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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, 2007
 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
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##### Table of Contents



Kendle International Inc.
 Form 10-K Annual Report
For the Fiscal Year Ended December 31, 2007
 Table of Contents
 PagePart IItem 1 - Business
    
    
    3Item 1A - Risk Factors
    
    
    5Item 1B - Unresolved Staff Comments
    
    
    9Item 2 - Properties
    
    
    9Item 3 - Legal Proceedings
    
    
    10Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    10Part IIItem 5 - Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    10Item 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
    
    
    26Item 8 - Financial Statements and Supplementary Data
    
    
    28Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28Item 9A - Controls and Procedures
    
    
    28Item 9B - Other Information
    
    
    30Part IIIItem 10 - Directors, Executive Officers and Corporate Governance
    
    
    30Item 11 - Executive Compensation
    
    
    31Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    31Item 13 - Certain Relationships and Related Transactions, and Director Independence
    
    
    32Item 14 - Principal Accountant Fees and Services
    
    
    33Part IVItem 15 - Exhibits and Financial Statement Schedules
    
    
    33Signatures
 2




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##### 



BUSINESS
 General
   Acquisition Activity
   Business Strategy
  
    
    Driving growth in the Companys core competency in Phases I through IV clinical trials.
    
    Meeting the specific development pipeline needs for the Companys targeted customers.
    
    Gaining share in the CRO market through further penetration in the large (greater than
$10 million in contract value) trial sector as well as continued expansion in mid-sized
trials.
    
    Expanding the Companys geographic footprint with a focus on high-growth regions such as
Africa and Asia/Pacific.
    
    Setting the stage for business mix expansion, such as expansion in support of Early
Stage.
    
    Building infrastructure to support the continued expansion and growth of the Company.EX-10.24EX-12.1EX-21EX-23.1EX-24EX-31.1EX-31.2EX-32.1EX-32.2
  3




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Customers and Marketing
   Backlog
   Competition
   Government Regulation
   Employees
  4




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Available Information
 www.kendle.com
  
  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 it
to achieve its goals.
  5




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If the Company is required to write off goodwill or other intangible assets acquired in its
business combinations, its financial position and results of operations would be adversely
affected.
  The CRO industry is highly competitive.
  The Company has grown rapidly and its growth has placed, and is expected to continue to place,
significant demands on it.
  The Companys backlog is composed of contracts varying in terms of amounts, global nature and type.
To the extent this mix of contracts continues to shift toward larger (in excess of $10 million)
contracts with a more global component, this may cause the rate at which this backlog converts into
revenue to lengthen when compared with historical trends.
  The Companys indebtedness could adversely affect its business and financial condition.
   6




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
    
    Seek additional financing in the debt or equity markets;
    
    Seek to refinance or restructure all or a portion of its indebtedness;
    
    Sell selected assets;
    
    Reduce or delay planned capital expenditures
   The current accounting treatment applicable to the Companys Convertible Notes may be rescinded.
 Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP 14-a)
 The Companys convertible note hedge and warrant transactions may affect the trading price of its
common stock.
  
    
    may enter into various over-the-counter derivative transactions or purchase or sell the
Companys common stock in secondary market transactions; and
    
    may enter into, or may unwind, various over-the-counter derivatives or purchase or sell
the Companys common stock in secondary market transactions, including during any
conversion reference period with respect to a conversion the Convertible Notes.
  7




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Change in government regulation could adversely affect the Company.
  The Companys international operations are subject to numerous risks.
  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 revenues 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 our 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.
  8




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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.
  The nature of the Companys business exposes it to litigation and regulatory risk.
  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
its 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
  9




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LEGAL PROCEEDINGS
  
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  
  RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 ®
 2007 Quarterly
    
    First
    
    Second
    
    Third
    
    FourthRanges of stock priceHigh
    
    $
    39.61
    
    
    $
    37.57
    
    
    $
    44.51
    
    
    $
    51.34Low
    
    
    30.02
    
    
    
    31.22
    
    
    
    34.70
    
    
    
    39.02
 2006 Quarterly
    
    First
    
    Second
    
    Third
    
    FourthRanges of stock priceHigh
    
    $
    34.94
    
    
    $
    41.11
    
    
    $
    37.34
    
    
    $
    36.44Low
    
    
    21.40
    
    
    
    29.11
    
    
    
    21.34
    
    
    
    29.25
  10




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Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
   Dollar Value of $100 Investment at December 3112/02
    
    
    12/03
    
    
    12/04
    
    
    12/05
    
    
    12/06
    
    
    12/07Kendle International Inc.
    
    
    
    100.00
    
    
    
    
    72.04
    
    
    
    
    99.99
    
    
    
    
    292.47
    
    
    
    
    357.35
    
    
    
    
    555.85NASDAQ Composite
    
    
    
    100.00
    
    
    
    
    149.75
    
    
    
    
    164.64
    
    
    
    
    168.60
    
    
    
    
    187.83
    
    
    
    
    205.22NASDAQ Health Services
    
    
    
    100.00
    
    
    
    
    135.61
    
    
    
    
    168.24
    
    
    
    
    184.41
    
    
    
    
    186.06
    
    
    
    
    181.42
 Securities Authorized Under Equity Compensation Plans:
  11




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CONSOLIDATED
STATEMENTS OF OPERATIONS (3)
 For the years ended December 31,(in thousands except per share data)2007 (1)
    
    
    2006 (2)
    
    
    2005
    
    
    2004
    
    
    2003Net service revenues
    
    $
    397,584
    
    
    $
    283,471
    
    
    $
    202,032
    
    
    $
    172,888
    
    
    $
    156,221Reimbursable out-of-pocket revenues
    
    
    171,234
    
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980
    
    
    
    53,436Total revenues
    
    
    568,818
    
    
    
    373,936
    
    
    
    250,639
    
    
    
    215,868
    
    
    
    209,657Cost and expenses:Direct costs
    
    
    204,161
    
    
    
    152,826
    
    
    
    108,582
    
    
    
    96,909
    
    
    
    91,133Reimbursable out-of-pocket costs
    
    
    171,234
    
    
    
    90,465
    
    
    
    48,607
    
    
    
    42,980
    
    
    
    53,436Selling, general and administrative
    
    
    125,744
    
    
    
    91,796
    
    
    
    68,216
    
    
    
    59,797
    
    
    
    52,402Depreciation and amortization
    
    
    14,865
    
    
    
    10,403
    
    
    
    7,991
    
    
    
    9,175
    
    
    
    9,057Employee severance and office consolidation costs
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    302
    
    
    
    1,468Intangible impairment charge
    
    
    
    
    
    
    8,200
    
    
    
    
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    516,004
    
    
    
    353,926
    
    
    
    233,396
    
    
    
    209,163
    
    
    
    207,496Income from operations
    
    
    52,814
    
    
    
    20,010
    
    
    
    17,243
    
    
    
    6,705
    
    
    
    2,161Other income (expense):Interest income
    
    
    1,466
    
    
    
    1,939
    
    
    
    1,019
    
    
    
    400
    
    
    
    334Interest expense
    
    
    (14,870
    )
    
    
    (6,781
    )
    
    
    (460
    )
    
    
    (776
    )
    
    
    (1,039
    )Write-off deferred financing costs
    
    
    (4,152
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (4,816
    )
    
