EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
PAREXEL International Corporation (the "Company") is a
leading contract research and medical marketing services
organization 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. Founded in
1983, the Company has built its business through internal
expansion and acquisitions.
The Company's contracts are typically fixed price, multi-
year contracts that usually require a portion of the fee to
be paid at the time the contract is entered into and 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, which vary from contract
to contract, are paid by the client. The Company recognizes
net revenue from its contracts, which excludes reimbursed
costs, on a percentage-of-completion basis as work is
performed. The Company views net revenue as its primary
measure of revenue growth.
Direct costs primarily consist of compensation and related
fringe benefits for project-related employees, other project-
related costs not reimbursed by the client, and allocated
facilities and information systems costs. Selling, general
and administrative expenses primarily 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.
Global Operations
The following table presents net revenue and the percentage
of total net revenue by geographic region for the three
years ended
June 30, 1998:
($ in thousands)1998% of Total 1997 % of Total 1996% of Total
North America$175,045 61% $ 118,525 58%$ 64,605 52%
Europe 106,619 37% 81,984 40% 59,455 47%
Asia/Pacific 3,778 2% 3,167 2% 993 1%
Total $285,442 100% $203,676 100%$125,053 100%
The Company's foreign subsidiaries generally enter into
contracts denominated in the local currency of the foreign
subsidiary. Because expenses of the foreign subsidiaries
are generally paid in the local currency, such foreign
subsidiaries' local currency earnings are not materially
affected by fluctuations in exchange rates. However,
changes in the exchange rates between these local currencies
and the U.S. dollar will affect the translation of such
subsidiaries' financial results into U.S. dollars for the
purposes of reporting the Company's consolidated financial
results. In cases where the Company contracts for a multi-
country clinical trial and a significant portion of the
contract expenses are in a currency other than the contract
currency, the Company seeks to contractually shift to its
client the effect of fluctuations in the relative values of
the contract currency and the currency that the expenses are
incurred. To the extent the Company is unable to shift to
its clients the effects of currency fluctuations, these
fluctuations could have a material effect on the Company's
results of operations. The Company does not currently hedge
against the risk of exchange rate fluctuations.
As the Company conducts operations on a global basis, the
Company's results of operations may be affected by changes
in the tax rates of the various jurisdictions in which it
conducts such operations. In particular, from period to
period, as the geographic mix of the Company's results of
operations among various tax jurisdictions changes, the
Company's effective tax rate may vary significantly.
Results of Operations
Impact of Acquisition-related and Other Charges
In December 1997, the Company acquired Kemper-Masterson,
Inc. ("KMI"); and in March 1998, the Company acquired, in
separate transactions, PPS Europe Limited ("PPS"), Genesis
Pharma Strategies Limited ("Genesis"), MIRAI B.V. ("MIRAI"),
and LOGOS GmbH ("LOGOS") in business combinations accounted
for as poolings of interests. The Company's historical
consolidated financial statements have been restated to
include the financial position and results of operations of
KMI, PPS, and MIRAI for all periods prior to the
acquisitions. As described in Note 3 and Note 6 to the
Consolidated Financial Statements, the Company's results of
operations for the year ended June 30, 1998, were
significantly impacted by certain acquisition-related and
other charges.
These charges included a $4.1 million charge and a $6.2
million charge recorded in the second and third fiscal
quarters of 1998, respectively, for legal, accounting, and
other transaction-related fees pertaining to the
acquisitions, noncash compensation expense related to
employee stock options previously granted by KMI and PPS,
and an accelerated compensation payment to a PPS executive
pursuant to a pre-existing employment agreement.
In addition to these transaction-related costs, the Company
also recorded a $1.6 million provision to increase the
allowance for doubtful accounts of PPS and MIRAI to conform
to the Company's policy and a $1.7 million charge resulting
from a change in estimate of the remaining service lives of
certain computer equipment arising from integration
activities and a company-wide program to upgrade and
standardize the Company's information technology platform.
The following table represents the effect of such charges:
For the years ended June 30,
As ReportedAcquisition Charges
Proforma As Reported
($ in thousands) 1998 1998 1998 1997 1996
Net revenue $285,442$ $- 285,442 $203,676 $125,053
Costs and expenses:
Direct costs 185,718 - 185,718 135,048 81,883
Selling, general 61,036 (1,610) 59,426 43,799 28,499
and administrative
Depreciation and
amortization 15,114 (1,684) 13,430 7,710 4,280
Acquisition-related
charges 10,273 (10,273) - - -
Income from operations $ 13,301 $(13,567)$ 26,868 $ 17,119 $ 10,391
Income from operations as 4.7% - 9.4% 8.4% 8.3%
Net income $ 9,319 $ (10,178)$ 19,497 $12,803 $ 6,655
Diluted earnings per share 0.38 $ (0.41) $ 0.79 $ 0.56 $ 0.39
Fiscal Year Ended June 30, 1998,
Compared to Fiscal Year Ended June 30, 1997
Net revenue increased by $81.8 million, or 40.1%, from
$203.7 million for fiscal 1997 to $285.4 million for fiscal
1998. For fiscal 1998, net revenue from North American,
European, and Asian operations increased by $56.5 million,
$24.6 million, and $0.6 million, respectively, over the
prior year. These increases were primarily attributable to
additional offerings in the Company's clinical research and
medical marketing services and the initiation of services
under contracts awarded subsequent to July 1, 1997. 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" in the Company's Annual
Report on Form 10K for the fiscal year ended June 30, 1998.
Direct costs increased by $50.7 million, or 37.5%, from
$135.0 million for fiscal 1997 to $185.7 million for fiscal
1998. This increase in direct costs was due to the increase
in the number of project-related personnel, hiring expenses,
facilities, and information system costs necessary to
support the increased level of operations. Direct costs as
a percentage of net revenue decreased from 66.3% in 1997 to
65.1% in fiscal 1998.
Selling, general and administrative expenses increased by
$17.2 million, from $43.8 million for fiscal 1997 to $61.0
million for fiscal 1998. This increase was due to increased
selling and administrative personnel, hiring, and facilities
costs, in line with increasing infrastructure to accommodate
the Company's growth, and a noncash charge of $1.6 million
recorded to increase the allowance for doubtful accounts of
recently acquired businesses to conform reserve estimates to
the Company's policies. Excluding this $1.6 million
adjustment, selling, general and administrative expenses
were $59.4 million, an increase of 35.7% over the prior
year. As a percentage of net revenue, selling, general and
administrative expenses excluding the $1.6 million charge
decreased from 21.5% for fiscal 1997 to 20.8% for fiscal
1998.
Depreciation and amortization expense increased by $7.4
million, from $7.7 million for fiscal 1997, to $15.1 million
for fiscal 1998. The increase was due to increased capital
spending on computer equipment and facilities to support the
increase in project-related personnel and a $1.7 million
noncash charge to reflect a reduction
in expected service lives of certain computer equipment as a
result of integration activities of acquired businesses and
the Company's program to upgrade and standardize its
information technology platform. Excluding this charge,
depreciation and amortization expense was $13.4 million, an
increase of $5.7 million, or 74.2%, over the prior year.
