Acquisitions
In June 2008, the Company completed its acquisition of 100% of the outstanding common stock of DecisionLine Clinical Research Corporation (DecisionLine), an Ontario corporation, and its related company. DecisionLine was integrated as part of the Company's Early Stage segment.
The aggregate purchase price was approximately $18,355,000 in cash paid at closing, including acquisition costs, plus net adjustments for working capital and other items in accordance with the terms and conditions of the Share Purchase Agreement of $1,276,000. In addition, there is an earnout provision, with a maximum additional amount to be paid of $6,500,000 (in Canadian dollars) payable if certain conditions are met, as well as an additional contingent payment of $900,000 (in Canadian dollars) upon receipt of certain tax credits arising from pre-acquisition operations. In March 2009, an increase to goodwill and a corresponding liability of $720,000 ($900,000 in Canadian dollars at current exchange rates) were recorded since the additional contingent payment related to certain tax credits has been received. Additionally, in May 2009, an agreement was reached to settle the outstanding earnout provision for $5 million (in Canadian dollars) and accelerate the payment date for a portion of the amount. This additional goodwill will be recorded in the second quarter of 2009. New Business Authorizations and Backlog
New business authorizations, which are sales of our services, are added to backlog when the Company enters into a contract, letter of intent or other forms of commitments. Authorizations can vary significantly from quarter to quarter and contracts generally have terms ranging from several months to several years. The Company's new business authorizations for the three months ended March 31, 2009 and 2008 were approximately $72 million and $180 million, respectively. New business authorizations in the first quarter of 2009 are down significantly from previous quarters due to delays in the selling cycle. Mergers and acquisitions by and between the Company's customers in the biopharmaceutical industry are resulting in delays in signed contracts as our customers are re-evaluating their research and development spending priorities. In addition, smaller customers without large partners are experiencing difficulty obtaining financing. In the first quarter of 2009, the Company experienced cancellations at a higher level than its historical norms and in this current environment could continue to experience higher than its normal cancellations.
Backlog consists of new business authorizations for which the work has not started but is anticipated to begin in the future as well as contracts in process that have not been completed. The average duration of the contracts in backlog fluctuates from quarter to quarter based on the contracts constituting backlog at any given time. The Company generally experiences a longer period of time between contract award and revenue recognition with respect to large contracts covering global services. As the Company increasingly competes for and enters into large contracts that are global in nature, the Company expects the average duration of the contracts in backlog to increase. Backlog at March 31, 2009 was approximately $930 million compared to $1.02 billion at December 31, 2008. The net book-to-bill ratio was .2 to 1 and 1.4 to 1, respectively, for the three months ended March 31, 2009 and 2008.
In light of the current industry dynamics, including increased project cancellations and delays, the Company is continuing to conduct a thorough review of its backlog with the potential for assigning a more conservative profile as appropriate to this current environment.
For various reasons discussed in "Item 1 - Backlog" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, the Company's backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations
The Company's results of operations are subject to volatility due to a variety of factors. The cancellation or delay of contracts and cost overruns could have adverse effects on the Condensed Consolidated Financial Statements. Fluctuations in the Company's sales cycle and the ability to maintain large customer contracts or to enter into new contracts could hinder the Company's long-term growth. In addition, the Company's aggregate backlog, consisting of signed contracts and letters of intent as well as awarded projects for which the contract is actively being negotiated, is not necessarily a meaningful indicator of future results. Accordingly, no assurance can be given that the Company will be able to realize the net service revenues included in the backlog. For a more detailed discussion regarding the risk factors associated with the Company's results of operations, among other things, see Item 1A-Risk Factors, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Information to be discussed regarding segments is outlined in the below table:

                                         Early         Late         Support
   (in thousands)                       Stage(b)       Stage       & Other(c)       Total
   Three Months Ended March 31, 2009

   Net service revenues                 $ 9,082     $  96,638      $   2,383     $ 108,103
   Income from operations               $ 1,020     $  21,186      $ (14,068 )   $   8,138
   Operating Margin % (a)                  11.2 %        21.9 %            -           7.5 %

   Three Months Ended March 31, 2008

   Net service revenues                 $ 5,638     $ 104,779      $   3,707     $ 114,124
   Income from operations               $   386     $  24,666      $ (11,077 )   $  13,975
   Operating Margin % (a)                   6.8 %        23.5 %            -          12.2 %

(a) Expressed as a percentage of net service revenues.

(b) The Early Stage segment results for the three months ended March 31, 2009 include operating results of DecisionLine, acquired in June of 2008.