    
    (1,795
    )
    
    
    (287
    )
    
    
    (873
    )
    
    
    (725
    )Investment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )Gain on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    597
    
    
    
    558Total other income (expenses)
    
    
    (22,372
    )
    
    
    (6,637
    )
    
    
    572
    
    
    
    (652
    )
    
    
    (1,277
    )Income before income taxes
    
    
    30,442
    
    
    
    13,373
    
    
    
    17,815
    
    
    
    6,053
    
    
    
    884Income taxes
    
    
    11,755
    
    
    
    4,843
    
    
    
    7,141
    
    
    
    2,481
    
    
    
    2,574Net income (loss)
    
    $
    18,687
    
    
    $
    8,530
    
    
    $
    10,674
    
    
    $
    3,572
    
    
    $
    (1,690
    )INCOME (LOSS) PER SHARE DATABasic:Net income (loss) per share
    
    $
    1.29
    
    
    $
    0.60
    
    
    $
    0.79
    
    
    $
    0.27
    
    
    $
    (0.13
    )Weighted average shares
    
    
    14,520
    
    
    
    14,323
    
    
    
    13,572
    
    
    
    13,166
    
    
    
    12,973Diluted:Net income (loss) per share
    
    $
    1.26
    
    
    $
    0.58
    
    
    $
    0.76
    
    
    $
    0.27
    
    
    $
    (0.13
    )Weighted average shares
    
    
    14,889
    
    
    
    14,762
    
    
    
    14,120
    
    
    
    13,391
    
    
    
    12,973
 CONSOLIDATED BALANCE SHEET DATA (3)
 as of December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Working capital
    
    $
    60,084
    
    
    $
    56,404
    
    
    $
    63,992
    
    
    $
    40,714
    
    
    $
    38,523Total assets
    
    
    499,723
    
    
    
    455,072
    
    
    
    184,759
    
    
    
    162,680
    
    
    
    154,415Total short and long-term debt, including capital leases
    
    
    200,455
    
    
    
    200,099
    
    
    
    4,572
    
    
    
    9,853
    
    
    
    15,503Total shareholders equity
    
    
    141,523
    
    
    
    140,112
    
    
    
    122,504
    
    
    
    102,775
    
    
    
    96,369
 
 (1)
    
    Includes the effects of the January 1, 2007 adoption of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes.(2)
    
    Includes the effects of the January 1, 2006 adoption of SFAS 123R, Share-Based Payment.(3)
    
    From 2003 to 2007, the Company made three acquisitions. See Note 11 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
   Late Stage Segment Contracts
   
    
    The customer may request a change in the assumptions;
    
    The customer may increase or decrease the scope of services, which requires a change
to the service assumptions; and
    
    The Company may discover that, for a particular contract, the assumptions are
incorrect or insufficient to permit completion of the contract.
  13




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Early Stage Segment Contracts
  Acquisitions
    Recent Developments and CRO Marketplace
  14




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Results of Operations
 Year Ended December 31, 2007 (2007) Compared with Year Ended December 31, 2006 (2006)
 Net Service Revenues
      Reimbursable Out-of-Pocket Revenues/Expenses
  Operating Expenses
   15




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Other Income/(Expense)
       16




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Income Taxes
  Net Income
   Year Ended December 31, 2006, Compared With Year Ended December 31, 2005 (2005)
    17




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Reimbursable Out-of-Pocket Revenues/Expenses
  Operating Expenses
       18




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Other Income/(Expense)
  Income Taxes
  Net Income
  Liquidity and Capital Resources
    19




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20




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Convertible Bonds with Issuer Option to
Settle for Cash upon Conversion Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own Stock The
Meaning of Indexed to a Companys Own Stock
          21




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Contractual Obligations
  Year
    
    
    Years
    
    
    Years
    
    
    Years(in thousands)
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    After 2012
    
    
    TotalCapital lease obligations (including interest)
    
    $
    215
    
    
    $
    232
    
    
    $
    35
    
    
    $
    
    
    
    $
    482Operating Leases
    
    
    15,162
    
    
    
    21,610
    
    
    
    13,350
    
    
    
    13,002
    
    
    
    63,124Debt payments (1)
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    200,000Interest on debt (1)
    
    
    6,750
    
    
    
    13,500
    
    
    
    10,406
    
    
    
    
    
    
    
    30,656Interest rate collar arrangement (2)
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    382Foreign currency hedge arrangements (3)
    
    
    
    
    
    
    203
    
    
    
    1,414
    
    
    
    
    
    
    
    1,617FIN 48 obligation, including interest and
penalties(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    22,127
    
    
    $
    35,927
    
    
    $
    225,205
    
    
    $
    13,002
    
    
    $
    296,261
  
 (1)
    
    Under the terms of the Convertible Notes, the Convertible Notes are convertible into shares of
the Common Stock upon the occurrence of various factors described in the Liquidity and Capital
Resources section of Managements Discussion and Analysis. The above table assumes no conversion
with the principal amount of the Convertible Notes paid at the maturity date of July 15, 2012.The interest rate used in the calculation of interest was 3.375% as outlined in the Convertible
Notes.(2)
    
    Based on December 31, 2007 fair value of interest rate collar arrangement maturing March
of 2010.(3)
    
    Based on December 31, 2007 fair value of foreign currency hedge arrangements maturing in
2009 and 2012.(4)
    
    FIN 48 obligations of $5.4 million have not been reflected in the above table due to the
inherent uncertainty as to the amount and timing of settlement, which is contingent upon the
occurrence of possible future events, such as examinations and determinations by various tax
authorities. Critical Accounting Policies and Estimates
  Revenue Recognition
   22




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
    
    Actual costs incurred to date and the work completed in incurring the actual costs;
    
    The remaining work to be completed based on the timeline of the contract as well as
the number of units remaining for certain tasks in the contract; and
    
    Factors that could change the rate of progress of future contract performance.
       Direct Costs
   
    
    Higher utilization rates for billable employees; and
    
    The ability to complete contracted work more efficiently than estimated by the
Company.
 23




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
    
    The occurrence of cost overruns from increased time to complete contract
performance;
    
    Increased costs due to higher-paid employees or contractors performing contract
services; and
    
    Pricing pressure from increased competition.
  Other Costs
   Accounts Receivable/Allowance for Doubtful Accounts
  Long-Lived Assets
     Internally Developed Software
  24




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Tax Valuation Allowance and Tax Liabilities
   Stock-based Compensation
     25




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New Accounting Pronouncements
  Cautionary Statement for Forward-Looking Information
    
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       26




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Foreign Currency Hedges
  Fair Value of Derivative Transactions
  Notional
    
    
    FairAmount
    
    
    ValueInterest rate collar
    
    $
    52,000
    
    
    $
    (382
    )Foreign currency hedges
    
    
    81,098
    
    
    
    (1,617
    )$
    (1,999
    )
 27




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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
  ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 CONTROLS AND PROCEDURES
 Managements Evaluation of Disclosure Controls and Procedures
  (a) Managements Report on Internal Control over Financial Reporting
  1.
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of the Company;2.
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with GAAP and that receipts
and expenditures of the Company are being made only in accordance with the authorizations
of management and the Directors of the Company; and3.
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the Consolidated Financial Statements.
    (b) Changes in Internal Control Over Financial Reporting
  28