Income from operations for fiscal 1998 includes acquisition-
related charges of $10.3 million incurred during the second
and third quarters of fiscal 1998 as well as the $1.6
million charge to selling, general and administrative
expenses to increase the allowance for doubtful accounts of
acquired businesses (see Note 3 to the Consolidated
Financial Statements) and a $1.7 million charge to
depreciation incurred in the third quarter of fiscal 1998 to
reflect the change in useful lives of computer equipment.
Excluding the impact of all of these nonrecurring charges,
income from operations increased $9.7 million, or 56.9%,
from $17.1 million (or 8.4% of net revenue) for fiscal 1997
to $26.9 million (or 9.4% of net revenue) for fiscal 1998.
Interest income decreased by $0.5 million from $4.0 million
for fiscal 1997 to $3.5 million for fiscal 1998 primarily
due to a lower average balance of marketable securities and
the transition to tax-exempt securities, which have slightly
lower yields.
The Company's effective tax rate was 45.2% for fiscal 1998.
Excluding the effect of certain nondeductible permanent
acquisition-related charges, the effective income tax rate
for fiscal 1998, would have been 36.2% compared to 39.4% for
fiscal 1997. 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.
Fiscal Year Ended June 30, 1997,
Compared to Fiscal Year Ended June 30, 1996
Net revenue increased by $78.6 million, or 62.9%, from
$125.1 million for fiscal 1996 to $203.7 million for fiscal
1997. This net revenue growth was primarily attributable to
an increase in the volume and average contract value of
contract services provided by the Company and initiation of
services under contracts awarded subsequent to July 1, 1996.
In fiscal 1997, net revenue from North American, European,
and Asian operations increased $53.9 million, $22.5 million,
and $2.2 million, respectively, over the prior year.
Direct costs increased by $53.2 million, or 64.9%, from
$81.9 million for fiscal 1996 to $135.0 million for fiscal
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. As a percentage
of net revenue, direct costs increased from 65.5% in fiscal
1996 to 66.3% in fiscal 1997.
Selling, general and administrative expenses increased by
$15.3 million, or 53.7%, from $28.5 million for fiscal 1996
to $43.8 million for fiscal 1997. This increase was due to
increased selling and administrative personnel hiring and
facilities costs, as a result of increasing infrastructure
to accommodate the Company's growth. As a percentage of net
revenue, selling, general and administrative expenses
decreased from 22.8% in fiscal 1996 to 21.5% in fiscal 1997.
Depreciation and amortization expense increased by $3.4
million, from $4.3 million for fiscal 1996 to $7.7 million
for fiscal 1997. This increase was primarily due to
increased capital spending on computer equipment and
facilities to support the increase in project-related
personnel required to support the increased level of
operations.
Income from operations increased $6.7 million, or 64.7%,
from $10.4 million for fiscal 1996 to $17.1 million for
fiscal 1997. As a percentage of net revenue, income from
operations increased to 8.4% for fiscal 1997, from 8.3% for
fiscal 1996.
Interest income increased $2.4 million in fiscal 1997 as a
result of higher average balances of cash and investments.
This increase was due to proceeds from the Company's public
offerings in 1996 and 1997 and cash generated from
operations.
The Company's effective income tax rate decreased from 40.5%
in fiscal 1996 to 39.4% in fiscal 1997. This decrease was
attributable to changes in the mix of taxable income from
the different geographic jurisdictions that the Company
operated in fiscal 1997 compared to fiscal 1996.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations
and growth, including acquisition costs, with cash flows
from operations and the proceeds from the sale of equity
securities. Investing activities primarily reflect capital
expenditures for information systems enhancements and
leasehold improvements.
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, usually on a milestone-achievement
basis. Revenue from contracts is recognized on a percentage-
of-completion basis as the work is performed. Accordingly,
cash receipts do not necessarily correspond to costs
incurred and revenue recognized on contracts.
The Company's operating cash flow is influenced by changes
in the levels of billed and unbilled receivables and advance
billings. These account balances and the number of days
revenue outstanding in accounts receivable, net of advance
billings, can vary based on contractual milestones and the
timing and size of cash receipts. The number of days
revenue outstanding in accounts receivable, net of advance
billings, was 54 days at June 30, 1998, compared to 42 days
at June 30, 1997. This increase in days revenue outstanding
was primarily due to the timing of certain project milestone
billings and related payments, and a decrease in advance
billings. Accounts receivable, net of the allowance for
doubtful accounts, increased from $82.8 million at June 30,
1997, to $109.7 million at June 30, 1998. Advance billings
decreased from $46.2 million at June 30, 1997, to $45.3
million at June 30, 1998.
During fiscal 1998, unrestricted cash and cash equivalents
increased by $2.5 million as a result of $1.0 million and
$2.6 million in cash provided by investing activities and
financing activities, respectively, and a $0.7 million
adjustment for the elimination of net cash activities of
acquired companies for duplicated periods offset by $0.7
million of cash used in operating activities and a $1.1
million unfavorable effect of exchange rate changes. Net
cash used by operating activities of $0.7 million resulted
from net income excluding noncash expenses of $29.2 million,
a decrease in restricted cash of $1.2 million, and increases
in accounts payable and other current liabilities of $0.5
million and $5.0 million, respectively, offset by increases
in accounts receivable, prepaid expenses and other current
assets, and other assets of $26.8 million, $7.3 million, and
$1.6 million, respectively, and a decrease in advance
billings of $0.9 million. Net cash provided by investing
activities of $1.0 million consisted primarily of net
proceeds from sales of marketable securities of $30.1
million, partially offset by capital expenditures of $27.7
million related to facility expansions and investments in
information technology. The Company expects to continue to
make significant investments in facility expansion and
investments in information systems technology. Financing
activities consisted primarily of net proceeds from the
issuance of common stock of $4.9 million, partially offset
by repayments on lines of credit of $0.9 million and by
dividends of $1.3 million paid by acquired companies prior
to acquisition.
The Company has domestic and foreign lines of credit with
banks totaling approximately $14.8 million, and a capital
lease line of credit with a U.S. bank for $2.4 million. At
June 30, 1998, the Company had approximately $15.4 million
in available credit under these arrangements.
The Company's primary short-term and long-term cash needs
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
existing lines of credit will be sufficient to meet its
foreseeable cash needs. In the future, the Company will
consider acquiring businesses to enhance its service
offerings, therapeutic base, and global presence. Any such
acquisitions may require additional external financing, 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 financing will be
available on terms acceptable to the Company.
The statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations
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 a difference include, but are not limited to, the
loss or delay of large contracts, the Company's dependence
on certain industries and clients and government regulation
of such industries and clients, competition or consolidation
within the industry, as well as those discussed in "Risk
Factors" and in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998.
Inflation
The Company believes the effects of inflation generally do
not have a material adverse impact on its operations or
financial condition.
Year 2000
Information systems are an integral part of the services the
Company provides. As such, the Company recognizes that it
must ensure that its service and operations will not be
adversely affected by Year 2000 software and equipment
failures (the "Year 2000 Issue"), which can arise from the
use of date-dependent systems that utilize only two digits
to represent the year applicable to a transaction; for
example, "98" to represent "1998" rather than the full four
digits. Computer systems so engineered may not operate
properly when the last two digits of the year become "00" as
will occur on January 1, 2000.
