Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission File Number: 0-27058
PAREXEL International Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-2776269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 West Street, Waltham, MA 02154
(Address of principal executive offices) (Zip code)
(617) 487-9900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of January 30, 1998, there were 20,804,987 shares of
PAREXEL International Corporation common stock outstanding.
PAREXEL INTERNATIONAL CORPORATION
INDEX
Page
Part I. Financial Information
Financial Statements (Unaudited)
Item 1.
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 2
Condensed Consolidated Income Statements -
Three months ended December 31, 1997 and 1996; 3
Six months ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
- Six months ended December 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial 5
Statements
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations 9
Risk 15
Factors
Part Other Information
II.
Changes in Securities and Use of Proceeds 20
Item 2.
Submission of Matters to a vote of Security 20
Item 4. Holders
Exhibits and Reports on Form 8-K 21
Item 6.
Signatures 22
Part I. Financial
Information
Item 1 - Financial
Statements
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
(Unaudited)
December 31, June 30,
1997 1997
ASSETS
Current assets:
Cash and cash
equivalents:
Unrestricted
Restricted $46,846 28,392
Marketable securities 2,772 1,967
Accounts receivable, 35,137 66,891
net
Other current assets 85,054 66,061
11,341 12,106
Total current 181,150 175,417
assets
Property and 36,287 28,222
equipment, net
Other assets 3,420 1,862
$220,857 205,501
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Current maturities
of long-term debt 172 1,698
Accounts payable 6,277 8,127
Advance billings 45,305 33,369
Other current
liabilities 18,609 21,347
Total current
liabilities 70,363 64,541
Long-term debt -- 72
Other liabilities 1,452 1,724
Total liabilities 71,815 66,337
Stockholders' equity:
Preferred stock - -- --
$0.01 par value;
shares authorized:
5,000,000
Common stock - $.01
par value; shares
authorized: 50,000,000
at December 31, 1997,
and at June 30,
1997; shares issued:
20,826,633 at
December 31, 1997,
20,563,924 at
June 30, 1997; shares
outstanding: 208 205
20,797,221 at December
31, 1997,
20,534,512 at
June 30, 1997
Additional paid-in
capital and other 136,561 131,770
stockholders' equity 12,273 7,189
Retained earnings
Total stockholders' 149,042 139,164
equity
220,857 205,501
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
Revenue 76,271 51,498 143,037 97,202
Reimbursed costs (11,578) (30,151) (22,038)
(17,655)
Net revenue 58,616 39,920 112,886 75,164
Costs and expenses:
Direct costs 38,951 27,198 75,261 51,413
Selling,
general and 11,781 8,421 22,761 15,722
administrative
Depreciation
and amortization 2,513 1,073 4,540 2,031
Special charge 4,100 -- 4,100 --
57,345 36,692 106,662 69,166
Income from 1,271 3,228 6,224 5,998
operations
Other income, net 824 412 1,781 782
Income before
provision for 2,095 3,640 8,005 6,780
income taxes
Provision for
income taxes 733 1,299 2,802 2,454
Net income 1,362 2,341 5,203 4,326
Earnings per common
share:
Basic 0.07 0.13 0.25 0.25
Diluted 0.06 0.13 0.25 0.24
Shares used in
computing
earnings per common
share:
Basic 20,704 17,985 20,628 17,623
Diluted 21,188 18,550 21,148 18,169
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended December 31,
1997 1996
Cash flows from operating
activities
Net income $5,203 $4,326
Adjustments to reconcile net
income to net cash provided
(used) by operating 4,540 2,031
activities:
Depreciation and 4,100 --
amortization
Special Charge
Change in operating assets
and liabilities, net of
effects from acquisitions (14,435) (6,183)
Net cash provided (used) by
operating activities (592) 174
Cash flows from investing
activities:
Purchase of marketable (46,319) (20,965)
securities
Proceeds from sale of
marketable securities 77,962 22,537
Acquisition activities (1,410) 251
Purchase of property and (12,725) (7,543)
equipment
Net cash provided (used) by
investing activities 17,508 (5,720)
Cash flows from financing
activities:
Proceeds from issuance of 2,315 59,389
common stock
Net repayments under line of (497) (25)
credit
Repayments of long-term debt (283) (3,204)
Net cash provided by financing
activities 1,535 56,160
Effect of exchange rate
changes on unrestricted cash
and cash equivalents 3 (314)
Net increase in unrestricted 18,454 50,300
cash and cash equivalents
Unrestricted cash and cash
equivalents at beginning of 28,392 16,257
period
Unrestricted cash and cash
equivalents at end of period $46,846 $66,557
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
On December 1, 1997, the Company completed its acquisition of
Kemper-Masterson, Inc. ("KMI") in a business combination accounted
for as a pooling of interests (see Note 3). Prior periods
presented in the accompanying condensed consolidated financial
statements have been retroactively restated to combine the accounts
and operations of KMI with those of the Company for the periods
presented.