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/s/ Candace Kendle
    
    Chairman of the Board of Directors, Chief Executive
Officer and Principal Executive
Officer
    
    March 17, 2008Candace Kendle, PharmD/s/ Karl Brenkert III
    
    Senior Vice President, Chief Financial Officer
and Principal Financial
Accounting Officer
    
    March 17, 2008Karl Brenkert III
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
Control  Integrated Framework
    Internal Control
 Integrated Framework
   
 29




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OTHER INFORMATION
  
  
 ITEM 10.
 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
       EXECUTIVENAME
    
    AGE
    
    POSITION
    
    OFFICER SINCECandace Kendle, PharmD
    
    61
    
    Chief Executive Officer and Chairman
    
    1989of the Board of DirectorsChristopher C. Bergen
    
    57
    
    President, Chief Operating
    
    1989Officer and DirectorKarl Brenkert III
    
    60
    
    Senior Vice President, Chief Financial
    
    2002OfficerMartha R. Feller
    
    59
    
    Senior Vice President, Global Clinical
    
    2007DevelopmentSimon S. Higginbotham
    
    47
    
    Vice President and Chief
    
    2004Marketing Officer
  30




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www.kendle.com
 
  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.
 
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
   31




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(a)
    
    (b)
    
    (c)Number of securitiesremainingNumber of Securities to be
    
    
    
    
    
    available for 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)) (2)Equity compensation
plans approved by
security holders
    
    
    543,007
    
    
    $
    13.33
    
    
    
    1,000,000Equity compensation
plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    543,007
    
    
    $
    13.33
    
    
    
    1,000,000
 
 (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.(2)
    
    Represents shares available for issuance under the 2007 Stock Plan. 
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
         32




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##### Table of Contents



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 Annual Report on 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 SEC 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
    
    C2.7
    
    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
    
    I
 33




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status2.18
    
    Units Purchase Agreement dated April 7, 2000 by and among the Company and the Shareholders of
SYNERmedicaPTY Limited and SYNERmedicaUnit 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
    
    H4.2
    
    Indenture dated March 31, 2007 between the Company and LaSalle Bank National
Association
    
    X4.3
    
    Supplemental Indenture No. 1 dated July 16, 2007 between the Company and LaSalle Bank
National Association
    
    BB10.1
    
    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
 (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
    Z
 10.17
    
    First Amendment to the Stock Purchase Agreement dated as of August 16, 2006 between the Company
and Charles River Laboratories, Inc.
    
    V10.18
    
    Second Amended and Restated Credit Agreement dated as of April 13, 2007 among Kendle International
Inc., the several lenders from time to time party thereto and UBS AG, Stamford Branch, as
administrative agent.
    
    W10.19
    
    Increase Joinder Agreement dated June 27, 2007 among the Company, certain of its subsidiaries, various
Lenders, and UBS AG, Stamford Branch as administrative agent for the lenders
    
    Y10.20
    
    Confirmation of Convertible Bond Hedge Transaction, dated July 10, 2007, by and between the Company
and UBS AG, London Branch
    
    CC10.21
    
    Confirmation of Convertible Bond Hedge Transaction, dated July 10, 2007, by and between the Company
and JPMorgan Chase Bank, National Association, London Branch
    
    CC10.22
    
    Confirmation of Issuer Warrant Transaction, dated July 10, 2007, by and between the Company and
UBS AG, London Branch
    
    CC10.23
    
    Confirmation of Issuer Warrant Transaction, dated July 10, 2007, by and between the Company and
JPMorgan Chase Bank, National Association, London Branch
    
    CC
 34




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status10.24
    
    Third Amended and Restated Credit Agreement dated as of December 18, 2007 among Kendle International
Inc., the several lenders from time to time party thereto and UBS AG, Stamford Branch, as administrative
agent
    
    DD10.30
    
    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(f)
    
    2007 Stock Incentive Plan
    
    AA(n)
    
    2003 Directors Compensation Plan
    
    O
 12.1
    
    Computation of Ratio of Earnings to Fixed Charges
    
    DD14
    
    Code of Ethics
    
    EE21
    
    List of Subsidiaries
    
    DD23.1
    
    Consent of Deloitte & Touche LLP
    
    DD24
    
    Powers of Attorney
    
    DD31.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
    
    DD31.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
    
    DD32.1
    
    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
    
    DD32.2
    
    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
    
    DD
 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, 1999
 35




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##### Table of Contents



FilingStatus
    
    Description of Filing StatusH
    
    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, 1999J
    
    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
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007X
    
    Incorporated by reference to Exhibit 4.1 to the Companys Form S-3 filed with the Commission on April 9, 2007Y
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly periodended June 30, 2007Z
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007AA
    
    Incorporated by reference to the Companys definitive Proxy Statement on Schedule 14A filed with the Commission on April 9, 2007BB
    
    Incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed with the Commission on July 16, 2007CC
    
    Incorporated by reference to Exhibits 10.1, 10.2, 10.3 and 10.4 to the Companys Current Report on Form 8-k filed with the Commission on July 10, 2007DD
    
    Filed herewithEE
    
    Available on the Companys Web site at www.kendle.com
      36




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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, 2007, 2006 and 2005.
    
    
    F-3Consolidated Balance Sheets as of December 31, 2007 and 2006.
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2007, 2006 and 2005.
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.
    
    
    F-6Notes to Consolidated Financial Statements.
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      DELOITTE & TOUCHE LLP
 
 F-2




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 
 2007
    
    
    2006
    
    
    2005Net service revenues
    
    $
    397,584
    
    
    $
    283,471
    
    
    $
    202,032Reimbursable out-of-pocket revenues
    
    
    171,234
    
    
    
    90,465
    
    
    
    48,607Total revenues
    
    
    568,818
    
    
    
    373,936
    
    
    
    250,639Costs and expenses:Direct costs
    
    
    204,161
    
    
    
    152,826
    
    
    
    108,582Reimbursable out-of-pocket costs
    
    
    171,234
    
    
    
    90,465
    
    
    
    48,607Selling, general and administrative
    
    
    125,744
    
    
    
    91,796
    
    
    
    68,216Depreciation and amortization
    
    
    14,865
    
    
    
    10,403
    
    
    
    7,991Employee severance and office
consolidation costs
    
    
    
    
    
    
    236
    
    
    
    Intangible impairment charge
    
    
    
    
    
    
    8,200
    
    
    
    Total costs and expenses
    
    
    516,004
    
    
    
    353,926
    
    
    
    233,396Income from operations
    
    
    52,814
    
    
    
    20,010
    
    
    
    17,243Other income (expense):Interest income
    
    
    1,466
    
    
    
    1,939
    
    
    
    1,019Interest expense
    
    
    (14,870
    )
    
    
    (6,781
    )
    
    
    (460
    )Write-off of deferred financing costs
    
    
    (4,152
    )
    
    
    
    
    
    
    Other
    
    
    (4,816
    )
    
    
    (1,795
    )
    
    
    (287
    )Gain on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    300Total other income (expenses)
    
    
    (22,372
    )
    
    
    (6,637
    )
    
    
    572Income before income taxes
    
    
    30,442
    
    
    
    13,373
    
    
    