The Company has initiated a four-phase program, led by its
Chief Information Officer and a global, cross-functional
team, to assess and remediate the effect of the Year 2000
Issue on the Company's operations. As part of this program,
the Company is contacting its clients, principal suppliers,
and other vendors to assess whether their Year 2000 Issues,
if any, will affect the Company. This Company-wide effort
began in 1997; and many Year 2000 dependencies have already
been identified and addressed through planned systems and
infrastructure evolution, replacement, or elimination. The
continuing program described below is to assure that the
Company identifies and addresses all remaining Year 2000
systems and dependencies well in advance of the millennium
change.
The first phase of the program, conducting an inventory of
all systems and dependencies that may be affected by the
Year 2000 Issue, is substantially complete. The second
phase of the program, the assessment and categorization of
all the inventoried systems and dependencies by level of
priority reflecting their potential impact on business
continuation, is underway. Based on this prioritization,
the third phase will be to develop detailed plans to address
each Year 2000 Issue and a general contingency plan in the
event that any noncompliant critical systems remain by
January 1, 2000.
While the Company has not yet completed its full assessment
of the scope of the Year 2000 Issue facing its systems and
dependencies, based on our analysis to date, we do not
believe that the costs to be incurred will be material.
However, until the full analysis is complete, the Company is
unable to provide assurance whether or not future costs will
be material. Furthermore, as noted above, the Company is
contacting its principal clients, suppliers, and other
vendors concerning the state of their Year 2000 compliance.
Until that effort is completed, the Company cannot be
assured that those other systems are or will be Year 2000
compliant and is unable to estimate at this time the impact
on the Company if one or more of those systems is not Year
2000 compliant. For the foregoing reasons, the Company is
not able to provide assurance at this time whether the Year
2000 Issues will materially affect its future financial
results or financial condition.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which replaced
primary and fully diluted earnings per share with basic and
diluted earnings per share. The Company adopted SFAS No.
128 in the second quarter of fiscal 1998 and restated all
previously reported earnings per share data.
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 in fiscal 1999. The adoption of the new
standards will not have an effect on the Company's financial
position or results of operations but will result in
additional disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This
statement establishes new standards for the recognition of
gains and losses on derivative instruments and provides
guidance as to whether a derivative may be accounted for as
a hedging instrument. Gain or loss from hedging
transactions may be wholly or partially recorded in earnings
or comprehensive income as part of a cumulative translation
adjustment, depending upon the classification of the hedge
transaction. Gain or loss on a derivative instrument not
classified as a hedging instrument is recognized in earnings
in the period of change. SFAS No. 133 will be effective for
the Company beginning in fiscal 2000. The Company does not
believe adoption of SFAS No. 133 will have a material impact
on its financial position or its results of operations.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
($ in thousands, except per share data) 1998 1997 1996
Net revenue $285,442 $203,676 $125,053
Costs and expenses:
Direct costs 185,718 135,048 81,883
Selling, general and administrative 61,036 43,799 28,499
Depreciation and amortization 15,114 7,710 4,280
Acquisition-related charges (Note 3) 10,273 - -
272,141 186,557 114,662
Income from operations 13,301 17,119 10,391
Interest income 3,511 4,040 1,646
Interest expense (195) (278) (201)
Other income (expense), net 382 241 (654)
3,698 4,003 791
Income before provision for income taxes 16,999 21,122 11,182
Provision for income taxes 7,680 8,319 4,527
Net income $ 9,319 $ 12,803 $ 6,655
Earnings per share:
Basic $ 0.39 $ 0.59 $ 0.42
Diluted $ 0.38 $ 0.56 $ 0.39
Shares used in computing earnings per share:
Basic 23,939 21,628 15,801
Diluted 24,825 22,822 17,255
The accompanying notes are an integral part of the
consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
June 30,
($ in thousands, except share data) 1998 1997
Assets
Current assets:
Cash and cash equivalents:
Unrestricted $ 39,155 $ 36,626
Restricted 786 1,967
Marketable securities 37,479 67,713
Accounts receivable, net 109,741 82,827
Prepaid expenses 11,895 8,882
Other current assets 10,674 6,378
Total current assets 209,730 204,393
Property and equipment, net 45,311 33,508
Other assets 6,717 2,643
Total assets $261,758$240,544
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion $1,413 $ 2,236
of long-term debt
Accounts payable 10,923 10,425
Advance billings 45,273 46,170
Other current liabilities 33,184 31,565
Total current liabilities 90,793 90,396
Long-term debt 36 136
Other liabilities 2,549 2,564
Total liabilities 93,378
93,096
Commitments (Note 15)
Stockholders' equity:
Preferred stock - $.01 par value; shares authorized:
5,000,000; none issued and outstanding - -
Common stock - $.01 par value; shares authorized:
50,000,000 at June 30, 1998 and 1997; shares issued:
24,657,637 at June 30, 1998, and 24,021,082
at June 30, 1997;
shares outstanding: 24,628,225 at June 30, 1998,
and 23,991,670 at June 30, 1997 246 240
Additional paid-in capital 149,921 136,549
Retained earnings 20,120 11,585
Cumulative translation adjustment (1,907) (926)
Total stockholders' equity 168,380 147,448
Total liabilities and stockholders' $261,758 $240,544
equity
The accompanying notes are an integral part of the
consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Common Retained Total
Preferred Stock Stock Additional Earnings Stock Cumulative Stock- Total
Number Issuance Number Par Paid-In (Accumulated Subscriptions Translation holders'
of shares Price,Netof SharesValueCapital Deficit) Receivable Adjustment Equity
($ in thousands, except share data)
Balance at June 30, 1995 2,327,744 $ 23,683 4,955,139$51 $ 4,237 $ (6,162) $(157) $ 320 $ 21,972
Convertible preferred stock
issued upon exercise of
warrants 176,887 1,769 1,769
Proceeds from stock subscriptions
receivable 157 157
Conversion of preferred stock
into common upon initial
public offering (2,504,631)(25,452)8,956,016 88 25,364
Payments of accrued
preferred stock dividends (940)
(940)
Net proceeds from public
offerings 4,200,000 42 36,845 36,887
Shares issued under stock
option plans 625,620 6 405 411
Deferred compensation 337 337
Income tax benefit from
exercise of stock options 3,058 3,058
Acquisitions (Note 3) 161,636 2 144 (76) 70
Dividends paid by acquired
companies (657) (657)
Net unrealized gain on marketable
securities 44 44
Foreign currency translation 25 25
Net income 6,655 6,655
Balance at June 30, 1996 - - 18,898,411 189 70,390 (1,136) - 345 69,788
Net proceeds from public offering 2,516,300 25 57,161 57,186
Shares issued under stock option
and purchase plans 1,364,898 14 3,354 3,368
Deferred compensation 1,048 1,048
Income tax benefit from exercise
of stock options 4,527 4,527
Income tax benefit from
building acquisition 320 320
Acquisitions (Note 3) 1,217,841 12 30 1,231 1,273
Dividends paid by acquired
companies (1,293) (1,293)
Elimination of KMI's net activity
duplicated for the six months
ended December 31, 1996 (Note 3) (5,780) (281) (117) (398)
Net unrealized gain on marketable
securities 97 97
Foreign currency translation
(1,271) (1,271)
Net income 12,803 12,803
Balance at June 30, 1997 - 23,991,670 240 136,549 11,585 - (926) 147,448
Shares issued under stock option
and purchase plans 420,120 4 7,803 7,807
Deferred compensation 2,198 2,198
Income tax benefit from exercise
of stock options 2,400 2,400
Acquisitions (Note 3) 216,435 2 1,227 311 1,540
Acquisition costs reimbursed by
shareholders 300 300
Elimination of PPS and MIRAI net
activity duplicated for the six
months ended November 30 and
December 31, 1997, respectively (Note 3) (556) (1,040) (1,596)
Effect of change in fiscal year of