The accompanying unaudited condensed consolidated financial
statements of PAREXEL International Corporation ("the Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating
results for the six months ended December 31, 1997, are not
necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 1998. For further information, refer to
the consolidated financial statements and notes thereto included in
the Company's Prospectus on Form S-3, dated January 20, 1998.
The balance sheet at June 30, 1997, has been derived from the
audited consolidated financial statements at that date but does not
include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
The Company's stock is currently quoted on the Nasdaq National
Market under the symbol "PRXL."
Note 2 - Special Charge
As described in Note 3, the Company acquired KMI in a business
combination accounted for as a pooling of interests. In connection
with the acquisition, KMI incurred a special charge of $4.1
million, reported as a separate component of income from operations
in the Condensed Consolidated Income Statement. This charge
primarily relates to noncash compensation expense recorded at the
acquisition date attributable to incentive stock options previously
granted to certain KMI key employees. These options contained
formula-value repurchase terms which required periodic revaluation
of the compensation expense over the vesting period of the options.
These options fully vested upon the acquisition and no future
compensation expense will be recorded.
Note 3 - Acquisition
On December 1, 1997, the Company completed its acquisition of KMI,
a leading regulatory consulting firm, based in Massachusetts, in a
business combination accounted for as a pooling of interests. The
Company issued 581,817 shares common stock in exchange for all of
the outstanding shares of KMI. The accompanying condensed
consolidated financial statements combine the accounts and
operations of KMI with those of the Company for all periods
presented. Accordingly, all prior periods presented have been
retroactively restated.
Due to the differing year ends of the Company and KMI, financial
information for dissimilar fiscal years has been combined for the
Company's fiscal year 1996 and 1995. KMI's results of operations
for its fiscal years ended December 31, 1996 and 1995 were combined
with the Company's results of operations for the fiscal years ended
June 30, 1996 and 1995, respectively. Balance sheet information as
of June 30, 1996 includes the financial position of KMI as of
December 31, 1996 and the Company as of June 30, 1996.
Accordingly, KMI's results of operations for the six months ended
December 31, 1996 (including revenue, operating income, and net
income of $5.0 million, $167,000, and $117,000, respectively) were
duplicated in the combined statements of operations for fiscal 1997
and 1996. Therefore, KMI's net income for one of the six month
periods ended December 31, 1996, was eliminated from stockholders'
equity.
Revenues and net income (loss) for each of the two previously
separate companies for the period prior to the KMI acquisition are
as follows:
Three Months
Year Ended June 30, Ended
September 30,
1997 1996 1995 1997 1996
Net
Revenues:
PAREXEL $159,679 $88,006 $58,573 $51,211 $33,030
KMI 10,676 9,355 8,520 3,059 2,214
$170,355 $97,361 $67,093 $54,270 $35,244
Net Income
(loss):
PAREXEL $10,848 $ 4,599 $10,630) $ 3,628 $ 1,936
KMI 189 94 (41) 213 49
$11,037 $ 4,693 ($10,671) $ 3,841 $ 1,985
Note 4 - Earnings per Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces primary
and fully diluted earnings per share with basic and diluted
earnings per share. SFAS 128 is effective for the Company's
current quarter and requires the restatement of all previously
reported earnings per share data presented.
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per common share
computations for the Company's net income.
Three Six
months months
ended ended
December December
31, 31,
1997 1996 1997 1996
Basic Earnings Per Common Share
Computation
Net Income attributable to common
shares $1,362 $2,341 $5,203 $4,326
Weighted average common shares
outstanding:
Shares attributable to common
stock outstanding 20,704 17,985 20,628 17,623
Earnings per common share - basic $0.07 $0.13 $0.25 $0.25
Diluted Earnings Per Common Share
Computation
Net Income attributable to common
shares $1,362 $2,341 $5,203 $4,326
Weighted average common shares
outstanding:
a. Shares attributable to common
stock outstanding 20,704 17,985 20,628 17,623
b. Shares attributable to common
stock options
pursuant to SFAS 128, paragraph 17 484 565 520 546
Total weighted average common shares
outstanding 21,188 18,550 21,148 18,169
Earnings per common share - diluted $0.06 $0.13 $0.25 $0.24
All share and per share data have been restated to reflect the
February 1997 two-for-one stock split, in the form of a 100% stock
dividend.
