Net Income Per Share Data
   F-9




---



##### Table of Contents



Net Income Per Share Data
 (in thousands)
    
    2006
    
    2005
    
    2004Weighted average common shares outstanding
    
    
    14,323
    
    
    
    13,572
    
    
    
    13,166Stock options and non-vested restricted shares
    
    
    439
    
    
    
    548
    
    
    
    225Weighted average shares
    
    
    14,762
    
    
    
    14,120
    
    
    
    13,391
  Income Taxes
      Stock Options
   Year Ended December 31,2006
    
    2005
    
    2004Divided yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    56.2
    %
    
    
    55.6
    %
    
    
    67.5
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    3.7
    %
    
    
    3.7
    %Expected term
    
    5.9 years
    
    4.7 years
    
    5.0 years
 F-10




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##### Table of Contents



1)
    
    Outstanding/unvested as of May 12, 20052)
    
    Have an option price greater than $11.73 (fair market value on May 12, 2005)3)
    
    Were granted between May 1, 2001, and May 1, 2002
    (in thousands, except per share data)
    
    2005
    
    
    2004Pro forma net incomeAs reported
    
    $
    10,674
    
    
    $
    3,572Less: pro forma adjustment for stock-based compensation, net of tax
    
    
    (3,739
    )
    
    
    (3,015
    )Pro forma net income
    
    
    6,935
    
    
    
    557Pro forma net income per diluted shareAs reported
    
    
    0.76
    
    
    
    0.27Pro forma
    
    
    0.49
    
    
    
    0.04Effect of pro forma expense
    
    
    (0.27
    )
    
    
    (0.23
    )Pro forma net income per basic shareAs reported
    
    
    0.79
    
    
    
    0.27Pro forma
    
    
    0.51
    
    
    
    0.04Effect of pro forma expense
    
    
    (0.28
    )
    
    
    (0.23
    )
 Restricted/Unrestricted Stock
  F-11




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Restricted stock
    
    $
    57
    
    
    $
    78
    
    
    $
    71Unrestricted stock
    
    
    336
    
    
    
    
    
    
    
    Total stock-based compensation
    
    $
    393
    
    
    $
    78
    
    
    $
    71
 Use of Estimates
  New Accounting Pronouncements
      F-12




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##### Table of Contents



2. AVAILABLE-FOR-SALE SECURITIES:
  Amortized
    
    
    Unrealized
    
    
    FairAvailable-for-Sale Securities:
    
    Cost
    
    
    Gain (Loss)
    
    
    ValueCorporate-backed securities:Maturing in 1 year or less
    
    $
    8,667
    
    
    $
    (27
    )
    
    $
    8,640Maturing after 1 year through 5 years
    
    
    818
    
    
    
    (12
    )
    
    
    806Maturing after 10 years
    
    
    
    
    
    
    
    
    
    
    Government-backed securities:Maturing in 1 year or less
    
    
    
    
    
    
    
    
    
    
    Maturing after 1 year through 5 years
    
    
    530
    
    
    
    
    
    
    
    530Maturing after 10 years
    
    
    750
    
    
    
    
    
    
    
    75012/31/05 Totals
    
    $
    10,765
    
    
    $
    (39
    )
    
    $
    10,726
  3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
  4. ACCOUNTS RECEIVABLE:
  (in thousands)December 31,
    
    2006
    
    
    2005Billed
    
    $
    64,125
    
    
    $
    40,388Unbilled
    
    
    58,555
    
    
    
    24,724$
    122,680
    
    
    $
    65,112
  F-13




---



##### Table of Contents



(in thousands)Balance at 12/31/03
    
    $
    533Invoice write-offs
    
    
    (436
    )Additional expense
    
    
    149Balance at 12/31/04
    
    $
    246Invoice write-offs
    
    
    (90
    )Additional expense
    
    
    1,901Balance at 12/31/05
    
    $
    2,057Invoice write-offs
    
    
    (1,754
    )Additional expense
    
    
    250Balance at 12/31/06
    
    $
    553
  5. PROPERTY AND EQUIPMENT:
  (in thousands)December 31,
    
    2006
    
    
    2005Furnishings, equipment and other
    
    $
    63,290
    
    
    $
    48,186Equipment under capital leases
    
    
    2,168
    
    
    
    2,723Less: accumulated depreciation and amortization
    
    
    (42,434
    )
    
    
    (35,825
    )Property and equipment, net
    
    $
    23,024
    
    
    $
    15,084
  6. GOODWILL AND OTHER INTANGIBLE ASSETS:
      F-14




---



##### Table of Contents



(in thousands)
    