foreign operation 85 85
Net unrealized loss on marketable
securities (140) (140)
Foreign currency translation (981) (981)
Net income 9,319 9,319
Balance at June 30, 1998 - 24,628,225 $246 $149,921 $20,120 - (1,907) $168,380
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
($ in thousands) 1998 1997 1996
Cash flows from operating activities:
Net income $ 9,319$ 12,803$ 6,655
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 15,114 7,710 4,280
Stock compensation charges of acquired companies 4,844 1,048 337
Change in assets and liabilities, net of effects from
acquisitions:
Restricted cash 1,181 168 (1,597)
Accounts receivable, net (26,829) (27,373) (23,625)
Prepaid expenses and other current assets (7,309) (2,068) (3,865)
Other assets (1,637) (192) (2,013)
Accounts payable 498 (834) 1,543
Advance billings (897) 13,456 16,731
Other current liabilities 5,022 16,590 8,480
Other liabilities (15) 699 987
Net cash provided (used) by operating activities (709) 22,007 7,913
Cash flows from investing activities:
Purchase of marketable securities (118,533)(118,698)(131,903)
Proceeds from sale of marketable securities 148,634 81,223 104,128
Purchase of property and equipment (27,736) (25,112) (7,461)
Other investing activities (1,377) 781 52
Net cash provided (used) by investing activities 988 (61,806) (35,184)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,906 60,554 37,298
Proceeds from issuance of convertible preferred stock - - 1,769
Cash received from stock subscriptions - - 157
Net proceeds (repayments) under line of credit (866) 63 619
Net proceeds (repayments) of long-term debt (100) (3,464) (945)
Dividends paid (1,293) (1,293) (1,597)
Net cash provided by financing activities 2,647 55,860 37,301
Elimination of net cash activities of acquired companies
for duplicated periods 672 (21) -
Effect of exchange rate changes on unrestricted cash and
cash equivalents (1,069) (1,289) 349
Net increase in unrestricted 2,529 14,751 10,379
cash and cash equivalents
Unrestricted cash and cash equivalents 36,626 21,875 11,496
at beginning of year
Unrestricted cash and cash equivalents at end of year$39,155$ 36,626$ 21,875
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 188$ 283$ 267
Income taxes $ 4,730$ 1,909$ 3,038
Supplemental disclosure of noncash financing activities:
lease obligations
Property and equipment acquired under capital -$ 323$ 552
Income tax benefit from exercise of stock options$2,400 $ 4,527$ 3,058
Income tax benefit from building acquisition -$ 320 -
Common stock issued in connection with acquisitions$3,928 - -
The accompanying notes are an integral part of the
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
The Company is a leading contract research and medical
marketing services organization providing a broad range of
knowledge-based product development and product launch
services to the worldwide pharmaceutical, biotechnology, and
medical device industries. The Company has developed
expertise in such disciplines as: clinical trials
management, biostatistical analysis and data management,
medical marketing, clinical pharmacology, regulatory and
medical consulting, industry training and publishing, and
other drug development consulting services.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts
of PAREXEL International Corporation and its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated. In fiscal year 1998, the
Company's German subsidiary changed its fiscal year end from
May 31 to June 30 in order to conform to the Company's
fiscal year end. Results of operations for the month ended
June 30, 1998, were credited directly to Retained Earnings.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and
disclosures of contingent assets and liabilities. Actual
results may differ from those estimates.
Revenue
Fixed price contract revenue is recognized using the
percentage-of-completion method based on the ratio that
costs incurred to date bear to estimated total costs at
completion. Revenue from other contracts is recognized as
services are provided. Revenue related to contract
modifications is recognized when realization is assured and
the amounts are reasonably determinable. Adjustments to
contract cost estimates are made in the periods in which the
facts that require the revisions become known. When the
revised estimate indicates a loss, such loss is provided in
the current period in its entirety. Unbilled accounts
receivable represents revenue recognized in excess of
amounts billed. Advance billings represents amounts billed
in excess of revenue recognized.
Cash, Cash Equivalents, Marketable Securities, and Financial
Instruments
The Company considers all highly liquid investments
purchased with original maturities of three months or less
to be cash equivalents. Marketable securities include
securities purchased with original maturities of greater
than three months. Cash equivalents and marketable
securities are classified as "available for sale" and are
carried at fair market value. Unrealized gains and losses
are recorded as part of stockholders' equity. Restricted
cash consists of advances and deposits from customers
subject to certain restrictions.
The Company occasionally purchases securities with seven-day
put options that allow the Company to sell the underlying
securities in seven days at par value. The Company uses
these derivative financial instruments on a limited basis to
shorten contractual maturity dates, thereby managing
interest rate risk. Approximately $4.9 million of
securities were subject to seven-day put options at June 30,
1998, and $2.7 million at June 30, 1997. The Company does
not hold derivative instruments for trading purposes.
The fair values of the Company's financial instruments are
not materially different from their carrying amounts at June
30, 1998 and 1997.
Concentration of Credit Risk
Financial instruments which potentially expose the Company
to concentrations of credit risk include trade accounts
receivable. However, such risk is limited due to the large
number of clients and their international dispersion. In
addition, the Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not
exceeded management expectations. One customer accounted
for 12% of consolidated net revenue for fiscal 1998. No
single customer accounted for more than 10% of the Company's
consolidated net revenue in fiscal 1997 and 1996.
Property and Equipment
Property and equipment is stated at cost. Depreciation is
provided on the straight-line method over the estimated
useful lives of the assets ranging from three to eight
years. Leasehold improvements are amortized over the lesser
of the estimated useful lives of the improvements or the
remaining lease term. Repair and maintenance costs are
expensed as incurred.
Intangible Assets
Intangible assets consist principally of goodwill, customer
lists, covenants not to compete, and other intangible assets
attributable to businesses acquired. Goodwill represents
the excess of the cost of businesses acquired over the fair
value of the related net assets at the date of acquisition
for acquisitions accounted for under the purchase method.
Intangible assets are amortized using the straight-line
method over their expected useful lives ranging from five to
twenty years.
Intangible assets of $5.2 million and $2.5 million, included
in Other Assets, are net of accumulated amortization of $1.7
million and $1.3 million as of June 30, 1998 and 1997,
respectively. Amortization expense was $0.4 million, $0.3
million, and $0.3 million for the fiscal years ended June
30, 1998, 1997, and 1996, respectively.
Income Taxes
Deferred income tax assets and liabilities are recognized
for the expected future tax consequences, utilizing current
tax rates, of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Deferred tax assets are recognized, net of any valuation
allowance, for the estimated future tax effects of
deductible temporary differences and tax operating loss and
credit carryforwards. Deferred income tax expense
represents the change in the net deferred tax asset and
liability balances.
Foreign Currency
Assets and liabilities of the Company's international
operations are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates
during the year. Translation adjustments are accumulated in
a separate component of stockholders' equity. Realized
gains and losses recorded in the statements of operations
were not material for each period presented.