Note 5 - Stock Plans
In November 1997, the stockholders of the Company approved an
amendment to the Company's 1995 Stock Plan (the "1995 Plan"). In
connection therewith, the Company terminated the 1995 Non-Employee
Director Stock Option Plan (the "Director Plan") and transferred
all remaining shares under the Director Plan to the 1995 Plan,
without increasing the aggregate number of shares available for
grant under all of the Company's stock option plans. The amendment
also provides for the annual formula grant of options to purchase
up to 15,000 shares of common stock of the Company to non-employee
directors dependent upon the attendance by such non-employee
directors at meetings of the Board of Directors and committees
thereof.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
As described in Note 3 to the Condensed Consolidated Financial
Statements, in December 1997, the Company consummated its
acquisition of Kemper-Masterson, Inc. ("KMI") in a business
combination accounted for as a pooling of interests. All financial
data in this discussion and analysis is reported as though the
companies were combined for all periods.
The information set forth and discussed below for the three months
and six months ended December 31, 1997, is derived from the
Condensed Consolidated Financial Statements included herein. The
financial information set forth and discussed below is unaudited
but, in the opinion of management, reflects all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of such information. The Company's results of
operations for a particular quarter may not be indicative of
results expected during subsequent fiscal quarters or for the
entire year.
Overview
The Company is a leading contract research organization ("CRO")
providing a broad range of knowledge-based product development and
product launch services to the worldwide pharmaceutical,
biotechnology and medical device industries. The Company's primary
objective is to help clients quickly obtain the necessary
regulatory approvals of their products and, ultimately, optimize
the market penetration of those products. The Company's service
offerings include: clinical trials management, data management,
biostatistical analysis, medical marketing, clinical pharmacology,
regulatory and medical consulting, performance improvement,
industry training and publishing, and other drug development
consulting services.
The Company's contracts are typically fixed price, multi-year
contracts that require a portion of the fee to be paid at the time
the contract is entered into, with the balance of the fee paid in
installments during the contract's duration. Net revenue from
contracts is generally recognized on a percentage of completion
basis as work is performed.
Most of the Company's contracts are terminable upon 60 to 90 days'
notice by the client. Clients terminate or delay contracts for a
variety of reasons, including, among others, the failure of
products being tested to satisfy safety requirements, unexpected or
undesired clinical results of the product, the client's decision to
forego a particular study, insufficient patient enrollment or
investigator recruitment, or production problems resulting in
shortages of the drug.
As is customary in the industry, the Company routinely subcontracts
with third party investigators in connection with clinical trials
and other third party service providers for laboratory analysis and
other specialized services. These and other reimbursable costs are
paid by the client and, in accordance with industry practice, are
included in revenue. Reimbursed costs vary from contract to
contract. Accordingly, the Company views net revenue, which
consists of revenue less reimbursed costs, as its primary measure
of revenue growth.
Direct costs consist of compensation and related fringe benefits
for project-related employees, other project-related costs not
reimbursed and allocated facilities and information systems costs.
Selling, general and administrative expenses consist of
compensation and related fringe benefits for selling and
administrative employees, professional services and advertising
costs, as well as allocated costs related to facilities and
information systems.
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
Net revenue increased by $18.7 million, or 46.8%, from $39.9
million for the three months ended December 31, 1996, to $58.6
million for the three months ended December 31, 1997. This net
revenue growth was primarily attributable to an increase in the
volume and average contract value of clinical research projects
serviced by the Company. For the three months ended December 31,
1997, net revenue from North American and European operations
increased by $15.0 million and $3.4 million, respectively, over the
corresponding prior year period. There can be no assurance that
the Company can sustain this rate of increase in net revenue from
continuing operations in future periods. See "Risk Factors."
Direct costs increased by $11.8 million, or 43.2%, from $27.2
million for the three months ended December 31, 1996, to $39.0
million for the three months ended December 31, 1997. This
increase in direct costs was due to the increase in the number of
project-related personnel, hiring, facilities and information
system costs necessary to support the increased level of
operations. Direct costs as a percentage of net revenue decreased
from 68.1% for the three months ended December 31, 1996, to 66.5%
for the three months ended December 31, 1997.
Selling, general and administrative expenses increased by $3.4
million, or 39.9%, from $8.4 million for the three months ended
December 31, 1996, to $11.8 million for the three months December
31, 1997. This increase was primarily due to increased
administrative personnel, hiring, and facilities costs necessary to
accommodate the Company's growth. Selling, general and
administrative expenses as a percentage of net revenue decreased
slightly from 21.1% for the three months ended December 31, 1996,
to 20.1% for the three months ended December 31, 1997.
Depreciation and amortization expense increased by $1.4 million, or
134.2%, from $1.1 million for the three months ended December 31,
1996, to $2.5 million for the three months ended December 31, 1997.