    GoodwillBalance at 12/31/04
    
    $
    26,003Additional amount acquired
    
    
    Foreign currency fluctuations
    
    
    (1,539
    )Tax benefit to reduce goodwill
    
    
    (389
    )Balance at 12/31/05
    
    $
    24,075Additional amount acquired
    
    
    204,735Foreign currency fluctuations
    
    
    1,140Tax benefit to reduce goodwill
    
    
    (352
    )Balance at 12/31/06
    
    $
    229,598
     (a)As of December 31,(in thousands)
    
    2006
    
    
    2005Goodwill
    
    $
    229,598
    
    
    $
    24,075Amortizable intangible assets:Carrying amount:Customer relationships
    
    
    18,000
    
    
    
    15,400Non-compete agreements
    
    
    460
    
    
    
    460Completed technology
    
    
    2,600
    
    
    
    Backlog
    
    
    6,200
    
    
    
    Internally developed software (b)
    
    
    16,039
    
    
    
    16,228Total carrying amount
    
    $
    43,299
    
    
    $
    32,088Accumulated Amortization:Customer relationships
    
    
    (682
    )
    
    
    (90
    )Non-compete agreements
    
    
    (374
    )
    
    
    (259
    )Completed technology
    
    
    (205
    )
    
    
    Backlog
    
    
    (1,772
    )
    
    
    Internally developed software
    
    
    (14,228
    )
    
    
    (13,089
    )Total accumulated amortization
    
    $
    (17,261
    )
    
    $
    (13,438
    )Net amortizable assets
    
    
    26,038
    
    
    
    18,650Total goodwill and intangible assets
    
    $
    255,636
    
    
    $
    42,725
 
 (a)
    
    As disclosed in the paragraphs preceding this table, a $15 million customer
relationship intangible was determined to be
impaired in 2006. The Company recorded an $8.2 million impairment charge and changed the
assets designation from
indefinite to finite-lived.(b)
    
    Internally developed software is contained in Other Assets in the Companys Consolidated
Balance Sheets. F-15




---



##### Table of Contents



(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    InternallyCustomer
    
    
    Non-Compete
    
    
    Completed
    
    
    
    
    
    
    Developed(in thousands)
    
    Relationships
    
    
    Agreements
    
    
    Technology
    
    
    Backlog
    
    
    SoftwareBalance at 12/31/04
    
    $
    15,346
    
    
    $
    317
    
    
    $
    
    
    
    $
    
    
    
    $
    5,097Additional amounts acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )2005 amortization
    
    
    (37
    )
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    (2,123
    )Balance at 12/31/05
    
    $
    15,309
    
    
    $
    202
    
    
    $
    
    
    
    $
    
    
    
    $
    3,139Additional amounts acquired
    
    
    10,800
    
    
    
    
    
    
    
    2,600
    
    
    
    6,200
    
    
    
    90Intangible impairment charge
    
    
    (8,200
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )2006 amortization
    
    
    (592
    )
    
    
    (115
    )
    
    
    (205
    )
    
    
    (1,772
    )
    
    
    (1,368
    )Balance at 12/31/06
    
    $
    17,317
    
    
    $
    87
    
    
    $
    2,395
    
    
    $
    4,428
    
    
    $
    1,811
 
 (a)
    
    As disclosed in the paragraphs preceding this table, a $15 million customer
relationship intangible was determined to be
impaired in 2006. The Company recorded an $8.2 million impairment charge and changed the
assets designation from
indefinite to finite-lived.        (in thousands)2007
    
    $
    5,6262008
    
    $
    4,0912009
    
    $
    3,1252010
    
    $
    2,4312011
    
    $
    2,261Thereafter
    
    $
    8,504
  F-16




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##### Table of Contents



7. OTHER ACCRUED LIABILITIES:
  (in thousands)December 31,
    
    2006
    
    
    2005Accrued compensation and related payroll withholdings and taxes
    
    $
    13,177
    
    
    $
    7,447Amounts payable  book overdraft
    
    
    34
    
    
    
    89Other
    
    
    17,289
    
    
    
    7,899$
    30,500
    
    
    $
    15,435
 8. DEBT:
            F-17




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##### Table of Contents



9. EMPLOYEE SEVERANCE AND OFFICE CONSOLIDATION COSTS:
   Employee(in thousands)
    
    Severance
    
    
    Other
    
    
    TotalLiability at December 31, 2004
    
    $
    15
    
    
    $
    
    
    