Earnings Per Share
Earnings per share has been calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," which was adopted as required in
fiscal 1998. All previously reported earnings per share
data presented herein have been restated. Basic earnings
per share is calculated based on the weighted average number
of common shares outstanding during the period. Diluted
earnings per share is calculated based on the weighted
average number of common shares and dilutive common
equivalent shares assumed outstanding during the period.
Stock-Based Compensation
The Company accounts for employee stock awards using the
intrinsic value based method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation expense
is recognized because the exercise price of the Company's
stock options was equal to the market price of the
underlying stock on the date of grant. The Company has
adopted the provisions of SFAS No. 123, "Accounting for
Stock-based Compensation," for disclosure only.
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. The adoption of
the new standards will not have an effect on the Company's
financial position or results of operations but will result
in additional disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This
statement establishes new standards for the recognition of
gains and losses on derivative instruments and provides
guidance as to whether a derivative may be accounted for as
a hedging instrument. Gain or loss from hedging
transactions may be wholly or partially recorded in earnings
or comprehensive income as part of a cumulative translation
adjustment, depending upon the classification of the hedge
transaction. Gain or loss on a derivative instrument not
classified as a hedging instrument is recognized in earnings
in the period of change. SFAS No. 133 will be effective for
the Company beginning in fiscal 2000. The Company does not
believe adoption of SFAS No. 133 will have a material impact
on its financial position or its results of operations.
Note 3. Acquisitions
Fiscal 1998
In March 1998, the Company acquired, in separate
transactions, PPS Europe Limited ("PPS"), a leading medical
marketing firm based in the United Kingdom, and MIRAI B.V.
("MIRAI"), a full service, pan-European contract research
organization based in the Netherlands. The Company issued
2,774,813 shares of common stock in exchange for all of the
outstanding ordinary shares of PPS and 134,995 common stock
options in exchange for all of the outstanding ordinary
share options of PPS. The Company issued 682,345 shares of
common stock in exchange for all of the outstanding shares
of MIRAI. Both acquisitions were accounted for as poolings
of interests. The Company's historical consolidated
financial statements have been restated to include the
financial position and results of operations of PPS and
MIRAI for all periods prior to the acquisitions.
Due to the differing fiscal year ends of PPS (November 30)
and MIRAI (December 31), financial information for
dissimilar fiscal years has been combined with that of the
Company. The consolidated statements of operations of the
Company for fiscal 1997 and 1996 combine the Company's
results of operations for the years ended June 30, 1997 and
1996, with the results of operations of PPS and MIRAI for
their respective fiscal years ended November 30 and December
31, 1997 and 1996.
In March 1998, the Company changed the fiscal year end of
PPS from November 30 to May 31 and the fiscal year end of
MIRAI from December 31 to June 30. As such, the statement
of operations for
the fiscal year ended June 30, 1998, includes the results of
operations of PPS and MIRAI for the twelve months ended May
31 and June 30, 1998, respectively. As a result of
conforming fiscal year ends, the results of operations of
PPS and MIRAI for the six months ended November 30 and
December 31, 1997, respectively, are duplicated
in the combined statements of operations for fiscal 1997 and
1998. Therefore, net income and equity activity for one of
the duplicated periods were eliminated from stockholders'
equity.
The following represents the duplicated amounts included in
both
the results of operations for fiscal years 1997 and 1998:
($ in thousands)PPS MIRAI Total
Net revenue $13,205 $4,891$18,096
Operating income1,553 438 1,991
Net income 697 343 1,040
Also in March 1998 the Company acquired, in separate
transactions, Genesis Pharma Strategies Limited ("Genesis"),
a physician-focused marketing and clinical communications
firm servicing the international pharmaceutical industry,
and LOGOS GmbH ("LOGOS"), a provider of regulatory services
to pharmaceutical manufacturers. The Company issued a total
of 184,819 shares of common stock in exchange for all of the
outstanding shares of Genesis and LOGOS. Both acquisitions
were accounted for as poolings of interests. The historical
results of operations and financial position of Genesis and
LOGOS are not material, individually or in aggregate, to the
Company's historical financial statements. Therefore, prior
period amounts have not been restated and results of
operations of Genesis and LOGOS have been included in the
consolidated results since acquisition.
In December 1997, the Company acquired Kemper-Masterson,
Inc. ("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 of
common stock in exchange for all of the outstanding shares
of KMI. The Company's historical consolidated financial
statements have been restated to include the financial
position and results of operations of KMI for all periods
prior to the acquisition. In March 1998, the Company
changed the fiscal year of KMI from December 31 to June 30.
As a result of conforming dissimilar year ends, KMI's
results of operations for the six months ended December 31,
1996 (including revenue, operating income, and net income of
$5.0 million, $0.2 million, and $0.1 million respectively),
were duplicated in the consolidated statements of operations
for fiscal 1997 and 1996. Therefore, net income and equity
activity for one of the duplicated periods were eliminated
from stockholders' equity.
In connection with the acquisitions during fiscal 1998, the
Company incurred acquisition-related charges of $10.3
million consisting principally of noncash compensation
attributed to stock options of KMI and PPS, granted prior to
the acquisition by the Company, an accelerated compensation
payment to a PPS executive pursuant to a pre-existing
employment agreement, and legal, accounting, and other
transaction-related fees. In addition the Company recorded
a $1.6 million provision during fiscal 1998 which has been
reflected in selling, general and administrative expense in
the accompanying consolidated statement of operations to
increase the accounts receivable reserves of PPS and MIRAI
to conform reserve estimates with the Company policy.
Revenue and net income for the previously separate companies
are as follows:
For the six months For the years
ended December 31, ended June 30,
($ in thousands) 1997 1997 1996
Net revenue:
PAREXEL $106,363 $159,679 $ 88,006
KMI 6,523 10,676 9,355
PPS 13,205 24,881 18,522
MIRAI 4,891 8,440 9,170
$130,982 $203,676 $125,053
Net income:
PAREXEL $ 4,478 $ 10,848 $ 4,599
KMI 724 189 94
PPS 697 1,201 1,721
MIRAI 343 565 241
$ 6,242 $ 12,803 $ 6,655
In September 1997, the Company acquired substantially all of
the assets of Perceptive Systems, Inc., a Colorado
corporation doing business as Hayden Image Processing Group
("Hayden"), in exchange for 5,035 shares of the Company's
common stock. In addition, Hayden will receive three annual
contingent payments (not exceeding $0.2 million in
aggregate) of the Company's common stock, based on net
receipts generated by certain acquired assets. The
transaction was accounted for as a purchase.
Fiscal 1997
In February 1997, the Company acquired, in separate
transactions, RESCON, Inc., a medical marketing business
located in the Washington, D.C. area, and Sheffield
Statistical Services, Ltd.("S-Cubed"), a company located in
the United Kingdom that specializes in biostatistical
analysis. The Company issued a total of 209,537 shares of
common stock in exchange for all the outstanding shares of
RESCON and S-Cubed. In August 1996, the Company acquired,
in separate transactions, Lansal Clinical Pharmaceutics,
Limited ("Lansal"), a contract research organization located
in Israel, and State and Federal Associates, Inc. ("S&FA"),
a medical marketing business located in the Washington, D.C.
area. The Company issued 1,008,304 shares of common stock
in exchange for all of the outstanding shares of Lansal and
S&FA. These transactions were accounted for as poolings of
interests. The Company's financial statements were not
restated as the historical results of operations of the
acquired companies, individually or in aggregate, were not
material.