The increase is primarily due to increased capital spending on
computer equipment and facilities to support the increase in
project-related personnel.
Income from operations for the three months ended December 31,
1997, includes a $4.1 million primarily noncash, acquisition-
related charge recorded by KMI, as discussed in Note 2 of Notes to
Condensed Consolidated Financial Statements of the Company. Income
from operations, excluding the impact of the acquisition charge,
increased $2.1 million, or 66.4%, from $3.2 million for the three
months ended December 31, 1996, to $5.4 million for the three
months ended December 31, 1997.
Other income, net increased by $412,000 from $412,000 for the three
months ended December 31, 1996, to $824,000 for the three months
ended December 31, 1997. This increase resulted from higher
average balances of cash, cash equivalents and marketable
securities due primarily to proceeds from the Company's December
1996 public offering.
The Company's effective income tax rate was 35.0% for the three
months ended December 31, 1997, compared to 35.7% for the three
months ended December 31, 1996. This decrease was due to changes
in the mix of taxable income from the different jurisdictions in
which the Company operates and the impact of tax-exempt interest
income from securities held by the Company.
Six Months Ended December 31, 1997 Compared to Six Months Ended
December 31, 1996
Net revenue increased by $37.7 million, or 50.2%, from $75.2
million for the six months ended December 31, 1996 to $112.9
million for the six months ended December 31, 1997. This net
revenue growth was primarily attributable to an increase in the
volume and average contract value of clinical research projects
serviced by the Company. For the six months ended December 31,
1997, net revenue from North American and European operations
increased $29.2 million and $7.6 million, respectively, over the
prior year period. There can be no assurance that the Company can
sustain this rate of increase in net revenue from continuing
operations in future periods. See "Risk Factors."
Direct costs increased by $23.8 million, or 46.4%, from $51.4
million for the six months ended December 31, 1996, to $75.3
million for the six months ended December 31, 1997. This increase
in direct costs was due to the increase in the number of project-
related personnel, hiring, facilities and information system costs
necessary to support the increased level of operations. Direct
costs as a percentage of net revenue decreased from 68.4% for the
six months ended December 31, 1996, to 66.7% for the six months
ended December 31, 1997.
Selling, general and administrative expenses increased by $7.0
million, or 44.8%, from $15.7 million for the six months ended
December 31, 1996, to $22.8 million for the six months ended
December 31, 1997. This increase was primarily due to increased
administrative personnel, hiring and facilities costs, in line with
management's objective of increasing infrastructure to accommodate
the Company's growth. Selling, general and administrative expenses
as a percentage of net revenue decreased slightly from 20.9% for
the six months ended December 31, 1996 to 20.2% for the six months
ended December 31, 1997.
Depreciation and amortization expense increased by $2.5 million, or
123.5%, from $2.0 million for the six months ended December 31,
1996 to $4.5 million for the six months ended December 31, 1997.
The increase is primarily due to increased capital spending on
computer equipment and facilities to support the increase in
project-related personnel.
Income from operations for the six months ended December 31, 1997,
includes a $4.1 million primarily noncash, acquisition-related
charge recorded by KMI, as discussed in Note 2 of Notes to
Condensed Consolidated Financial Statements of the Company. Income
from operations, excluding the impact of the acquisition charge,
increased $4.3 million, or 72.1%, from $6.0 million for the six
months ended December 31, 1996, to $10.3 million for the six months
ended December 31, 1997.
Other income, net increased by approximately $1.0 million from
$782,000 for the six months ended December 31, 1996, to $1.8
million for the six months ended December 31, 1997. This increase
resulted from higher average balances of cash, cash equivalents and
marketable securities due primarily to proceeds from the Company's
December 1996 public offering.
The Company's effective income tax rate was 35.0% for the six
months ended December 31, 1997, compared to 36.2% for the six
months ended December 31, 1996. This decrease was due to changes
in the mix of taxable income from the different jurisdictions in
which the Company operates and the impact of tax-exempt interest
income on securities held by the Company.
Liquidity and Capital Resources
The Company's clinical research and development contracts are
generally fixed price, with some variable components, and range in
duration from a few months to several years. The cash flows from
contracts typically consist of a down payment required to be paid
at the time the contract is entered into and the balance in
installments over the contract's duration, in some cases on a
milestone achievement basis. Revenue from the contracts is
generally recognized on a percentage of completion basis as work is
performed. Accordingly, cash receipts do not necessarily
correspond to costs incurred and revenue recognized on contracts.