    $
    15Amounts accrued
    
    
    70
    
    
    
    
    
    
    
    70Amounts paid
    
    
    (85
    )
    
    
    
    
    
    
    (85
    )Non-cash charge
    
    
    
    
    
    
    
    
    
    
    Adjustment to liability
    
    
    
    
    
    
    
    
    
    
    Liability at December 31, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Amounts accrued
    
    
    
    
    
    
    
    
    
    
    Amounts paid
    
    
    
    
    
    
    
    
    
    
    Non-cash charge
    
    
    
    
    
    
    
    
    
    
    Adjustment to liability
    
    
    
    
    
    
    
    
    
    
    Liability at December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
 10. EMPLOYEE BENEFIT PLANS:
 401(k) Plan
  Employee Stock Purchase Plan
  F-18




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##### Table of Contents



Stock Option and Stock Incentive Plan
      Weighted
    
    
    Average
    
    
    IntrinsicAverage
    
    
    Remaining
    
    
    ValueShares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    ($ in thousands)Options outsanding at 12/31/03
    
    
    2,061,636
    
    
    $
    11.26Granted
    
    
    289,000
    
    
    
    6.80Canceled
    
    
    (313,070
    )
    
    
    13.39Exercised
    
    
    (60,526
    )
    
    
    1.71Options outstanding at 12/31/04
    
    
    1,977,040
    
    
    
    10.54Granted
    
    
    51,500
    
    
    
    11.80Canceled
    
    
    (197,583
    )
    
    
    10.57Exercised
    
    
    (715,628
    )
    
    
    10.52Options outstanding at 12/31/05
    
    
    1,115,329
    
    
    
    10.60Granted
    
    
    46,000
    
    
    
    32.66Canceled
    
    
    (77,649
    )
    
    
    8.89Exercised
    
    
    (286,083
    )
    
    
    12.32Options outstanding at 12/31/06
    
    
    797,597
    
    
    $
    11.55
    
    
    
    6.0
    
    
    $
    9,215Exercisable at 12/31/06
    
    
    533,177
    
    
    $
    12.99
    
    
    
    5.6
    
    
    $
    6,925
   F-19




---



##### Table of Contents



Weighted Average
    
    WeightedRange of
    
    Outstanding at
    
    Remaining
    
    AverageExercise Price
    
    December 31, 2006
    
    Contractual Life
    
    Exercise Price$  0.91$  3.39
    
    
    
    556
    
    
    
    0.04
    
    
    
    $  2.01$  3.40$  6.77
    
    
    
    165,690
    
    
    
    6.59
    
    
    
    5.51$  6.78$10.16
    
    
    
    349,595
    
    
    
    6.20
    
    
    
    8.23$10.17$13.55
    
    
    
    85,200
    
    
    
    6.32
    
    
    
    11.52$13.56$16.94
    
    
    
    17,760
    
    
    
    0.77
    
    
    
    14.43$16.95$20.32
    
    
    
    56,816
    
    
    
    4.59
    
    
    
    18.76$20.33$23.71
    
    
    
    73,880
    
    
    
    3.85
    
    
    
    21.20$23.72$27.10
    
    
    
    2,100
    
    
    
    1.38
    
    
    
    25.48$27.11$30.48
    
    
    
    14,000
    
    
    
    9.98
    
    
    
    30.06$30.49$33.87
    
    
    
    32,000
    
    
    
    9.36
    
    
    
    33.80797,597
    
    
    
    6.02
    
    
    
    $11.55
  WeightedRange of
    
    Exercisable at
    
    AverageExercise Price
    
    December 31, 2006
    
    Exercise Price$  0.91$  3.39
    
    
    
    556
    
    
    
    $  2.01$  3.40$  6.77
    
    
    
    71,670
    
    
    
    5.40$  6.78$10.16
    
    
    
    208,795
    
    
    
    8.38$10.17$13.55
    
    
    
    71,600
    
    
    
    11.58$13.56$16.94
    
    
    
    17,760
    
    
    
    14.43$16.95$20.32
    
    
    
    56,816
    
    
    
    18.76$20.33$23.71
    
    
    
    73,880
    
    
    
    21.20$23.72$27.10
    
    
    
    2,100
    
    
    
    25.48$27.11$30.48
    
    
    
    
    
    
    
    $30.49$33.87
    
    
    
    30,000
    
    
    
    33.87533,177
    
    
    