Fiscal 1996
In June 1996, the Company acquired, in separate
transactions, Sitebase Clinical Systems, Inc. ("Sitebase"),
a provider of remote data entry technology, and Caspard
Consultants ("Caspard"), a Paris-based biostatistical and
data management consulting company. The Company issued a
total of 161,636 shares of common stock in exchange for all
of the outstanding shares of Sitebase and Caspard. These
transactions were accounted for as poolings of interests.
The Company's financial statements were not restated as the
historical results of operations of the acquired companies,
individually or in aggregate, were not material.
Note 4. Investments
Available-for-sale securities included in cash and cash
equivalents as of June 30, 1998 and 1997, consisted of the
following:
($ in thousands) 1998 1997
Money market $ 6,119 $ 988
Municipal securities 116 1,000
Repurchase agreements 17,785 20,210
$24,020 $22,198
Available-for-sale securities included in marketable
securities at June 30, 1998 and 1997, consisted of the
following:
($ in thousands) 1998 1997
Municipal securities $23,146 $ 3,788
Federal government securities 6,747 24,221
Corporate debt securities 7,586 39,704
$37,479 $67,713
Reflected at fair market value, which approximates amortized
cost. Unrealized gains and losses as of June 30, 1998 and
1997, were not material.
Note 5. Accounts Receivable
Accounts receivable at June 30, 1998 and 1997, consisted of
the
following:
($ in thousands) 1998 1997
Billed $ 63,255 $53,939
Unbilled 51,548 32,272
Allowance for doubtful accounts (5,062) (3,384)
$109,741 $82,827
Note 6. Property and Equipment
Property and equipment at June 30, 1998 and 1997, consisted
of the following:
($ in thousands) 1998 1997
Computer and office equipment $40,463 $29,855
Computer software 11,431 5,351
Furniture and fixtures 16,303 12,228
Leasehold improvements 5,278 2,311
Building 2,757 2,757
Other 2,107 2,065
78,339 54,567
Less accumulated depreciation
and amortization 33,028 21,059
$45,311 $33,508
Included in the above amounts is computer and office
equipment acquired under capital lease obligations of $3.9
million at June 30, 1998 and 1997. Accumulated depreciation
on computer and office equipment under capital leases
totaled $3.8 million and $2.5 million at June 30, 1998 and
1997, respectively.
Depreciation and amortization expense relating to property
and equipment was $14.7 million, $7.4 million, and $4.0
million for the years ended June 30, 1998, 1997, and 1996,
respectively, of which $1.2 million, $0.6 million, and $0.7
million related to amortization of property and equipment
under capital leases.
In fiscal 1998, the Company recorded a $1.7 million charge
to depreciation and amortization expense resulting from a
change in estimate of the remaining service lives of certain
computer equipment arising from integration activities
associated with acquisitions and a company-wide program
implemented to upgrade and standardize its information
technology platform.
Note 7. Other Current Liabilities
Other current liabilities at June 30, 1998 and 1997,
consisted of the following:
($ in thousands) 1998 1997
Accrued compensation and withholdings $11,629 12,420
Income taxes payable 8,937 4,164
Other 12,618 14,981
$33,184 $31,565
Note 8. Credit Arrangements
The Company has domestic and foreign line of credit
arrangements with banks totaling approximately $14.8
million. The lines are collateralized by accounts
receivable and fixed assets, are payable on demand, and bear
interest at rates ranging from 3.7% to 8.5%. The lines of
credit expire at various dates through June 1999 and are
renewable. At June 30, 1998 and 1997, $1.3 million was
outstanding under these lines of credit and was included in
notes payable. At June 30, 1998, $13.5 million was
available under these lines of credit.
The Company has a renewable $2.4 million capital lease line
of credit with a U.S. bank for the financing of property and
equipment. This line is collateralized by property and
equipment. Borrowings under this line are payable over a
three-year term with interest fixed at the five-year U.S.
treasury note rate plus 2.5% (8.03% at June 30, 1998).
Available capacity under this line was approximately $2.0
million at June 30, 1998.
Long-term debt at June 30, 1998 and 1997, primarily
consisted of borrowings under the capital lease line. The
fair value of debt is estimated based on the market value
for similar debt and approximates carrying value at June 30,
1998 and 1997. Aggregate lease obligations bear a weighted
average interest rate of approximately 8.03% and 8.3% at
June 30, 1998 and 1997, respectively. Long-term debt at
June 30, 1998, matures as follows: $28,000 in fiscal 2000
and $8,000 in fiscal 2001.
Note 9. Stockholders' Equity
As of June 30, 1998 and 1997, there were 5 million shares of
preferred stock, $0.01 per share, authorized; but none were
issued or outstanding. Preferred stock may be issued at the
discretion of the Board of Directors (without stockholder
approval) with such designations, rights and preferences as
the Board of Directors may determine.
There were 29,412 shares of common stock held in treasury as
of June 30, 1998 and 1997, at a cost of $17,430.
Note 10. Earnings Per Share
The following table is a summary of shares used in
calculating
basic and diluted earnings per share:
For the years ended June 30,
(in thousands) 1998 1997 1996
Weighted average number of
shares outstanding, used in
computing basic earnings
per share 23,939 21,628 15,801
Contingently issuable
common shares 381 467 371
Dilutive common stock options 505 727 1,083
Shares used in computing
diluted earnings per share 24,825 22,822 27,255
Note 11. Stock and Employee Benefit Plans
The Stock Option Committee of the Board of Directors is
respon-
sible for administration of the Company's stock option plans
and determines the term of each option, the option exercise
price, the number of option shares granted, and the rate at
which options become exercisable.
1998 Stock Plan
In February 1998, the Company adopted the 1998 Nonqualified,
Non-Officer Stock Option Plan (the "1998 Plan") which
provides for the grant of nonqualified options to purchase
up to an aggregate of 500,000 shares of common stock to any
employee or consultant of the Company who is not an officer
or director of the Company.
1995 Stock Plan
The 1995 Amended and Restated Stock Plan (the "1995 Plan")
provides for the grant of incentive stock options to
officers and employees of the Company and the grant of
nonqualified stock options to employees, consultants,
directors, and officers of the Company for the purchase of
up to an aggregate of 2,438,334 shares of common stock.
Options generally expire eight to ten years from the date of
grant and generally vest over four to five years.
In September 1998, the Board of Directors voted to terminate
the automatic annual formula grant of options to nonemployee
directors and to grant options to nonemployee directors in
accordance with a discretionary arrangement.
Employee Stock Purchase Plan
In September 1995, the Company adopted the 1995 Employee
Stock Purchase Plan (the "Purchase Plan"). Under the
Purchase Plan, employees have the opportunity to purchase
common stock at 85% of the average market value on the first
or last day of the plan period (as defined by the Purchase
Plan), whichever is lower, up to specified limits. An
aggregate of 600,000 shares may be issued under the Purchase
Plan.