The Company's cash flow is influenced by changes in the levels of
billed and unbilled receivables and advance billings. As a result,
the number of days revenue outstanding in accounts receivable, net
of advance billings and the related dollar values of these
accounts, can vary due to the achievement of contractual milestones
and the timing and size of cash receipts. The number of days
revenue outstanding in accounts receivable, net of advance
billings, was 47 days at December 31, 1997, compared to 48 days at
June 30, 1997. The decrease in days revenue outstanding from June
30, 1997, to September 30, 1997, was primarily due to the timing of
the achievement of project milestones and related billings,
partially offset by an increase in advance billings. Accounts
receivable, net of the allowance for doubtful accounts, increased
from $66.1 million at June 30, 1997, to $85.1 million at December
31, 1997. Advance billings increased from $33.4 million at June
30, 1997, to $45.3 million at December 31, 1997, due to accounts
billed to clients in advance of revenue earned.
Unrestricted cash and cash equivalents increased by $18.5 million
during the six months ended December 31, 1997, as a result of $17.5
million and $1.5 million in cash provided by investing and
financing activities, respectively, partially offset by $592,000 in
cash used by operating activities.
Net cash used by operating activities resulted from increases in
accounts receivable and other current assets of $19.7 million and
$1.7 million, respectively, and decreases in accounts payable and
other currents liabilities of $1.7 million and $2.8 million,
respectively, nearly offset by net income, excluding noncash
expenses, of $13.8 million and an increase in advance billings of
$12.5 million.
Cash provided by investing activities consisted primarily of net
proceeds from sales of marketable securities of $31.6 million,
partially offset by capital expenditures of $12.7 million related
to facility expansion and investments in information technology.
Financing activities consisted primarily of net proceeds from the
exercise of stock options of $2.3 million.
The Company has domestic and foreign line of credit arrangements
with banks totaling approximately $14.5 million and a capital lease
line of credit with a U.S. bank for $2.4 million. At December 31,
1997, the Company had approximately $15.9 million in available
credit under these arrangements.
The Company's primary cash needs on both a short-term and long-term
basis are for the payment of salaries and fringe benefits, hiring
and recruiting expenses, business development costs, capital
expenditures and facility-related expenses. The Company believes
that its existing capital resources, together with cash flows from
operations and borrowing capacity under its existing lines of
credit, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring
businesses to enhance its service offerings, therapeutic base and
global presence. Any such acquisitions may require additional
external financings and the Company may from time to time seek to
obtain funds from public or private issuances of equity or debt
securities. There can be no assurance that such financings will be
available on terms acceptable to the Company.
The foregoing statements include forward-looking statements which
involve risks and uncertainties. The Company's actual experience
may differ materially from that discussed above. Factors that
might cause such differences include, but are not limited to, those
discussed in "Risk Factors" as well as future events that have the
effect of reducing the Company's available cash balances, such as
unexpected operating losses or capital expenditures or cash
expenditures related to possible future acquisitions.
YEAR 2000
The Company recognizes that it must ensure that its services and
operations will not be adversely affected by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-sensitive
software applications with two-year digits to define the applicable
year. In such applications, a date using "00" as the year may be
recognized as the year 1900 rather than the year 2000. The Company
is in the process of replacing many of its business and computer
operating systems with software which, when upgraded, are Year 2000
compatible. The Company is planning to complete all necessary Year
2000 upgrades of its major systems and is currently identifying and
developing conversion strategies for its remaining systems that may
be impacted by the Year 2000 issue.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in the consolidated financial statements.
SFAS No. 131 establishes standards for reporting information on
operating segments in interim and annual financial statements.
Both statements are effective for the Company for fiscal 1999.
In November 1997, the Emerging Issues Task Force (EITF) reached a
consensus on issue 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that
Combines Business Process Reengineering and Information Technology
Transformation" (EITF 97-13) that the costs of business process
reengineering activities, whether done internally or by third
parties, is to be expensed as incurred. The consensus also applies
to the costs of business process reengineering activities conducted
in conjunction with a project to acquire, develop, or implement
internal-use software. The transition provisions of EITF 97-13
require unamortized previously capitalized costs for business
process reengineering activities to be written off in the Company's
fiscal quarter ending December 31, 1997 and reported as a
cumulative effect of a change in accounting principle. The Company
has assessed the impact of EITF 97-13 and accordingly, has charged
an immaterial amount to the results of operations for the three
months ended December 31, 1997.
RISK FACTORS
In addition to the other information in this report, the following
risk factors should be considered carefully in evaluating the
company and its business. Information provided by the Company from
time to time may contain certain "forward-looking" information, as
that term is defined by (i) the Private Securities Litigation
Reform Act of 1995 (the "Act") and (ii) in releases made by the
Securities and Exchange Commission (the "SEC"). These risk factors
are being provided pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the "safe harbor"
provisions of the Act.