    $12.99
     SharesOutsanding at 12/31/03
    
    
    10,667Granted
    
    
    18,000Vested
    
    
    (5,334
    )Canceled
    
    
    Outstanding at 12/31/04
    
    
    23,333Granted
    
    
    Vested
    
    
    (11,333
    )Canceled
    
    
    Outstanding at 12/31/05
    
    
    12,000Granted
    
    
    250Vested
    
    
    (6,000
    )Canceled
    
    
    Outstanding at 12/31/06
    
    
    6,250
 F-20




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##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES:
 Leases:
  Capital
    
    
    Operating(in thousands)
    
    Leases
    
    
    Leases2007
    
    $
    219
    
    
    $
    14,3702008
    
    
    208
    
    
    
    12,6402009
    
    
    142
    
    
    
    9,6292010
    
    
    45
    
    
    
    7,5342011
    
    
    35
    
    
    
    4,815thereafter
    
    
    
    
    
    
    10,959Total minimum lease payments
    
    
    649
    
    
    $
    59,947Amounts representing interest
    
    
    (50
    )Present value of net minimum lease payments
    
    
    599Current portion
    
    
    195Obligations under capital leases, less current portion
    
    $
    404
  Protective Compensation and Benefit Agreements:
  Legal Proceedings:
  Anti-takeover Provisions:
  F-21




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##### Table of Contents



12. INCOME TAXES:
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    2,131
    
    
    $
    1,149
    
    
    $
    (708
    )State and local
    
    
    314
    
    
    
    (20
    )
    
    
    (639
    )Foreign
    
    
    6,012
    
    
    
    4,207
    
    
    
    2,925Subtotal
    
    
    8,457
    
    
    
    5,336
    
    
    
    1,578Deferred:Federal
    
    
    (4,252
    )
    
    
    (95
    )
    
    
    395State and local
    
    
    (336
    )
    
    
    2,081
    
    
    
    (114
    )Foreign
    
    
    621
    
    
    
    (570
    )
    
    
    233Subtotal
    
    
    (3,967
    )
    
    
    1,416
    
    
    
    514Benefit applied to reduce goodwill
    
    
    353
    
    
    
    389
    
    
    
    389Total provision
    
    $
    4,843
    
    
    $
    7,141
    
    
    $
    2,481
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004United States
    
    $
    (7,062
    )
    
    $
    6,055
    
    
    $
    (529
    )Foreign
    
    
    20,435
    
    
    
    11,760
    
    
    
    6,582Income before income taxes
    
    $
    13,373
    
    
    $
    17,815
    
    
    $
    6,053
  2006
    
    
    2005
    
    
    2004Income tax expense at the U.S. federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Effects of foreign taxes, net of foreign tax credits and deductions
    
    
    (6.5
    )
    
    
    2.2
    
    
    
    13.9State and local income taxes, net of federal benefit
    
    
    0.1
    
    
    
    7.8
    
    
    
    (7.6
    )Dutch operating loss carryforward- reversal of valuation allowance
    
    
    
    
    
    
    (4.6
    )
    
    
    Effects of repatriated foreign dividend
    
    
    6.9
    
    
    
    
    
    
    
    Other
    
    
    0.7
    
    
    
    (0.3
    )
    
    
    (0.3
    )Total
    
    
    36.2
    %
    
    
    40.1
    %
    
    
    41.0
    %
   F-22




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##### Table of Contents



(in thousands)
    
    2006
    
    
    2005Deferred tax assets:Compensation and employee benefits
    
    $
    1,634
    
    
    $
    294Accrued expenses and other future deductible items
    
    
    4,667
    
    
    
    920Foreign operating loss carryforward
    
    
    14,050
    
    
    
    3,819State and local operating loss carryforward
    
    
    1,055
    
    
    
    781Federal operating loss carryforward
    
    
    
    
    
    
    639Tax benefit of unrealized losses
    
    
    
    
    
    
    23Contributions carryforward
    
    
    
    
    
    
    96Capital loss carryforward
    
    
    716
    
    
    
    728Foreign tax credit carryforward
    
    
    2,402
    
    
    
    47Intangible assets
    
    
    
    
    
    
    3,697Unrealized foreign exchange losses
    
    
    650
    
    
    
    68Depreciation and software costs
    
    
    1,233
    
    
    
    Stock option expense
    
    
    357
    
    
    
    Accounting method differences
    
    
    925
    
    
    
    317Total deferred tax assets
    
    
    27,689
    
    
    
    11,429Deferred tax liabilities:Depreciation and software costs
    
    
    
    
    
    
    1,312Intangible assets
    
    
    1,800
    
    
    