    17,815Income taxes
    
    
    11,755
    
    
    
    4,843
    
    
    
    7,141Net income
    
    $
    18,687
    
    
    $
    8,530
    
    
    $
    10,674Income per share data:Basic:Net income per share
    
    $
    1.29
    
    
    $
    0.60
    
    
    $
    0.79Weighted average shares
    
    
    14,520
    
    
    
    14,323
    
    
    
    13,572Diluted:Net income per share
    
    $
    1.26
    
    
    $
    0.58
    
    
    $
    0.76Weighted average shares
    
    
    14,889
    
    
    
    14,762
    
    
    
    14,120
  F-3




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 
 2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    45,512
    
    
    $
    19,917Restricted cash
    
    
    844
    
    
    
    2,395Accounts receivable, net
    
    
    135,550
    
    
    
    122,680Deferred tax asset  current
    
    
    11,403
    
    
    
    5,249Other current assets
    
    
    13,476
    
    
    
    16,435Total current assets
    
    
    206,785
    
    
    
    166,676Property and equipment, net
    
    
    32,021
    
    
    
    23,024Goodwill
    
    
    230,168
    
    
    
    229,598Other finite-lived intangible assets, net
    
    
    19,464
    
    
    
    24,227Long-term deferred tax asset
    
    
    1,171
    
    
    
    3,181Other assets
    
    
    10,114
    
    
    
    8,366Total assets
    
    $
    499,723
    
    
    $
    455,072Liabilities and Shareholders EquityCurrent liabilities:Current portion of obligations under capital leases
    
    $
    199
    
    
    $
    195Current portion of amounts outstanding under credit facilities
    
    
    
    
    
    
    2,000Trade payables
    
    
    20,993
    
    
    
    15,150Advance billings
    
    
    78,402
    
    
    
    62,427Other accrued liabilities
    
    
    47,107
    
    
    
    30,500Total current liabilities
    
    
    146,701
    
    
    
    110,272Obligations under capital leases, less current portion
    
    
    256
    
    
    
    404Long-term debt
    
    
    
    
    
    
    197,500Convertible notes
    
    
    200,000
    
    
    
    Deferred income taxes payable
    
    
    2,322
    
    
    
    760Non-current income taxes payable
    
    
    3,582
    
    
    
    Other liabilities
    
    
    5,339
    
    
    
    6,024Total liabilities
    
    
    358,200
    
    
    
    314,960Commitments and contingenciesShareholders equity:Preferred stockno par value; 100,000 shares authorized; none issued and outstandingCommon stockno par value; 45,000,000 shares authorized;
14,681,029 and 14,445,393 shares issued and 14,657,977 and 14,422,341
outstanding at December 31, 2007 and 2006, respectively
    
    
    75
    
    
    
    75Additional paid-in capital
    
    
    140,109
    
    
    
    154,641Accumulated deficit
    
    
    (1,967
    )
    
    
    (16,392
    )Accumulated other comprehensive income:Foreign currency translation adjustment
    
    
    3,798
    
    
    
    2,280Less: Cost
of Common Stock held in treasury, 23,052 shares at December 31, 2007 and 2006, respectively
    
    
    (492
    )
    
    
    (492
    )Total shareholders equity
    
    
    141,523
    
    
    
    140,112Total liabilities and shareholders equity
    
    $
    499,723
    
    
    $
    455,072
  F-4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Common
    
    
    
    
    
    
    
    
    
    (Accumulated
    
    Accumulated OtherCommon Stock
    
    Stock
    
    Additional
    
    Treasury
    
    Deficit) Retained
    
    Comprehensive
    
    Total Shareholders
    
    Comprehensive(in thousands except share data)
    
    Number of Shares
    
    Amount
    
    Paid-in Capital
    
    Stock
    
    Earning
    
    Income(Loss)
    
    Equity
    
    Income (Loss)Balance at January 1, 2005
    
    
    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
    
    
    $
    140,112Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,687
    
    
    
    
    
    
    
    18,687
    
    
    
    18,687Other comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,518
    
    
    
    1,518
    
    
    
    1,518Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,205Shares issued under stock plans
    
    
    235,636
    
    
    
    
    
    
    
    2,560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,560Stock option expense
    
    
    
    
    
    
    
    
    
    
    860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    860Income tax benefit from exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188Note hedge transaction
    
    
    
    
    
    
    
    
    
    
    (42,880
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,880
    )Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    24,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,740FIN 48 adoption
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,262
    )
    
    
    
    
    
    
    (4,262
    )Balance at December 31, 2007
    
    
    14,657,977
    
    
    $
    75
    
    
    $
    140,109
    
    
    $
    (492
    )
    
    $
    (1,967
    )
    
    $
    3,798
    
    
    $
    141,523
  F-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)For the Years Ended December 31,
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    18,687
    
    
    $
    8,530
    
    
    $
    10,674Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    14,865
    
    
    
    10,403
    
    
    
    7,991Goodwill and investment impairment
    
    
    
    
    
    
    8,200
    
    
    
    Deferred income taxes
    
    
    (5,234
    )
    
    
    (3,967
    )
    
    
    1,416Income tax benefit from stock option exercises
    
    
    (188
    )
    
    
    (898
    )
    
    
    Compensation expense on stock grants
    
    
    879
    
    
    
    1,879
    
    
    
    78Debt issue cost amortization
    
    
    5,404
    
    
    
    
    
    
    
    Foreign currency exchange (gain) / loss
    
    
    3,770
    
    
    
    184
    
    
    
    (215
    )Other
    
    
    172
    
    
    
    338
    
    
    
    306Gain on convertible note repayment
    
    
    
    
    
    
    
    
    
    
    (300
    )Changes in operating assets and liabilities, net of effects from acquisitions:Restricted cash
    
    
    1,587
    
    
    
    (441
    )
    
    
    293Accounts receivable
    
    
    (16,138
    )
    
    
    (27,559
    )
    
    
    (10,328
    )Other current assets
    
    
    1,507
    
    
    
    (1,262
    )
    
    
    (385
    )Other assets
    
    
    (486
    )
    
    
    (207
    )
    
    
    256Trade payables
    
    
    2,632
    
    
    
    2,806
    
    
    
    355Advance billings
    
    
    18,814
    
    
    
    15,895
    
    
    
    7,471Accrued liabilities and other
    
    
    14,712
    
    
    
    3,650
    
    
    
    5,707Net cash provided by operating activities
    
    
    60,983
    
    
    
    17,551
    
    
    
    23,319Cash flows from investing activitiesPurchase of available-for-sale securities
    
    
    
    
    
    
    (7,027
    )
    
    
    (9,552
    )Proceeds from sale and maturity of available-for-sale securities
    
    
    
    
    
    
    17,868
    
    
    
    9,050Acquisitions of property and equipment
    
    
    (14,724
    )
    
    
    (8,725
    )
    
    
    (4,732
    )Additions to internally developed software
    
    
    (531
    )
    
    
    (91
    )
    
    
    (233
    )Acquisitions of businesses, less cash acquired
    
    
    2,154
    
    
    
    (231,879
    )
    
    
    Other
    
    
    (722
    )
    
    
    (153
    )
    
    
    20Net cash used in investing activities
    
    
    (13,823
    )
    