Loss or Delay of Large Contracts
Most of the Company's contracts are terminable upon 60 to 90 days'
notice by the client. Clients terminate or delay contracts for a
variety of reasons, including, among others, the failure of
products being tested to satisfy safety requirements, unexpected or
undesired clinical results of the product, the client's decision to
forego a particular study, such as for economic reasons,
insufficient patient enrollment or investigator recruitment or
production problems resulting in shortages of the drug. In
addition, the Company believes that cost-containment and
competitive pressures have caused pharmaceutical companies to apply
more stringent criteria to the decision to proceed with clinical
trials and therefore may result in a greater willingness of these
companies to cancel contracts with CROs. The loss or delay of a
large contract or the loss or delay of multiple contracts could
have a material adverse effect on the financial performance of the
Company.
Variability of Quarterly Operating Results
The Company's quarterly operating results have been subject to
variation, and will continue to be subject to variation, depending
upon factors such as the initiation, progress, or cancellation of
significant projects, exchange rate fluctuations, the mix of
services offered, the opening of new offices and other internal
expansion costs, the costs associated with integrating acquisitions
and the startup costs incurred in connection with the introduction
of new products and services. In addition, during the third quarter
of fiscal 1995 and 1993, the Company's results of operations were
affected by a noncash write-down due to the impairment of long-
lived assets and a noncash restructuring charge, respectively. See
"Risks Associated with Acquisitions." Because a high percentage of
the Company's operating costs are relatively fixed, variations in
the initiation, completion, delay or loss of contracts, or in the
progress of client projects can cause material adverse variations
in quarterly operating results.
Dependence on Certain Industries and Clients
The Company's revenues are highly dependent on research and
development expenditures by the pharmaceutical and biotechnology
industries. The Company's operations could be materially and
adversely affected by general economic downturns in its clients'
industries, the impact of the current trend toward consolidation in
these industries or any decrease in research and development
expenditures. Furthermore, the Company has benefited to date from
the increasing tendency of pharmaceutical companies to outsource
large clinical research projects. A reversal or slowing of this
trend would have a material adverse effect on the Company. In
fiscal 1997 and the three months ended December 31, 1997, the
Company's top five clients accounted for 39% and 37%, respectively,
of the Company's consolidated net revenue. In fiscal 1997, no
single customer accounted for more than 10% of the Company's
consolidated net revenue; however, one client accounted for 12% and
14% of consolidated net revenue for the three months and the six
months ended December 31, 1997, respectively. The loss of business
from a significant client could have a material adverse effect on
the Company.
Management of Business Expansion; Need for Improved Systems;
Assimilation of Foreign Operations
The Company's business and operations have recently experienced
substantial expansion over the past 15 years. The Company believes
that such expansion places a strain on operational, human and
financial resources. In order to manage such expansion, the Company
must continue to improve its operating, administrative and
information systems, accurately predict its future personnel and
resource needs to meet client contract commitments, track the
progress of ongoing client projects and attract and retain
qualified management, professional, scientific and technical
operating personnel. Expansion of foreign operations also may
involve the additional risks of assimilating differences in foreign
business practices, hiring and retaining qualified personnel, and
overcoming language barriers. In the event that the operation of an
acquired business does not live up to expectations, the Company may
be required to restructure the acquired business or write-off the
value of some or all of the assets of the acquired business.
Failure by the Company to meet the demands of and to manage
expansion of its business and operations could have a material
adverse effect on the Company's business.
Risks Associated with Acquisitions
The Company has made a number of acquisitions and will continue to
review future acquisition opportunities. No assurances can be given
that acquisition candidates will continue to be available on terms
and conditions acceptable to the Company. Acquisitions involve
numerous risks, including, among other things, difficulties and
expenses incurred in connection with the acquisitions and the
subsequent assimilation of the operations and services or products
of the acquired companies, the diversion of management's attention
from other business concerns and the potential loss of key
employees of the acquired company. Acquisitions of foreign
companies also may involve the additional risks of assimilating
differences in foreign business practices and overcoming language
barriers. In the event that the operations of an acquired business
do not live up to expectations, the Company may be required to
restructure the acquired business or write-off the value of some or
all of the assets of the acquired business. In fiscal 1993 and
1995, the Company's results of operations were materially and
adversely affected by write-offs associated with the Company's
acquired German operations. There can be no assurance that any
acquisition will be successfully integrated into the Company's
operations.