    Deferred state income taxes
    
    
    101
    
    
    
    191Total deferred tax liability
    
    
    1,901
    
    
    
    1,503Valuation allowance
    
    
    18,118
    
    
    
    4,548Total net deferred tax (asset)/liability
    
    $
    (7,670
    )
    
    $
    (5,378
    )
         F-23




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Beginning balance
    
    $
    4,548
    
    
    $
    7,014
    
    
    $
    5,865Additions charged to expense
    
    
    1,357
    
    
    
    399
    
    
    
    1,591Additions attributable to acquisitions
    
    
    12,739
    
    
    
    
    
    
    
    Reductions from utilization and reassessments
    
    
    (526
    )
    
    
    (2,865
    )
    
    
    (442
    )Ending balance
    
    $
    18,118
    
    
    $
    4,548
    
    
    $
    7,014
   13. ACQUISITIONS:
  2006:
 Acquisition of International Clinical Research Limited and related companies
     (in thousands)Current assets
    
    $
    170Property, plant and equipment
    
    
    9Customer relationship intangible asset
    
    
    500Goodwill
    
    
    322Total assets acquired
    
    
    1,001Current liabilities
    
    
    (50
    )Net assets acquired
    
    $
    951
 Acquisition of Phase II-IV Clinical Services Business of Charles River Laboratories
International, Inc.:
  F-24




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##### Table of Contents



(in thousands)Accounts receivable
    
    $
    23,221Other current assets
    
    
    16,463Property, plant and equipment
    
    
    4,784Other long-term assets
    
    
    2,851Customer relationship intangible asset
    
    
    10,300Completed technology intangible asset
    
    
    2,600Backlog intangible asset
    
    
    6,200Goodwill
    
    
    204,413Total assets acquired
    
    
    270,832Advanced billings
    
    
    (10,264
    )Other current liabilities
    
    
    (11,737
    )Other long-term liabilities
    
    
    (12,920
    )Total liabilities assumed
    
    
    (34,921
    )Net assets acquired
    
    $
    235,911
   (in thousands, except per share data)
    
    2006
    
    
    2005Net service revenues
    
    $
    350,781
    
    
    $
    313,926Net income
    
    
    2,158
    
    
    
    8,246Net income per diluted share
    
    $
    0.15
    
    
    $
    0.58Weighted average shares
    
    
    14,762
    
    
    
    14,120
  14. INVESTMENTS:
  F-25




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##### Table of Contents



15. RELATED PARTY TRANSACTIONS:
   16. SEGMENT INFORMATION:
  Early
    
    
    Late
    
    
    Support(in thousands)
    
    Stage
    
    
    Stage
    
    
    & Other
    
    
    TotalTwelve months ended December 31, 2006Net service revenues
    
    $
    23,328
    
    
    $
    254,954
    
    
    $
    5,189
    
    
    $
    283,471Reimbursable out-of-pocket revenues
    
    $
    
    
    
    $
    90,465
    
    
    $
    
    
    
    $
    90,465Total revenues
    
    $
    23,328
    
    
    $
    345,419
    
    
    $
    5,189
    
    
    $
    373,936Operating Income (loss)
    
    $
    (2,476
    )
    
    $
    65,846
    
    
    $
    (43,360
    )
    
    $
    20,010Total assets
    
    $
    31,992
    
    
    $
    370,527
    
    
    $
    52,553
    (a)
    
    $
    455,072Twelve months ended December 31, 2005Net service revenues
    
    $
    23,999
    
    
    $
    174,622
    
    
    $
    3,411
    
    
    $
    202,032Reimbursable out-of-pocket revenues
    
    $
    
    
    
    $
    48,607
    
    
    $
    
    
    
    $
    48,607Total revenues
    
    $
    23,999
    
    
    $
    223,229
    
    
    $
    3,411
    
    
    $
    250,639Operating Income (loss)
    
    $
    7,648
    
    
    $
    37,021
    
    
    $
    (27,426
    )
    
    $
    17,243Total assets
    
    $
    30,825
    
    
    $
    94,156
    
    
    $
    59,778
    (a)
    
    $
    184,759Twelve months ended December 31, 2004Net service revenues
    
    $
    18,157
    
    
    $
    151,070
    
    
    $
    3,661
    
    
    $
    172,888Reimbursable out-of-pocket revenues
    
    $
    
    
    
    $
    42,980
    
    
    $
    
    
    
    $
    42,980Total revenues
    
    $
    18,157
    
    
    $
    194,050
    
    
    $
    3,661
    
    
    $
    215,868Operating Income (loss)
    