(c) Support and Other consists of unallocated corporate expenses, primarily information technology, marketing and communications, human resources, finance and legal.

Net Service Revenues
Net service revenues decreased approximately $6.0 million, or 5%, to $108.1 million in the first quarter of 2009 when compared with $114.1 million in the first quarter of 2008. On a constant currency basis (first quarter 2009 net service revenues converted at first quarter 2008 currency rates) 2009 net service revenues were up 8% over 2008 net service revenues, therefore foreign currency exchange rates fluctuations accounted for a 13% decline in first quarter 2009 net service revenues.
Net service revenues from the Early Stage segment increased by approximately 61% from $5.6 million in the three months ended March 31, 2008 to $9.1 million in the corresponding period of 2009. The increase is attributable to the DecisionLine acquisition. Net service revenues from DecisionLine were approximately $4.6 million in the first quarter of 2009. Net service revenues

at the Company's Phase I unit in Morgantown, West Virginia were approximately $2.1 million in the first quarter of 2009 compared to $1.6 million in the first quarter of 2008. Net service revenues in the Phase I unit in the Netherlands decreased by approximately $1.6 million from $4.0 million in the first quarter of 2008 to $2.4 million in the first quarter of 2009.
Net service revenues in the Late Stage segment decreased by approximately 8% to $96.6 million in the three months ended March 31, 2009 from $104.8 million in the three months ended March 31, 2008. The decrease in net service revenues in the Late Stage segment was driven primarily by delays in the selling cycle, more specifically, advancing contracts from the awarded status to the signed contract status, which prevented the Company from commencing work and revenue generating activities; coupled with a significantly higher than normal cancellation rate on previously awarded studies. We believe this situation is the result of weakness in the current global economy and stricter access to capital. Additionally, recent pharmaceutical company mergers as well as reduced prescription drug sales and uncertainty in the global economy have delayed customer decisions on previously awarded contracts and slowed the contract signature process as pharmaceutical companies re-evaluate their pipelines and, in the case of newly merged customers, focus on integration efforts rather than future development of products.
The Company did experience strong growth in Latin America in the first quarter of 2009 as customers continue to focus on the low-cost structure in this region to conduct clinical trials. The Company's net service revenues in the Latin America increased by approximately 53% in the first three months of 2009 compared to the same period of the prior year.
A summary of net service revenues by geographic region for the three months ended March 31, 2009 and 2008 is presented below.

                                     For the Three Months Ended
                                              March 31,
                              2009                                2008
                  Net Service                         Net Service
(in thousands)     Revenues        % of Revenue        Revenues        % of Revenue       % of Growth
North America    $      57,204                53 %   $      52,896                46 %               8 %
Latin America           12,039                11 %           7,852                 7 %              53 %
Europe                  35,484                33 %          48,140                42 %             -26 %
Asia-Pacific             3,376                 3 %           5,236                 5 %             -36 %

Total            $     108,103                       $     114,124                                  -5 %

The top five customers based on net service revenues contributed approximately 30% of net service revenues during the first quarter of 2009 compared to approximately 31% of net service revenues during the first quarter of 2008. No customer accounted for more than 10% of total first quarter 2009 or 2008 net service revenues.
Reimbursable Out-of-Pocket Revenues/Expenses Reimbursable out-of-pocket revenues and expenses fluctuate from period to period, primarily due to the level of investigator activity in a particular period. Reimbursable out-of-pocket revenues