Dependence on Government Regulation
The Company's business depends on the comprehensive government
regulation of the drug development process. In the United States,
the general trend has been in the direction of continued or
increased regulation, although the FDA recently announced
regulatory changes intended to streamline the approval process for
biotechnology products by applying the same standards as are in
effect for conventional drugs. In Europe, the general trend has
been toward coordination of common standards for clinical testing
of new drugs, leading to changes in the various requirements
currently imposed by each country. Japan also legislated GCP and
legitimatized the use of CRO's in April 1997. Changes in
regulation, including a relaxation in regulatory requirements or
the introduction of simplified drug approval procedures, as well as
anticipated regulation, could materially and adversely affect the
demand for the services offered by the Company. In addition,
failure on the part of the Company to comply with applicable
regulations could result in the termination of ongoing research or
the disqualification of data, either of which could have a material
adverse effect on the Company.
Competition; CRO Industry Consolidation
The Company primarily competes against in-house departments of
pharmaceutical companies, full service CROs, and, to a lesser
extent, universities, teaching hospitals and other site
organizations. Some of these competitors have greater capital,
technical and other resources than the Company. CROs generally
compete on the basis of previous experience, medical and scientific
expertise in specific therapeutic areas, the quality of services,
the ability to organize and manage large-scale trials on a global
basis, the ability to manage large and complex medical databases,
the ability to provide statistical and regulatory services, the
ability to recruit investigators and patients, the ability to
integrate information technology with systems to improve the
efficiency of contract research, an international presence with
strategically located facilities, financial viability and price.
PAREXEL believes that it competes favorably in these areas. There
can be no assurance that the Company will be able to compete
favorably in these areas.
The CRO industry is fragmented, with participants ranging from
several hundred small, limited-service providers to several large,
full-service CROs with global operations. PAREXEL believes that it
is the third largest full-service CRO in the world, comparable
annualized on annual net revenue. Other large CROs include
Quintiles Transnational Corporation, Covance Inc., IBAH, Inc.,
Pharmaceutical Product Development, Inc. and ClinTrials Research,
Inc. The trend toward CRO industry consolidation has resulted in
heightened competition among the larger CROs for clients and
acquisition candidates. In addition, consolidation within the
pharmaceutical industry as well pharmaceutical companies
outsourcing to a fewer number of preferred CROs has led to
heightened competition for CRO contracts.
Potential Volatility of Stock Price
The market price of the Company's Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in
operating results, changes in earnings estimates by analysts,
market conditions in the industry, prospects of health care reform,
changes in government regulation and general economic conditions.
In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have been unrelated
to the operating performance of particular companies. These market
fluctuations may adversely affect the market price of the Company's
Common Stock. Because the Company's Common Stock currently trades
at a relatively high price-earnings multiple, due in part to
analysts' expectations of continued earnings growth, even a
relatively small shortfall in earnings from, or a change in,
analysts' expectations may cause an immediate and substantial
decline in the Company's stock price. Investors in the Company's
Common Stock must be willing to bear the risk of such fluctuations
in earnings and stock price.
Potential Adverse Impact of Health Care Reform
Numerous governments have undertaken efforts to control growing
health care costs through legislation, regulation and voluntary
agreements with medical care providers and pharmaceutical
companies. In the last several years, several comprehensive health
care reform proposals were introduced in the U.S. Congress. The
intent of the proposals was, generally, to expand health care
coverage for the uninsured and reduce the growth of total health
care expenditures. While none of the proposals were adopted, health
care reform may again be addressed by the U.S. Congress.
Implementation of government health care reform may adversely
affect research and development expenditures by pharmaceutical and
biotechnology companies, resulting in a decrease of the business
opportunities available to the Company. Management is unable to
predict the likelihood of health care reform proposals being
enacted into law or the effect such law would have on the Company.
Many European governments have also reviewed or undertaken health
care reform. For example, German health care reform legislation
implemented in January 1993 contributed to an estimated 15% decline
in German pharmaceutical industry sales in calendar 1993 and led
several clients to cancel contracts with the Company. Subsequent to
these events, in the third quarter of fiscal 1993, the Company
restructured its German operations and incurred a restructuring
charge of approximately $3.3 million. In addition, in the third
quarter of fiscal 1995, the Company's results of operations were
affected by a non-cash write-down due to the impairment of long-
lived assets of PAREXEL GmbH, the Company's German subsidiary, of
approximately $11.3 million. The Company cannot predict the impact
that any pending or future health care reform proposals may have on
the Company's business in Europe.
Dependence on Personnel; Ability to Attract and Retain Personnel
The Company relies on a number of key executives, including Josef
H. von Rickenbach, its President, Chief Executive Officer and
Chairman, upon whom the Company maintains key man life insurance.
Although the Company has entered into agreements containing non-
competition restrictions with its senior officers, the Company does
not have employment agreements with certain of these persons and
the loss of the services of any of the Company's key executives
could have a material adverse effect on the Company.