    $
    5,183
    
    
    $
    25,578
    
    
    $
    (24,056
    )
    
    $
    6,705Total assets
    
    $
    30,873
    
    
    $
    90,141
    
    
    $
    41,666
    (a)
    
    $
    162,680
 
 (a)
    
    Primarily comprised of cash, marketable securities and tax-related assets. F-26




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##### Table of Contents



(in thousands)
    
    2006
    
    
    2005
    
    
    2004Net service revenuesUnited States
    
    $
    155,469
    
    
    $
    110,456
    
    
    $
    96,796Non-North America
    
    
    128,002
    
    
    
    91,576
    
    
    
    76,092$
    283,471
    
    
    $
    202,032
    
    
    $
    172,888Identifiable assetsUnited States
    
    $
    261,585
    
    
    $
    134,759
    
    
    $
    113,566Non-North America
    
    
    193,487
    
    
    
    50,000
    
    
    
    49,114$
    455,072
    
    
    $
    184,759
    
    
    $
    162,680
  2006
    
    
    2005
    
    
    2004Sponsor A
    
    
    12
    %
    
    
    15
    %
    
    
    20
    %
  17. QUARTERLY FINANCIAL DATA (unaudited):
   Quarter
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth2006Net service revenues
    
    $
    59,753
    
    
    $
    62,086
    
    
    $
    75,236
    
    
    $
    86,396Gross profit
    
    
    28,929
    
    
    
    28,131
    
    
    
    34,295
    
    
    
    39,290* Income (loss) from operations
    
    
    7,278
    
    
    
    6,396
    
    
    
    8,093
    
    
    
    (1,757
    )* Net income (loss)
    
    
    4,899
    
    
    
    4,289
    
    
    
    3,997
    
    
    
    (4,655
    )* Net income (loss) per diluted share
    
    
    0.33
    
    
    
    0.29
    
    
    
    0.27
    
    
    
    (0.32
    )* Net income (loss) per basic share
    
    
    0.35
    
    
    
    0.30
    
    
    
    0.28
    
    
    
    (0.32
    )2005Net service revenues
    
    $
    47,687
    
    
    $
    49,965
    
    
    $
    51,581
    
    
    $
    52,799Gross profit
    
    
    21,961
    
    
    
    22,813
    
    
    
    24,130
    
    
    
    24,546Income from operations
    
    
    2,849
    
    
    
    3,652
    
    
    
    5,541
    
    
    
    5,201Net income
    
    
    2,145
    
    
    
    1,442
    
    
    
    3,394
    
    
    
    3,693Net income per diluted share
    
    
    0.16
    
    
    
    0.10
    
    
    
    0.24
    
    
    
    0.25Net income per basic share
    
    
    0.16
    
    
    
    0.11
    
    
    
    0.25
    
    
    
    0.26
 
 (*)
    
    The net loss from operations in the fourth quarter of 2006 includes an $8.2 million impairment charge
on a customer relationship intangible asset acquired in the Companys acquisition of CPR in 2002. F-27




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##### Table of Contents



SIGNATURES
  KENDLE INTERNATIONAL INC.
 DATE SIGNED: March 16, 2007
    /s/ Candace KendleCandace Kendle, PharmDChairman, CEO and Principal Executive Officer  Signature
    
    Capacity
    
    Date/s/ Candace Kendle
    
    Chairman of the Board of
    
    March 16, 2007Candace Kendle, PharmD
    
    Directors, Chief Executive
Officer and Principal Executive
Officer/s/ Christopher C. Bergen
    
    President, Chief Operating
    
    March 16, 2007Christopher C. Bergen
    
    Officer and Director/s/ Karl Brenkert III
    
    Senior Vice President,
    
    March 16, 2007Karl Brenkert III
    
    Chief Financial Officer
and Principal Financial
Accounting Officer*

G. Steven Geis, Ph.D., M.D.
    
    Director
    
    March 16, 2007*
    
    Director
    
    March 16, 2007Donald C. Harrison, M.D.*
    
    Director
    
    March 16, 2007Timothy E. Johnson, Ph.D.*
    
    Director
    
    March 16, 2007Frederick A. Russ, Ph.D.*
    
    Director
    
    March 16, 2007Robert C. Simpson*
    
    Director
    
    March 16, 2007Robert R. Buck*
    
    as Attorney In-Fact
    
    March 16, 2007Karl Brenkert III




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit
    
    Filing Status2.1
    
    Stock Purchase Agreement dated July 1, 1997 by and among the Company and Shareholders
of U-Gene Research B.V.
    