    
    (230,007
    )
    
    
    (5,447
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    200,000
    
    
    
    200,000
    
    
    
    Payments of long-term debt
    
    
    (199,500
    )
    
    
    (4,250
    )
    
    
    (2,937
    )Payment of convertible note
    
    
    
    
    
    
    
    
    
    
    (1,200
    )Purchase of note hedges
    
    
    (42,880
    )
    
    
    
    
    
    
    Proceeds from the issuance of warrants
    
    
    24,740
    
    
    
    
    
    
    
    Proceeds from issuance of Common Stock
    
    
    2,623
    
    
    
    3,505
    
    
    
    7,422Income tax benefit from stock option exercises
    
    
    188
    
    
    
    898
    
    
    
    Amounts payable  book overdraft
    
    
    (22
    )
    
    
    (65
    )
    
    
    (353
    )Payments on capital lease obligations
    
    
    (196
    )
    
    
    (382
    )
    
    
    (691
    )Purchase of treasury stock
    
    
    
    
    
    
    (99
    )
    
    
    Debt issue costs
    
    
    (6,946
    )
    
    
    (5,568
    )
    
    
    (30
    )Net cash provided by (used in) financing activities
    
    
    (21,993
    )
    
    
    194,039
    
    
    
    2,211Effects of exchange rates on cash and cash equivalents
    
    
    428
    
    
    
    897
    
    
    
    (311
    )Net increase (decrease) in cash and cash equivalents
    
    
    25,595
    
    
    
    (17,520
    )
    
    
    19,772Cash and cash equivalentsBeginning of year
    
    
    19,917
    
    
    
    37,437
    
    
    
    17,665End of year
    
    $
    45,512
    
    
    $
    19,917
    
    
    $
    37,437Supplemental disclosure of cash flow informationCash paid during the year for interest
    
    $
    10,107
    
    
    $
    6,198
    
    
    $
    489Cash paid during the year for income taxes
    
    $
    4,870
    
    
    $
    7,698
    
    
    $
    3,154Supplemental schedule of noncash investing and financing activitiesAcquisition of equipment under capital leases
    
    $
    173
    
    
    $
    184
    
    
    $
    Accrued equipment purchases
    
    $
    (3,574)
    
    
    $
    
    
    
    $
    Acquisitions of businesses:Fair value of assets acquired via cash
    
    $
    (2,154
    )
    
    $
    266,850
    
    
    $
    Fair value of liabilities assumed or incurred
    
    $
    
    
    
    $
    (34,971
    )
    
    $
    Stock issued
    
    $
    
    
    
    $
    
    
    
    $
    Net cash payments
    
    $
    (2,154
    )
    
    $
    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




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##### Table of Contents



Revenue Recognition
    
    
    Actual costs incurred to date and the work completed in incurring the actual costs;
    
    The remaining work to be completed based on the timeline of the contract as well as
the number of units remaining for certain tasks in the contract; and
    
    Factors that could change the rate of progress of future contract performance.
       F-8




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##### Table of Contents



Concentration of Credit Risk
  Long-Lived Assets
   Furniture and Fixtures
    
    10 yearsComputer 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
    Goodwill
     F-9




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##### Table of Contents



Derivatives
    Marketing and Advertising Costs
  Investigator and Project Costs
  F-10




---



##### Table of Contents



Net Income Per Share Data
   Net Income Per Share Data
 (in thousands)
    
    2007
    
    2006
    
    2005Weighted average common shares outstanding
    
    
    14,520
    
    
    
    14,323
    
    
    
    13,572Stock options and non-vested restricted shares
    
    
    369
    
    
    
    439
    
    
    
    548Weighted average shares
    
    
    14,889
    
    
    
    14,762
    
    
    
    14,120
   Shares Due to the
    
    Incremental Shares IssuedConvertible Notes
    
    Warrant
    
    Total Treasury Method
    
    Company under Note
    
    by the Company UponShare Price
    
    Shares
    
    Shares
    
    Incremental Share (1)
    
    Hedges
    
    Conversion (2)$40.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $45.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $50.00
    
    
    191,993
    
    
    
    
    
    
    
    191,993
    
    
    
    (191,993
    )
    
    
    $55.00
    
    
    555,630
    
    
    
    
    
    
    
    555,630
    
    
    
    (555,630
    )
    
    
    $60.00
    
    
    858,660
    
    
    
    
    
    
    
    858,660
    
    
    
    (858,660
    )
    
    
    $65.00
    
    
    1,115,070
    
    
    
    245,070
    
    
    
    1,360,140
    
    
    
    (1,115,070
    )
    
    
    245,070$70.00
    
    
    1,334,850
    
    
    
    526,993
    
    
    
    1,861,843
    
    
    
    (1,334,850
    )
    
    
    526,993
 
 (1)
    
    Represents the number of incremental shares that must be included in the calculation
of fully diluted shares under U.S. Generally Accepted Accounting Principles.(2)
    
    Represents the number of incremental shares to be issued by the Company upon
conversion of the Convertible Notes, assuming concurrent settlement of the bond hedges
and warrants. Income Taxes
    F-11




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##### Table of Contents



Stock Options
  Restricted/Unrestricted Stock
  Use of Estimates
  F-12




---



##### Table of Contents



New Accounting Pronouncements
     2. FAIR VALUE OF FINANCIAL INSTRUMENTS:
  3. ACCOUNTS RECEIVABLE:
  (in thousands)December 31,
    
    2007
    
    
    2006Billed
    
    $
    62,993
    
    
    $
    64,125Unbilled
    
    
    72,557
    
    
    
    58,555$
    135,550
    
    
    $
    122,680
 F-13




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##### Table of Contents



(in thousands)Balance at 12/31/04
    
    $
    246Invoice write-offs
    
    
    (90
    )Additional expense
    
    
    1,901Balance at 12/31/05
    
    $
    2,057Invoice write-offs
    
    
    (1,754
    )Allowance acquired via acquisition
    
    
    199Additional expense
    
    
    250Balance at 12/31/06
    
    $
    752Invoice write-offs
    
    
    (34
    )Additional expense
    
    
    236Balance at 12/31/07
    
    $
    954
  4. PROPERTY AND EQUIPMENT:
  (in thousands)December 31,
    
    2007
    
    
    2006Furnishings, equipment and other
    
    $
    80,368
    
    
    $
    63,290Equipment under capital leases
    
    
    2,068
    
    
    
    2,168Less: accumulated depreciation and amortization
    
    
    (50,415
    )
    
    
    (42,434
    )Property and equipment, net
    
    $
    32,021
    
    
    $
    23,024
  5. GOODWILL AND OTHER INTANGIBLE ASSETS:
  (in thousands)
    
    GoodwillBalance at 12/31/05
    
    $
    24,075Additional amount acquired
    
    
    204,735Foreign currency fluctuations
    
    
    1,140Tax benefit to reduce goodwill
    
    
    (352
    )Balance at 12/31/06
    
    $
    229,598Additional adjustments
    
    
    (383
    )Foreign currency fluctuations
    
    
    1,291Tax benefit to reduce goodwill
    
    
    (338
    )Balance at 12/31/07
    
    $
    230,168
 F-14




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##### Table of Contents



(a)As of December 31,(in thousands)
    