Stock Options of Acquired Companies
In conjunction with the acquisition of KMI in December 1997,
all outstanding options were exercised under the Kemper-
Masterson, Inc. Stock Option Plan ("KMI Plan"), which
allowed for the grant of stock options for the purchase of
up to an aggregate of 138,714 shares of stock; and the KMI
Plan was terminated. The stock acquired through exercise of
KMI options were subject to repurchase by KMI upon certain
events, as specified in the option agreements. Certain
options provided KMI the right, but not the obligation, to
repurchase shares of stock previously acquired by employees
through exercise at a formula price defined in the stock
option agreements ("formula options") upon termination of
employment. Other options required KMI to repurchase shares
of stock previously acquired by employees through exercise
at the exercise price ("repurchase options"). All options
were granted with an exercise price of $0.17 per share.
The Company has accounted for the KMI Plan as a variable
option plan. Aggregate compensation cost was determined for
formula options during periods prior to exercise based on
the estimated formula value at each balance sheet date and
was recognized ratably over the vesting period. Upon
exercise, compensation expense was recognized for the
difference between the formula value of the stock on the
date of exercise and the exercise price. For repurchase
options, compensation expense was recognized as the
difference between the amount for which the stock was
repurchased and the exercise price. Because the exercise
price of the options was considered nonsubstantive and the
repurchase features lapsed as a result of the acquisition,
KMI recorded additional compensation expense of $4.1 million
in December 1997 based upon the value of the stock on the
date of acquisition.
In conjunction with the acquisition of PPS in March of 1998,
outstanding PPS options to purchase 121,121 shares that were
previously issued to employees with an exercise price below
the estimated fair value on the date of grant became fully
vested, in accordance with the PPS stock option agreements.
Accordingly, in March 1998, the Company recognized remaining
compensation expense of $1.6 million. Compensation expense
has been recognized ratably over the two-year vesting period
in an amount equal to the difference between the exercise
price and the estimated fair value of the underlying
ordinary shares on the date of grant. Aggregate
compensation expense under the various stock option plans
was $5.4 million, $1.0 million, and $0.3 million, for the
years ended June 30, 1998, 1997, and 1996, respectively.
Aggregate stock option activity for all plans for the two
years ended June 30, 1998 and 1997, is as follows:
June 30, 1998 June 30, 1997
Weighted Average Weighted Average
Options Exercise PriceOptionsExercise Price
Outstanding at beginning of year1,515,799 $13.762,206,298 $ 5.88
Granted 1,011,495 29.78 545,495 18.60
Exercised (332,174) 6.72(1,204,734) 1.35
Canceled (129,585) 24.27(31,260) 19.98
Outstanding at end of year 2,065,535 $22.131,515,799 $13.76
Options exercisable at end of year606,974 $11.81 594,460 $ 7.60
Weighted-average fair value of options granted
$15.28$13.22
Options available for future grant908,521 1,431,426
Summary information related to options outstanding and
exercisable as of June 30, 1998, is as follows:
Weighted
Average Weighted Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise as of Contractual Life Exercise as of Exercise
Prices June 30, 1998 (Years) Price June 30, 1998 Price
$ 0.01 - 10.00393,080 5.60 $ 4.87 341,977 $ 4.53
10.01 - 20.00362,900 5.86 18.48 145,750 18.40
20.01 - 30.00794,830 7.18 25.93 119,247 24.63
30.01 - 35.75514,725 7.13 32.02 - -
2,065,535 6.63 $22.13 606,974 $11.81
The fair value for options granted was estimated at the time
of the grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for the two
years ended June 30, 1998: Risk free interest rates of
5.84% in fiscal year 1998 and 6.18% in fiscal year 1997,
dividend yield of 0.0%, volatility factor of the expected
market price of the Company's common stock of 45.0%, and an
average expected life of the option of one year from the
date of vesting.
Had compensation cost for the Company's stock options and
the Purchase Plan been determined based on the fair value at
the date of grant, as prescribed in SFAS No. 123, the
Company's net income and net income per share would have
been as follows:
($ in thousands, except per share data) 1998 1997 1996
Pro forma net income $8,215 $10,792 $5,373
Pro forma diluted income
per share $ 0.33 $ 0.47 $0.31
As stock options vest over several years and additional
stock option grants are expected to be made each year, the
above pro forma disclosures are not necessarily
representative of pro forma effects on results of operations
for future years.
Note 12. 401(k) Plan
The Company sponsors an employee savings plan (the "Plan")
as defined by Section 401(k) of the Internal Revenue Code of
1986, as amended. The Plan covers substantially all
employees in the U.S. who elect to participate.
Participants have the opportunity to invest on a pre-tax
basis in a variety of mutual fund options. The Company
matches 100% of each participant's voluntary contributions
up to 3% of gross salary per payroll period. Company
contributions vest to the participants in 20% increments for
each year of employment and become fully vested after five
years of continuous employment. Company contributions to
the Plan were $1.4 million, $1.1 million, and $0.5 million,
for the years ended June 30, 1998, 1997, and 1996,
respectively.
Note 13. Income Taxes
Domestic and foreign income before income taxes for the
three years ended June 30, 1998, is as follows:
($ in thousands)1998 1997 1996
Domestic $ 9,428 $11,961$ 5,187
Foreign 7,571 9,161 5,995
$16,999 $21,122$11,182
The provision for income taxes for the three years ended
June 30, 1998, are as follows:
($ in thousands)1998 1997 1996
Current:
Federal $5,402 $ 4,816$2,364
State 1,144 1,207 684
Foreign 3,403 3,411 2,021
9,949 9,434 5,069
Deferred:
Federal (1,122) (432) (305)
State (384) (146) (87)
Foreign (763) (537) (150)
(2,269) (1,115) (542)
$ 7,680 $ 8,319$4,527
The Company's consolidated effective income tax rate
differed from the U.S. federal statutory income tax rate as
set forth below:
($ in thousands) 1998 1997 1996
Income tax expense computed
at the federal statutory rate $5,949 $7,374
$3,803
State income taxes, net of
federal benefit 494 1,044 474
Foreign rate differential (141) (33) (265)
Utilization of foreign net
operating loss carryforwards (1,117) (1,166) -
Nondeductible acquisition costs 2,229 191 -
Tax-exempt interest income (821) - -
Nondeductible amortization
of intangible assets 46 595 45
Foreign operating losses without
current benefit 522 142 26
Other 519 172 444
$7,680 $8,319 $4,527
Provision has not been made for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries as
those earnings have been permanently reinvested. Such
taxes, if any, are not expected to be significant.
Significant components of the Company's net deferred tax
asset as of June 30, 1998 and 1997, are as follows:
($ in thousands) 1998 1997
Deferred tax assets:
Foreign loss carryforwards $5,725
$5,173
Accrued expenses 1,984 1,121
Allowance for doubtful accounts 1,632 878
Deferred contract profit 866 -
Other 275 888
Gross deferred tax assets 10,482 8,060
Deferred tax asset valuation allowance (2,613)
(3,504)
Total deferred tax assets 7,869 4,556
Deferred contract profit - (976)
Property and equipment (2,271) (1,108)
Other (153) (96)
Total deferred tax liabilities (2,424)
(2,180)
$5,445 $2,376
The net deferred tax assets are included in the consolidated
balance sheets as of June 30, 1998 and 1997, as follows:
($ in thousands) 1998 1997
Other current assets $ 7,869
$3,251
Other assets - 226
Other current liabilities (404) (466)
Other liabilities (2,020) (635)
$ 5,445 $2,376
The net deferred tax asset includes the tax effect of
approximately $12.0 million of pre-acquisition and post-
acquisition foreign tax loss carryforwards available to
offset future liabilities for foreign income tax.