    *2.2
    
    Escrow Agreement dated June 27, 1997 among the Company, Keating, Muething & Klekamp,
P.L.L., Bio-Medical Research Holdings, B.V., Utrechtse Particatiemaatschappij B.V.,
P.J. Morrison, T.S. Schwarz, I.M. Hoepelman , Ph.K. Peterson, J. Remington,
M. Rozenberg-Arska and L.G.W. Sterkman
    
    *2.3
    
    Share Purchase Agreement dated July 2, 1997 by and among the Company and the
Shareholders of GMI Gescellschaft für Angewandte Mathematick und Informatik mbH
    
    *2.4
    
    Stock Purchase Agreement dated February 11, 1998 by and among the Company and the
Shareholders of ACER/EXCEL Inc.
    
    *2.5
    
    Escrow Agreement dated February 11, 1998 among the Company, Tzuo-Yan Lee, Jean C. Lee
Michael Minor, Conway Lee, Steven Lee, Jean C. Lee, as Trustee under a Trust dated
March 8, 1991 fbo Jennifer Lee, Citicorp Trust-South Dakota and The Fifth Third Bank
*2.6
    
    Registration Rights Agreement dated February 11, 1998 among the Company and
Tzuo-Yan Lee, Jean C. Lee, Michael Minor, Conway Lee, Steven Lee, Jean C. Lee, as Trustee
under a Trust dated March 8, 1991 fbo Jennifer Lee, Citicorp Trust-South Dakota
    
    *2.7
    
    Share Purchase Agreement dated December 23, 1998 by and among the Company and
the Shareholders of Research Consultants (International) Holdings Limited
    
    *2.8
    
    Escrow Agreement dated January 5, 1999 among the Company, John Glasby, Gillian Gregory
Michael Roy Broomby and Peter Nightingale
    
    *2.9
    
    Option Agreement dated September 9, 1998 by and between the Company and Component
Software International, Inc.
    
    *2.10
    
    Notice of Option Exercise dated January 11, 1999 of the Option Agreement dated
September 9, 1998
    
    *2.11
    
    Multi-Year Strategic Services Agreement dated January 20, 1999 by and between the Company
and Component Software International, Inc.
    
    *2.12
    
    Asset Purchase Agreement dated June 27, 1999 by and among the Company and the Shareholders
of Health Care Communications, Inc.
    
    *2.13
    
    Stock Purchase Agreement dated June 4, 1999 by and among the Company and the Shareholders
of ESCLI S.A.
    
    *2.14
    
    Asset Purchase Agreement dated July 13, 1999 by and among the Company and the Shareholders
of HCC Health Care Communications (1991), Ltd.
    
    *2.15
    
    Share Purchase Agreement dated August 31, 1999 by and among the Company and the
Shareholder of Specialist Monitoring Services Limited
    
    *2.16
    
    Escrow Agreement dated July 13, 1999 by and among the Company, Geoffrey H. Kalish, M.D.,
Bradley D. Kalish, Jill Kalish, and The Fifth Third Bank, as Escrow Agent
    
    *2.17
    
    Escrow Agreement dated August 31, 1999 by and among the Company, Paul Martin, and The
Fifth Third Bank, as Escrow Agent
    
    *2.18
    
    Units Purchase Agreement dated April 7, 2000 by and among the Company and the Shareholders
of SYNERmedicaPTY Limited and SYNERmedicaUnit Trust
    
    *2.19
    
    Stock Purchase Agreement dated February 27, 2001 by and among the Company and the
Shareholders of AAC Consulting Group, Inc.
    
    *2.20
    
    Form of Note Prepayment Agreement
    
    *2(a)
    
    Asset Purchase Agreement dated January 29, 2002 among Kendle International Inc., Clinical and
Pharmacologic Research, Inc., Thomas S. Clark, M.D., Charles T. Clark, and E. Stuart Clark
    
    *2(b)
    
    Convertible Subordinated Note, dated January 29, 2002 issued by Kendle International Inc. to
Clinical and Pharmacologic Research, Inc.
    