    2007
    
    
    2006Goodwill
    
    $
    230,168
    
    
    $
    229,598Amortizable intangible assets:Carrying amount:Customer relationships
    
    
    18,000
    
    
    
    18,000Non-compete agreements
    
    
    460
    
    
    
    460Completed technology
    
    
    2,600
    
    
    
    2,600Backlog
    
    
    6,200
    
    
    
    6,200Internally developed software (b)
    
    
    16,256
    
    
    
    15,783Total carrying amount
    
    $
    43,516
    
    
    $
    43,043Accumulated Amortization:Customer relationships
    
    
    (1,975
    )
    
    
    (682
    )Non-compete agreements
    
    
    (460
    )
    
    
    (374
    )Completed technology
    
    
    (736
    )
    
    
    (205
    )Backlog
    
    
    (4,625
    )
    
    
    (1,772
    )Internally developed software
    
    
    (14,896
    )
    
    
    (13,972
    )Total accumulated amortization
    
    $
    (22,692
    )
    
    $
    (17,005
    )Net amortizable assets
    
    
    20,824
    
    
    
    26,038Total goodwill and intangible assets
    
    $
    250,992
    
    
    $
    255,636
 
 (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




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##### Table of Contents



(b)(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    InternallyCustomer
    
    
    Non-Compete
    
    
    Completed
    
    
    
    
    
    
    Developed(in thousands)
    
    Relationships
    
    
    Agreements
    
    
    Technology
    
    
    Backlog
    
    
    SoftwareBalance 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
    
    
    $
    1,811Additional amounts acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531Dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2007 amortization
    
    
    (1,292
    )
    
    
    (87
    )
    
    
    (531
    )
    
    
    (2,853
    )
    
    
    (982
    )Balance at 12/31/07
    
    $
    16,025
    
    
    $
    
    
    
    $
    1,864
    
    
    $
    1,575
    
    
    $
    1,360
 
 (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.        (in thousands)2008
    
    $
    4,1042009
    
    $
    3,2392010
    
    $
    2,5442011
    
    $
    2,3742012
    
    $
    1,554Thereafter
    
    $
    7,009
  F-16




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##### Table of Contents



6. OTHER ACCRUED LIABILITIES:
  (in thousands)
    
    2007
    
    
    2006December 31,Accrued compensation and related payroll withholdings and taxes
    
    $
    16,354
    
    
    $
    14,521Income tax payable
    
    
    9,078
    
    
    
    2,790Interest payable
    
    
    3,102
    
    
    
    90Other
    
    
    18,573
    
    
    
    13,099$
    47,107
    
    
    $
    30,500
 7. DEBT:
      F-17




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##### Table of Contents



Convertible Bonds with Issuer Option to Settle for Cash upon Conversion Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Companys Own Stock The Meaning of Indexed to a Companys Own
Stock
        8. EMPLOYEE BENEFIT PLANS:
 401(k) Plan
  F-18




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##### Table of Contents



Stock Option and Stock Incentive Plan
      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
   F-19




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##### Table of Contents



(in thousands, except per share data)
    
    2005Pro forma net incomeAs reported
    
    $
    10,674Less: pro forma adjustment for stock-based compensation, net of tax
    
    
    (3,739
    )Pro forma net income
    
    
    6,935Pro forma net income per diluted shareAs reported
    
    
    0.76Pro forma
    
    
    0.49Effect of pro forma expense
    
    
    (0.27
    )Pro forma net income per basic shareAs reported
    
    
    0.79Pro forma
    
    
    0.51Effect of pro forma expense
    
    
    (0.28
    )
  2007
    
    2006
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.9
    %
    
    
    3.7
    %Expected volatility
    
    
    41.9
    %
    
    
    56.2
    %
    
    
    55.6
    %Expected holding period
    
    4.5 years
    
    5.9 years
    
    4.7 years
    F-20




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##### Table of Contents



Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    IntrinsicAverage
    
    
    Remaining
    
    
    ValueShares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    ($ in thousands)Options 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
    
    
    
    11.55Granted
    
    
    40,000
    
    
    
    32.50Canceled
    
    
    (55,056
    )
    
    
    10.23Exercised
    
    
    (239,534
    )
    
    
    10.98Options outstanding at 12/31/07
    
    
    543,007
    
    
    $
    13.33
    
    
    
    5.5
    
    
    $
    19,466Exercisable at 12/31/07
    
    
    421,687
    
    
    $
    13.62
    
    
    
    5.2
    
    
    $
    14,991
    Weighted Average
    
    
    WeightedRange of
    
    
    
    
    Outstanding at
    
    
    Remaining
    
    
    AverageExercise Price
    
    
    
    
    December 31, 2007
    
    
    Contractual Life
    
    
    Exercise Price$
    3.46-$6.92
    
    
    
    
    
    104,890
    
    
    
    5.55
    
    
    $
    5.41$
    6.93-$10.38
    
    
    
    
    
    228,700
    
    
    
    5.24
    
    
    
    8.26$
    10.38-$13.83
    
    
    
    
    
    45,175
    
    
    
    5.39
    
    
    
    11.39$
    13.84-$17.29
    
    
    
    
    
    7,400
    
    
    
    2.62
    
    
    
    16.42$
    17.30-$20.75
    
    
    
    
    
    67,792
    
    
    
    3.55
    
    
    
    19.78$
    20.76-$24.21
    
    
    
    
    
    9,500
    
    
    
    0.66
    
    
    
    23.56$
    24.22-$27.67
    
    
    
    
    
    550
    
    
    
    0.42
    
    
    
    25.94$
    27.68-$31.13
    
    
    
    
    
    14,000
    
    
    
    8.98
    
    
    
    30.06$
    31.14-$34.59
    
    
    
    
    
    65,000
    
    
    
    8.99
    
    
    
    33.03543,007
    
    
    
    5.53
    
    
    $
    13.33
 F-21




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##### Table of Contents



WeightedRange of
    
    
    
    
    Exercisable at
    
    
    AverageExercise Price
    
    
    
    
    December 31, 2007
    
    
    Exercise Price$
    3.46-$6.92
    
    
    
    
    
    63,670
    
    
    $
    5.29$
    6.93-$10.38
    
    
    
    
    
    178,400
    
    
    
    8.44$
    10.38-$13.83
    
    
    
    
    
    41,575
    
    
    
    11.42$
    13.84-$17.29
    
    
    
    
    
    7,400
    
    
    
    16.42$
    17.30-$20.75
    
    
    
    
    
    67,792
    
    
    
    19.78$
    20.76-$24.21
    
    
    
    
    
    9,500
    
    
    
    23.56$
    24.22-$27.67
    
    
    
    
    
    550
    
    
    
    25.94$
    27.68-$31.13
    
    
    
    
    
    2,800
    
    
    
    30.06$
    31.14-$34.59
    
    
    
    
    
    50,000
    
    
    
    32.81421,687
    
    
    $
    13.62
  Restricted/Unrestricted Stock
   Compensation Expense (in thousands)
    
    2007
    
    
    2006
    
    
    2005Year Ended December 31,Restricted stock
    
    $
    19
    
    
    $
    57
    
    
    $
    78Unrestricted stock
    
    
    
    
    
    
    336
    
    
    