and expenses decreased approximately 17% to $37.0 million in the first quarter of 2009 from $44.7 million in the corresponding period of 2008. Operating Expenses
Direct costs decreased approximately $1.2 million, or 2%, to $58.0 million in the first quarter of 2009 from $59.2 million in the first quarter of 2008. The decrease in direct costs relates to the decrease in net service revenues in the first quarter of 2009. Direct costs expressed as a percentage of net service revenues were 51.8% for the three months ended March 31, 2008 and 53.6% in the first quarter of 2009. The increase in direct costs as a percentage of net service revenues is due to decreased utilization of billable employees in the first quarter of 2009 compared to the first quarter of 2008 as a result of project cancellations and delays in signing of contracts, as previously discussed. Additionally, the Company accrued additional direct costs of approximately $1.0 million related to a programming issue unique to one study and one customer that occurred in the fourth quarter of 2008. This increase was the result of our evaluation of information provided by our customer late in the first quarter which led us to believe our initial estimate was understated. The issue requires the Company to rework a large portion of the project and additionally, to bear costs that would, under normal circumstances, be absorbed by the customer. The Company continues to discuss this matter with the customer. Additionally, the Company is in the process of working with its insurance provider to recover direct cost amounts that might be covered under the terms of the Company's insurance coverage. However, under the provisions of SFAS No. 5, "Accounting for Contingencies", any such recovery would be considered a gain contingency. Accordingly, no receivable has been recorded at March 31, 2009 related to potential insurance recovery. Any insurance proceeds received would serve to reduce direct costs in future periods.
Selling, general and administrative expenses increased $0.4 million, or 1%, from $37.6 million in the first quarter of 2008 to $38.0 million in the same quarter of 2009.
Selling, general and administrative expenses expressed as a percentage of net service revenues were 35.2% for the three months ended March 31, 2009 compared to 33.0% for the corresponding 2008 period. The increase in selling, general and administrative expenses as a percentage of net service revenue is due to the increase in non-billable headcount that occurred between the first quarter of 2008 and the first quarter of 2009 in line with the Company's efforts to build infrastructure to support the Company's projected growth. Selling, general and administrative expenses increased as a percentage of net service revenues due to the decline in net service revenues discussed above.
In the second quarter of 2009, the Company commenced several initiatives to optimize workforce and capacity and to reduce operating expenses, such as: the reduction of discretionary spending, limiting previously planned headcount additions, delay or elimination of merit increases, reduction or elimination of other benefits, workforce reductions or furloughs, and other potential cost savings in an attempt to reduce these expenses. The Company expects to take a one-time charge in the second quarter of 2009 for severance-related and other expenses in the range of $3.5 million to $4.5 million.
Depreciation and amortization expense increased by $0.6 million in the first quarter of 2009 compared to the first quarter of 2008. The increase is primarily due to amortization of approximately $362,000 related to a customer relationship asset acquired in the June 2008 acquisition of DecisionLine. Finite-lived intangibles are amortized in a manner consistent with the underlying expected future cash flows from the customers, resulting in higher amortization expense in the initial year of acquisition. The remainder of the increase is due to increased depreciation expense on fixed asset purchases.

Income from operations decreased to $8.1 million or 7.5% of net service revenues for the three months ended March 31, 2009 from $14.0 million or 12.2% of net service revenues for the corresponding 2008 period. Income from operations from Kendle's Early Stage segment increased approximately $634,000, or 164%, to $1.0 million or 11.2% of Early Stage net service revenues for the three months ended March 31, 2009, from approximately $386,000 or 6.8% of Early Stage net service revenues for the corresponding period of 2008. The reason for the increase in operating margin in Early Stage in 2009 was due to operating income from DecisionLine of approximately $745,000.
Income from operations from the Company's Late Stage segment decreased $3.5 million, (or 14%), to $21.2 million (or 21.9% of Late Stage net service revenues) for the three months ended March 31, 2009 from approximately $24.7 million (or 23.5% of net service revenues) from the corresponding period of 2008. The decline in the Late Stage operating margin was due to a drop in net service revenues, primarily in the European region, driven by decreased utilization of billable associates.
Other Income (Expense)
Other Income (Expense) was expense of approximately $483,000 in the first quarter of 2009 compared to expense of approximately $6.8 million in the first quarter of 2008.
The components of Other Income / (Expense) were as follows for the periods presented:

                                          Three Months          Three Months
                                         Ended March 31,       Ended March 31,
                                              2009                  2008
      (in thousands)                                            (As Adjusted)
      Interest expense                  $          (3,876 )   $          (4,437 )
      Interest income                                 230                   252
      Foreign currency gains/(losses)               3,590                (2,386 )
      Other expenses                                 (427 )                (222 )

                                        $            (483 )   $          (6,793 )

In August 2006, the Company borrowed $200 million under a term loan agreement in connection with the closing and purchase of CRL Clinical Services. In the third quarter of 2007, the Company issued $200.0 million in principal amount of 3.375% Convertible Notes. In conjunction with issuance and sale of the Convertible Notes, the Company made a mandatory prepayment on its term debt and subsequently paid off the balance of the term note in the third quarter of 2007. For a detailed discussion of the financing transaction see the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
The FASB issued FASB Staff Position ("FSP") No. APB 14-1, "Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement)" ("APB 14-1") in May 2008. APB 14-1 requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer's nonconvertible debt borrowing