    *2.21
    
    Stock Purchase Agreement between the Company and Charles River Laboratories International, Inc.
dated as of May 9, 2006
    
    *




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status3.1
    
    Restated and Amended Articles of Incorporation
    
    *3.2
    
    Amended and Restated Code of Regulations
    
    *3.3
    
    Amendment of the Restated and Amended Articles of Incorporation to Increase the Authorized
Shares
    
    *4
    
    Specimen Common Stock Certificate
    
    *4.1
    
    Shareholder Rights Agreement dated August 13, 1999 between the Company and The Fifth Third
Bank, as Rights Agent
    
    *10.1
    
    Amended and Restated Shareholders Agreement dated June 26, 1997
    
    *10.2
    
    Master Lease Agreement dated November 27, 1996 by and between the Company and Bank
One Leasing Corporation, as amended on April 18, 1997
    
    *10.6
    
    Master Equipment Lease dated August 16, 1996 by and between the Company and The Fifth
Third Leasing Company
    
    *10.7
    
    Lease Agreement dated December 9, 1991 by and between the Company and Carew Realty, Inc.,
as amended on December 30, 1991, March 18, 1996, October 8, 1996, January 29, 1997,
and February 16, 1999
    
    *10.8
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Candace
Kendle Bryan
    
    *10.9
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Christopher
C. Bergen
    
    *10.10
    
    Indemnity Agreement dated June 21, 1996 by and between the Company and Timothy M.
Mooney
    
    *10.11
    
    Indemnity Agreement dated May 14, 1997 by and between the Company and Charles A. Sanders
    
    *10.12
    
    Indemnity Agreement dated May 14, 1997 by and between the Company and Philip E. Beekman
    
    *10.13
    
    Indemnity Agreement dated December 10, 1998 by and between the Company and Robert Buck
    
    *10.14
    
    Indemnity Agreement dated December 10, 1998 by and between the Company and Mary Beth
Price
    
    *10.15
    
    Form of Indemnity Agreement by and between the Company and each member of the Companys
Board of Directors, except for those Indemnity Agreements noted above and filed previously.
    
    *10.16
    
    Credit Agreement dated as of August 16, 2006 by and among the Company, certain subsidiary
Guarantors, various Lenders, UBS Securities LLC, as Sole Lead Arranger and Sole Bookrunner,
UBS AG, Stamford Branch, as Issuing Bank, Administrative Agent and Collateral Agent, UBS Loan
Finance LLC, as Swingline Lender, JPMorgan Chase Bank, N.A., as Syndication Agent, and KeyBank
National Association, LaSalle Bank N.A. and National City Bank, as Co-Documentation Agents.
    
    *(a) First Amended and Restated Credit Agreement dated as of December 11, 2006 among
Kendle International Inc., the several lenders from time to time party thereto and
UBS AG, Stamford Branch, as administrative agent
    
    W10.17
    
    First Amendment to the Stock Purchase Agreement dated as of August 16, 2006 between the
Company and Charles River Laboratories, Inc.
    
    *10.20
    
    MANAGEMENT CONTRACTS AND COMPENSATION PLANS(a) 1995 Stock Option and Stock Incentive Plan
    
    *(b) 1995 Stock Option and Stock Incentive Plan Individual Stock Option
Agreement for Incentive Stock Option (contained in Exhibit 10.20(a))
    
    *(c) 1997 Stock Option and Stock Incentive Plan
    
    *(c)(1) Amendment No. 1 to 1997 Stock Option and Stock Incentive Plan
    
    *(c)(2) Amendment No. 2 to 1997 Stock Option and Stock Incentive Plan
    
    *(c)(3) Amendment No. 3 to 1997 Stock Option and Stock Incentive Plan
    
    *(c)(4) Form of Restricted Stock Award Agreement
    
    *




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status(d) Form of Protective Compensation and Benefit Agreement
    
    *(e) 1998 Employee Stock Purchase Plan
    
    *(e)(1) Amendment No. 1 to 1998 Employee Stock Purchase Plan
    
    *(e)(2) Amendment No. 2 to 1998 Employee Stock Purchase Plan
    
    *(e)(3) Amendment No. 3 to 1998 Employee Stock Purchase Plan
    
    *(e)(4) Amendment No. 4 to 1998 Employee Stock Purchase Plan
    
    *(e)(5) Amendment No. 5 to 1998 Employee Stock Purchase Plan
    
    *(n) 2003 Directors Compensation Plan
    
    *14
    
    Code of Ethics
    
    *21
    
    List of Subsidiaries
    
    W23.1
    
    Consent of Deloitte & Touche LLP
    
    W24
    
    Powers of Attorney
    
    W31.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
    
    W31.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
    
    W32.1
    
    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
    
    W32.2
    
    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
    
    W
 FilingStatus
    
    Description of Exhibit*
    
    Incorporated by reference  See Item 15W
    
    Filed herewith