    Total stock based compensation
    
    $
    19
    
    
    $
    393
    
    
    $
    78
 F-22




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##### Table of Contents



SharesOutstanding 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
    
    
    6,250Granted
    
    
    Vested
    
    
    (6,125
    )Canceled
    
    
    Outstanding at 12/31/07
    
    
    125
  9. COMMITMENTS AND CONTINGENCIES:
 Leases:
  Capital
    
    
    Operating(in thousands)
    
    Leases
    
    
    Leases2008
    
    $
    215
    
    
    $
    15,1622009
    
    
    177
    
    
    
    12,2082010
    
    
    55
    
    
    
    9,4022011
    
    
    35
    
    
    
    7,3902012
    
    
    
    
    
    
    5,960thereafter
    
    
    
    
    
    
    13,002Total minimum lease payments
    
    
    482
    
    
    $
    63,124Amounts representing interest
    
    
    (27
    )Present value of net minimum lease payments
    
    
    455Current portion
    
    
    199Obligations under capital leases, less current portion
    
    $
    256
   F-23




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##### Table of Contents



Protective Compensation and Benefit Agreements:
  Other:
  Legal Proceedings:
  Anti-takeover Provisions:
  10. INCOME TAXES:
  expense/(benefit)(in thousands)
    
    2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    1,946
    
    
    $
    2,131
    
    
    $
    1,149State and local
    
    
    510
    
    
    
    314
    
    
    
    (20
    )Foreign
    
    
    14,195
    
    
    
    6,012
    
    
    
    4,207Subtotal
    
    
    16,651
    
    
    
    8,457
    
    
    
    5,336Deferred:Federal
    
    
    (3,091
    )
    
    
    (4,252
    )
    
    
    (95
    )State and local
    
    
    (755
    )
    
    
    (336
    )
    
    
    2,081Foreign
    
    
    (1,388
    )
    
    
    621
    
    
    
    (570
    )Subtotal
    
    
    (5,234
    )
    
    
    (3,967
    )
    
    
    1,416Benefit applied to reduce goodwill
    
    
    338
    
    
    
    353
    
    
    
    389Total provision
    
    $
    11,755
    
    
    $
    4,843
    
    
    $
    7,141
 F-24




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##### Table of Contents



(in thousands)
    
    2007
    
    
    2006
    
    
    2005United States
    
    $
    520
    
    
    $
    (7,062
    )
    
    $
    6,055Foreign
    
    
    29,922
    
    
    
    20,435
    
    
    
    11,760Income before income taxes
    
    $
    30,442
    
    
    $
    13,373
    
    
    $
    17,815
  2007
    
    2006
    
    2005Income tax expense at the U.S. Federal statutory rate
    
    
    34.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Effects of foreign taxes, net of foreign tax credits and deductions
    
    
    3.3
    
    
    
    (6.5
    )
    
    
    2.2State and local income taxes, net of Federal benefit
    
    
    (0.7
    )
    
    
    0.1
    
    
    
    7.8Dutch operating loss carryforward- reversal of valuation allowance
    
    
    
    
    
    
    
    
    
    
    (4.6
    )Original issue discount-Convertible Notes
    
    
    (3.6
    )
    
    
    
    
    
    
    Effects of repatriated foreign dividend
    
    
    
    
    
    
    6.9
    
    
    
    Effects of deemed foreign dividend
    
    
    2.6
    
    
    
    
    
    
    
    Other
    
    
    3.0
    
    
    
    0.7
    
    
    
    (0.3
    )Total
    
    
    38.6
    %
    
    
    36.2
    %
    
    
    40.1
    %
   (in thousands)
    
    2007
    
    
    2006Deferred tax assets:Compensation and employee benefits
    
    $
    1,884
    
    
    $
    1,634Accrued expenses and other future deductible items
    
    
    4,633
    
    
    
    4,667Foreign operating loss carryforward
    
    
    14,903
    
    
    
    14,050State and local operating loss carryforward
    
    
    1,592
    
    
    
    1,055Federal operating loss carryforward
    
    
    871
    
    
    
    Deferred state income taxes
    
    
    13
    
    
    
    Contributions carryforward
    
    
    31
    
    
    
    Capital loss carryforward
    
    
    726
    
    
    
    716Foreign tax credit carryforward
    
    
    2,081
    
    
    
    2,402Unrealized foreign exchange losses
    
    
    501
    
    
    
    650Depreciation and software costs
    
    
    2,216
    
    
    
    1,233Stock option expense
    
    
    458
    
    
    
    357Accounting method differences
    
    
    816
    
    
    
    925Total deferred tax assets
    
    
    30,725
    
    
    
    27,689Deferred tax liabilities:Intangible assets
    
    
    1,216
    
    
    
    1,800Deferred state income taxes
    
    
    
    
    
    
    101Total deferred tax liability
    
    
    1,216
    
    
    
    1,901Valuation allowance
    
    
    19,341
    
    
    
    18,118Total net deferred tax (asset)/liability
    
    $
    (10,168
    )
    
    $
    (7,670
    )
  F-25




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##### Table of Contents



(in thousands)
    
    2007
    
    
    2006
    
    
    2005Beginning balance
    
    $
    18,118
    
    
    $
    4,548
    
    
    $
    7,014Additions charged to expense
    
    
    3,050
    
    
    
    1,357
    
    
    
    399Additions attributable to acquisitions
    
    
    
    
    
    
    12,739
    
    
    
    Reductions from utilization, reassessments and expirations
    
    
    (1,827
    )
    
    
    (526
    )
    
    
    (2,865
    )Ending balance
    
    $
    19,341
    
    
    $
    18,118
    
    
    $
    4,548
     F-26




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##### Table of Contents



(in thousands)Unrecognized tax benefit - adoption
    
    $
    6,828Gross increases - tax positions in prior period
    
    
    167Gross decreases - tax positions in prior period
    
    
    (352
    )Gross increases - tax positions in current period
    
    
    1,663Gross decreases - tax positions in current period
    
    
    (71
    )Settlements
    
    
    -Lapse of statute of limitations
    
    
    (2,788
    )Unrecognized tax benefit - ending balance
    
    $
    5,447
     Jurisdiction
    
    Open YearsUnited States
    
    2002, 2004 - 2007Germany
    
    2003 - 2007United Kingdom
    
    2005 - 2007Netherlands
    
    2004 - 2007
  11. ACQUISITIONS:
  2006:
 Acquisition of International Clinical Research Limited and related companies
  F-27




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##### Table of Contents



(in thousands at the prevailing exchange rate at April 25, 2006):Current assets
    
    $
    94Property, plant and equipment
    
    
    9Intangible assets
    
    
    500Goodwill
    
    
    418Total assets acquired
    
    
    1,021Current liabilities
    
    
    (50
    )Net assets acquired
    
    $
    971
 Acquisition of Phase II-IV Clinical Services Business of Charles River Laboratories
International, Inc.:
    (in thousands at the prevailing exchange rate at August 16, 2006):Accounts receivable
    
    $
    23,221Other current assets
    
    
    17,002Property, plant and equipment
    
    
    4,427Other long-term assets
    
    
    2,851Intangible assets
    
    
    19,100Goodwill
    
    
    203,857Total assets acquired
    
    
    270,458Advance billings
    
    
    (10,264
    )Other current liabilities
    
    
    (11,008
    )Other long-term liabilities
    
    
    (12,920
    )Total liabilities assumed
    
    
    (34,192
    )Net assets acquired
    
    $
    236,266
 F-28




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##### Table of Contents



Twelve Months Ended(in thousands, except per share data)
    