rate. APB 14-1 is effective for financial statements for fiscal years beginning after December 15, 2008 and requires retrospective application for all periods presented. The Company has adopted APB 14-1 effective January 1, 2009 as it relates to its $200 million (par value) 3.375% Convertible Notes issuance and as required by the new guidance has adjusted the prior periods for the effects of APB 14-1.
Interest expense on the Convertible Notes has been recorded at the effective rate of 8.02%. During the quarter ended March 31, 2009, the amount of interest expense recognized for the contractual interest rate was $1.7 million and the amount recognized for discount amortization was $1.7 million for a total of $3.4 million. During the quarter ended March 31, 2008, the amount of interest expense recognized for the contractual interest rate was $1.7 million and the amount recognized for discount amortization was $1.6 million for a total of $3.3 million.
In total, interest expense decreased by approximately $0.6 million in the first quarter of 2009 compared to the first quarter of 2008. In the first quarter of 2008, the Company recorded interest expense of approximately $0.7 million related to a decline in value of its interest rate collar, which was terminated during that quarter. The Company paid approximately $1.1 million to reflect amounts due upon termination of the collar.
Interest income decreased by approximately $22,000 in the first quarter of 2009 due to a general decrease in the rate of return on cash investments. In the first quarter of 2007, the Company entered into foreign currency hedge arrangements to hedge foreign currency exposure related to intercompany notes outstanding. The hedging transactions were designed to mitigate the Company's exposure related to two intercompany notes between the Company's U.S. subsidiary, as lender, and the Company's subsidiary in each of the United Kingdom and Germany. The derivative arrangements were not designated for hedge accounting treatment and mark to market adjustments on these arrangements are recorded in the Company's Condensed Consolidated Statements of Operations. In the first quarter of 2009, the Company eliminated a substantial portion of the note payable between the U.S. subsidiary and U.K. subsidiary, referenced above, and the entire amount of the note payable between the U.S. subsidiary and German subsidiary. In connection with these transactions, the Company also terminated its foreign currency hedge arrangements referenced above. In the first quarter of 2009, the Company recorded pre-settlement losses of approximately $1.7 million related to exchange rate fluctuations on these intercompany notes and the related derivative instruments compared to gains of approximately $2.1 million related to the intercompany notes and derivative instruments in the first quarter of 2008.
In addition to the gains on the intercompany notes and foreign currency hedge arrangements discussed above, the Company recorded foreign exchange rate gains of approximately $5.3 million in the first quarter of 2009 compared to losses of $4.5 million in the first quarter of 2008. The foreign exchange gain is due to the strengthening of the British pound against the Euro and the strengthening of the US dollar against both the British pound and the Euro as well as an increase in global contracts leading to increased exchange rate exposure. The exchange rate transaction losses typically occur when the Company holds assets in a currency other than the functional currency of the reporting location. As of December 31, 2008, one of the Company's British subsidiaries had intercompany payables, predominately denominated in euros, to other

Kendle subsidiaries, amounting to approximately $25.2 million. The majority of the first quarter 2009 exchange rate gain relates to the impact of the strengthening of the British pound against the euro on those intercompany payables. During the quarter, the Company implemented activities to substantially reduce its exposure on these pound-euro balances going forward. The Company does not currently have hedges in place to mitigate exposure due to foreign exchange rate fluctuations. Due to uncertainties regarding the timing of and currencies involved in the majority of the Company's foreign exchange rate transactions, it is impracticable to implement hedging instruments to match the Company's foreign currency inflows and outflows. The Company will continue to evaluate ways to mitigate the risk of this impact in the future. Income Taxes
The Company reported tax expense at an effective rate of 88.4% in the quarter ended March 31, 2009, compared to tax expense at an effective rate of 42.9% after retroactive application, as required, of APB 14-1 in the quarter ended March 31, 2008. The tax expense of $6.8 million for 2009 includes $4.4 million in tax for the settlement of the foreign currency hedge and related intercompany notes discussed above.
The Company continues to maintain full valuation allowances against the net operating losses incurred in some of its subsidiaries. Because Kendle operates on a global basis, the effective tax rate varies from quarter to quarter based on the mix of locations that generate the pre-tax earnings or losses. Net Income
The net income for the quarter ended March 31, 2009 (which includes a $4.4 million discrete tax expense, $.30 per diluted share, discussed above), was approximately $886,000, or $0.06 per basic and diluted share. Net income for the quarter ended March 31, 2008, as adjusted for the impact of the adoption of APB 14-1, was $4.1 million or $0.28 per basic and $0.27 per diluted share. Liquidity and Capital Resources
Cash and cash equivalents increased by $19.8 million for the three months ended March 31, 2009 as a result of cash provided by operating activities, investing activities and financing activities of $8.3 million, $11.9 million and $505,000, respectively. Foreign exchange rates had a negative impact on cash and cash equivalents in the first quarter of 2009 of approximately $851,000. At March 31, 2009, cash and cash equivalents were $55.0 million. In addition, the Company has . . .