The Company's performance also depends on its ability to attract
and retain qualified professional, scientific and technical
operating staff. The level of competition among employers for
skilled personnel, particularly those with M.D., Ph.D. or
equivalent degrees, is high. There can be no assurance the Company
will be able to continue to attract and retain qualified staff.
Potential Liability; Possible Insufficiency of Insurance
Clinical research services involve the testing of new drugs on
consenting human volunteers pursuant to a study protocol. Such
testing involves a risk of liability for personal injury or death
to patients due to, among other reasons, possible unforeseen
adverse side effects or improper administration of the new drug.
Many of these patients are already seriously ill and are at risk of
further illness or death. The Company could be materially and
adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is outside the scope
of an indemnity or insurance coverage, or if the indemnity,
although applicable, is not performed in accordance with its terms
or if the Company's liability exceeds the amount of applicable
insurance. In addition, there can be no assurance that such
insurance will continue to be available on terms acceptable to the
Company.
Adverse Effect of Exchange Rate Fluctuations
Approximately 33% and 29% of the Company's net revenue for fiscal
1997 and the six months ended December 31, 1997, respectively, was
derived from the Company's operations outside of North America.
Since the revenue and expenses of the Company's foreign operations
are generally denominated in local currencies, exchange rate
fluctuations between local currencies and the United States dollar
will subject the Company to currency translation risk with respect
to the results of its foreign operations. To the extent the Company
is unable to shift to its clients the effects of currency
fluctuations, these fluctuations could have a material adverse
effect on the Company's results of operations. The Company does not
currently hedge against the risk of exchange rate fluctuations.
Anti-Takeover Provisions; Possible Issuance of Preferred Stock
The Company's Restated Articles of Organization and Restated By-
Laws contain provisions that may make it more difficult for a third
party to acquire, or may discourage a third party from acquiring,
the Company. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of the
Company's Common Stock. In addition, shares of the Company's
Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having
such rights, privileges and preferences, as the Board of Directors
may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate
purposes, could adversely affect the market price of the Common
Stock and could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of
Preferred Stock.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) On December 1, 1997, the Company acquired all of the
outstanding capital stock Kemper-Masterson, Inc., a Massachusetts
corporation ("KMI"). As consideration for the transaction, the
Company issued to the former KMI stockholders 581,817 shares of the
Company's Common Stock ("the Shares"). The Shares were issued in
reliance upon an exemption from the registration provisions of the
Securities Act of 1933, as amended (the "Act"), set forth in
Section 4(2) thereof. In connection with this issuance, the KMI
Stockholders made certain representations to the Company as to
their investment intent and possessed a sufficient level of
sophistication and access to information. The Shares are subject
to restrictions on transfer absent registration under the Act. Of
these Shares, 290,909 were registered under the Act in January 1998
on Form S-3. The Company expects to register the remaining 290,908
Shares under the Act in July 1998.
(d) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On November 13, 1997, the Company held its 1997
Annual Meeting of Stockholders.
(b) Not applicable.
(c) At the meeting, the stockholders of the Company
voted:
(1) to elect the following persons to serve as
Class II directors, to serve for a three-year term
(until the Annual Meeting of Stockholders in 2000).
The votes cast were as follows:
FOR WITHHELD
James A. Saalfield 17,747,486 53,971
Serge Okun 17,746,962 54,495
(2) to approve an amendment to the Company's 1995 Stock
Plan
(a) in connection with the termination of the
Non-Employee Director Stock Option Plan (the "Director Plan"), to
transfer all remaining shares available for grant under the
Director Plan to the 1995 Stock Plan, without increasing the
aggregate number of shares available for grant under all of the
Company's stock option plans, and
(b) to provide for an annual formula grant to
non-employee directors of an option to purchase up to 15,000 shares
of Common Stock, such grant being dependant upon the attendance by
such non-employee director at meetings of the Board of Directors
and committees thereof, and
(c) to provide for the limited transferability
of stock options granted under the 1995 plan.
The votes cast were as follows:
For Against Abstain Non-Votes
17,040,713 671,205 6,083 83,456
(3) to ratify the selection of Price Waterhouse LLP as
independent auditors for the fiscal year ending
June 30, 1998. The votes cast were as follows:
For Against Abstain
17,709,250 4,963 3,788
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated
October 23, 1997 reporting financial results for the
three months ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, on this
6th day of February, 1998.
PAREXEL International Corporation
By: /s/ Josef H. von Rickenbach
Josef H. von Rickenbach
President, Chief Executive
Officer and Chairman
By: /s/ William T. Sobo, Jr.
William T. Sobo, Jr.
Senior Vice President,
Chief Financial Officer
Exhibit No. Description
27 Financial Data Schedule