    December 31, 2006Net service revenues
    
    $
    350,781Net income
    
    
    1,229Net income per diluted share
    
    $
    0.08Weighted average shares
    
    
    14,762
  12. INVESTMENTS:
  13. RELATED PARTY TRANSACTIONS:
   F-29




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##### Table of Contents



14. SEGMENT INFORMATION:
  Early
    
    
    Late
    
    
    Support(in thousands)
    
    Stage
    
    
    Stage
    
    
    & Other
    
    
    TotalTwelve months ended December 31, 2007Net service revenues
    
    $
    21,373
    
    
    $
    366,379
    
    
    $
    9,832
    
    
    $
    397,584Reimbursable out-of-pocket revenues
    
    $
    
    
    
    $
    171,234
    
    
    $
    
    
    
    $
    171,234Total revenues
    
    $
    21,373
    
    
    $
    537,613
    
    
    $
    9,832
    
    
    $
    568,818Operating Income (loss)
    
    $
    3,599
    
    
    $
    84,609
    
    
    $
    (35,394
    )
    
    $
    52,814Total assets
    
    $
    33,258
    
    
    $
    388,680
    
    
    $
    77,785
    (a)
    
    $
    499,723Twelve 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)
    
    $
    184,759
 
 (a)
    
    Primarily comprised of cash, marketable securities and tax-related assets.  (in thousands)
    
    2007
    
    
    2006
    
    
    2005Net service revenuesUnited States
    
    $
    198,242
    
    
    $
    155,469
    
    
    $
    110,456Non-United States
    
    
    199,342
    
    
    
    128,002
    
    
    
    91,576$
    397,584
    
    
    $
    283,471
    
    
    $
    202,032Identifiable assetsUnited States
    
    $
    309,678
    
    
    $
    261,585
    
    
    $
    134,759Non-United States
    
    
    190,045
    
    
    
    193,487
    
    
    
    50,000$
    499,723
    
    
    $
    455,072
    
    
    $
    184,759
 F-30




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##### Table of Contents



2006
    
    2005Sponsor A
    
    
    12
    %
    
    
    15
    %
  15. QUARTERLY FINANCIAL DATA (unaudited):
   First
    
    Second
    
    Third
    
    FourthQuarter2007Net service revenues
    
    $
    95,439
    
    
    $
    97,802
    
    
    $
    100,070
    
    
    $
    104,273Gross profit
    
    
    46,040
    
    
    
    46,258
    
    
    
    50,951
    
    
    
    50,174Income from operations
    
    
    12,489
    
    
    
    10,879
    
    
    
    14,245
    
    
    
    15,201Net income
    
    
    4,203
    
    
    
    4,332
    
    
    
    3,786
    
    
    
    6,366Net income per diluted share
    
    
    0.28
    
    
    
    0.29
    
    
    
    0.25
    
    
    
    0.43Net income per basic share
    
    
    0.29
    
    
    
    0.30
    
    
    
    0.26
    
    
    
    0.44
 First
    
    Second
    
    Third
    
    FourthQuarter2006Net 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
    )
 
 (*)
    
    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-31




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##### Table of Contents



SIGNATURES
  KENDLE INTERNATIONAL INC.DATE SIGNED: March 17, 2008
    /s/ Candace KendleCandace Kendle, PharmDChairman, CEO and Principal Executive Officer  Signature
    
    Capacity
    
    Date/s/ Candace Kendle
    
    Chairman of the Board of Directors, Chief Executive
    
    March 17, 2008Candace Kendle, PharmD
    
    Officer and Principal Executive
Officer/s/ Christopher C. Bergen
    
    President, Chief Operating Officer and Director
    
    March 17, 2008Christopher C. Bergen/s/ Karl Brenkert III
    
    Senior Vice President, Chief Financial Officer
and
    
    March 17, 2008Karl Brenkert III
    
    Principal Financial
Accounting Officer*
    
    Director
    
    March 17, 2008G. Steven Geis, Ph.D., M.D.*
    
    Director
    
    March 17, 2008Donald C. Harrison, M.D.*
    
    Director
    
    March 17, 2008Timothy E. Johnson, Ph.D.Director
    
    March 17, 2008Frederick A. Russ, Ph.D.*
    
    Director
    
    March 17, 2008Robert R. Buck*
/s/ Stacey
Heiser
    
    as Attorney In-Fact
    
    March 17, 2008Stacey
Heiser




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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 SYNERmedica PTY Limited and SYNERmedica Unit 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
    
    *3.1
    
    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
    
    *4.2
    
    Indenture dated March 31, 2007 between the Company and LaSalle Bank National Association
    
    *




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit
    
    Filing Status4.3
    
    Supplemental Indenture No. 1 dated July 16, 2007 between the Company and LaSalle Bank
National Association
    
    *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
    
    *10.17
    
    First Amendment to the Stock Purchase Agreement dated as of August 16, 2006 between the Company
and Charles River Laboratories, Inc.
    
    *10.18
    
    Second Amended and Restated Credit Agreement dated as of April 13, 2007 among Kendle International
Inc., the several lenders from time to time party thereto and UBS AG, Stamford Branch, as
administrative agent
    
    *10.19
    
    Increase Joinder Agreement dated June 27, 2007 among the Company,certain of its subsidiaries, various
lenders, and UBS AG, Stamford Branch, as administrative agent for the lenders
    
    *10.20
    
    Confirmation of Convertible Bond Hedge Transaction, dated July 10, 2007, by and between the Company
and UBS AG, London Branch
    
    *10.21
    
    Confirmation of Convertible Bond Hedge Transaction, dated July 10, 2007, by and between the Company
and JPMorgan Chase Bank, National Association, London Branch
    
    *10.22
    
    Confirmation of Issuer Warrant Transaction, dated July 10, 2007, by and between the Company and
UBS AG, London Branch
    
    *10.23
    
    Confirmation of Issuer Warrant Transaction, dated July 10, 2007, by and between the Company and
JPMorgan Chase Bank, National Association, London Branch
    
    *10.24
    
    Third Amended and Restated Credit Agreement dated as of December 18, 2007 among Kendle International
Inc., the several lenders from time to time party thereto and UBS AG, Stamford Branch, as administrative
Agent
    
    DD




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit
    
    Filing Status10.30
    
    
    
    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
    
    *(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
    
    *(f)
    
    2007 Stock Incentive Plan
    
    *(n)
    
    2003 Directors Compensation Plan
    
    *12.1
    
    Computation of Ratio of Earnings to Fixed Charges
    
    DD14
    
    Code of Ethics
    
    *21
    
    List of Subsidiaries
    
    DD23.1
    
    Consent of Deloitte & Touche LLP
    
    DD24
    
    Powers of Attorney
    
    DD31.1
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
    
    DD31.2
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
    
    DD32.1
    
    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
    
    DD32.2
    
    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
    
    DD
 FilingStatus
    
    Description of Exhibit*
    
    Incorporated by reference  See Item 15DD
    
    Filed herewith