Substantially all of the foreign tax losses are carried
forward indefinitely, subject to certain limitations. A
valuation allowance has been established for certain of the
future foreign income tax benefits primarily related to
income tax loss carryforwards and temporary differences
based on management's assessment that it is more likely than
not that such benefits will not be realized. Principally
due to the use of previously reserved foreign net operating
loss carryforwards, the Company's valuation allowance
decreased to $2.6 million at June 30, 1998, from $3.5
million at June 30, 1997. The ultimate realization of the
remaining loss carryforwards is dependent upon the
generation of sufficient taxable income in respective
jurisdictions, primarily Germany.
Note 14. Geographic Information
Financial information by geographic area for the three years
ended June 30, 1998, is as follows:
($ in thousands) 1998 1997 1996
Net revenue:
North America $175,045 $118,525 $64,605
Europe 106,619 81,984 59,455
Asia/Pacific 3,778 3,167 993
$285,442 $203,676 $125,053
Income (loss) from operations:
North America $ 6,334 $ 9,073 $5,331
Europe 7,266 7,873 5,236
Asia/Pacific (299) 173 (176)
$ 13,301 $17,119 $10,391
Identifiable assets:
North America $190,017 $173,866 $85,034
Europe 71,514 65,985 50,531
Asia/Pacific 227 693 156
$261,758 $240,544 $135,721
Note 15. Leases
The Company leases its facilities under operating leases
which include renewal and escalation clauses. Total rent
expense was $13.9 million, $9.8 million, and $6.6 million
for the years ended June 30, 1998, 1997, and 1996,
respectively. Future minimum lease payments due under
noncancelable operating leases and capital lease obligations
are as follows:
($ in thousands) Capital Leases Operating Leases
1999 $ 87 $13,127
2000 11 12,797
2001 3 10,941
2002 - 6,302
2003 - 3,679
Thereafter - 18,567
Total obligations 101 $65,413
Less amount representing interest(7)
$ 94
Note 16. Related Party Transactions
Certain of the Company's Directors are associated with
certain of the Company's customers. Net revenue recognized
from these customers was $25.2 million, $13.1 million, and
$8.1 million in fiscal 1998, 1997, and 1996, respectively.
Amounts due from these customers included in accounts
receivable at June 30, 1998 and 1997, were $14.3 million and
$3.3 million, respectively. Related party amounts included
in accounts receivable are on standard terms and manner of
settlement.
At June 30, 1998 and 1997, the Company had notes receivable
of $1.4 million and $1.3 million, respectively, from a
company owned by the former directors of PPS. The notes
bear interest at 8.0% and are payable on demand. The
Company recorded interest income related to these notes of
$0.2 million for each of the years ended June 30, 1998,
1997, and 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PAREXEL
International Corporation
In our opinion, based upon our audits and the report of
other auditors, the accompanying consolidated balance sheets
and related consolidated statements of operations, of
stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of PAREXEL
International Corporation and its subsidiaries at June 30,
1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the
financial statements of PPS Europe Limited, a wholly-owned
subsidiary, for fiscal years 1997 and 1996, which statements
reflect total assets of $26,197,000 at November 30, 1997,
and net revenues of $24,881,000 and $18,522,000 for the
years ended November 30, 1997 and 1996, respectively. Those
statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for
PPS Europe Limited as of and for the periods described
above, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance
with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting
principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion
expressed above.
Boston, Massachusetts
August 11, 1998
QUARTERLY OPERATING RESULTS & COMMON STOCK INFORMATION (unaudited)
The following is a summary of unaudited quarterly results of operations for the
two years ended June 30, 1998 and 1997:
For the year ended June 30, 1998
($ in thousands, except share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Net revenue $ 62,991 $ 67,991 $ 73,067 $ 81,393
Income (loss) from operations(1) 5,830 2,383 (2,454) 7,542
Net income (loss)(1) 4,339 1,903 (2,366) 5,443
Diluted earnings (loss) per share(1)0.18 0.08 (0.10) 0.22
Range of common stock prices(2)$ 31.25 - 44.75$ 28.63 - 43.50$ 30.50 - 41.25 $ 24.75 - 36.75
For the year ended June 30, 1997
($ in thousands, except share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Net revenue $ 42,225 $ 48,164 $53,584 $ 59,703
Income from operations 3,153 3,922 4,626 5,418
Net income 2,323 2,729 3,645 4,106
Diluted earnings per share 0.11 0.13 0.15 0.17
Range of common stock prices(2)$ 15.50 - 31.50$ 22.88 -31.88$ 21.75 -34.00$ 19.50 - 34.00
(1) Excluding acquisition-related and other nonrecurring charges, income from
operations was $6.5 million and $7.0 million; net income was $4.0 million and
$5.1 million; and diluted earnings per share was $0.19 and $0.21 in the second
and third quarters of fiscal 1998, respectively. See Note 3 to the Consolidated
Financial Statements for further discussion.
(2) The range of common stock prices is based on the high and low sales prices
on the Nasdaq National Market for the periods indicated.
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "PRXL."
As of September 18, 1998, there were approximately 140 stockholders of record
and the Company estimates that it has approximately 7,400 beneficial
stockholders.
The company has never declared or paid any cash dividends on its common stock
and does not anticipate paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings for the development and expansion
of its business.
SELECTED FINANCIAL DATA
($ in thousands, except per share data and number of employees)
1998 1997 1996 1995 1994
Operations
Net revenue $285,442 $203,676$125,053 $89,067 $81,835
Income (loss) from operations13,301(1) 17,119 10,391(8,454)(3) 5,895
Net income (loss) 9,319(1) 12,803 6,655 (9,239)3,929(4)
Diluted earnings $ 0.38(1) $ 0.56 $ 0.39 $ (2.02)(5)$ 0.27
(loss per share)
Financial Position
Unrestricted cash, $ 76,634 $104,339$ 52,022$ 12,996$ 4,705
cash equivalents
and marketable securities
Working capital 118,937 113,997 55,681 12,456 17,233
Total assets 261,758 240,544 135,721 67,693 64,411
Long-term debt 36 136 466 750 436
Stockholders' equity $168,380 $147,448$ 69,788$ 21,972 $30,674
Other Data
Investment in property $ 27,736 $ 25,112 $ 7,461 $ 4,742 $2,204
and equipment
Depreciation and amortization$ 15,114(2)$ 7,710$ 4,280$ 3,920$ 3,591
Number of employees 3,705 2,928 1,767 1,108 1,057
Shares used in computing 24,825 22,822 17,255 4,580(5) 14,688
Diluted Earnings Per Share
(1)Income from operations for the twelve months ended June 30, 1998, includes
$13.6 million of nonrecurring charges including $10.3 million pertaining to
acquisitions made during the fiscal year. Excluding these charges, income from
operations was $26.9 million, net income was $19.5 million, and diluted
earnings per share was $0.79. See Note 3 to the Consolidated Financial
Statements for further discussion.
(2)Depreciation and amortization for the twelve months ended June 30, 1998,
include a noncash charge of $1.7 million to reflect the reduced useful lives of
certaincomputer equipment as a result of the integration activities associated
with acquired companies and the Company's program to upgrade and standardize its
information technology platform.
(3) Loss from operations in fiscal 1995 includes an $11.3 million noncash
charge due to the write-down of impaired long-lived assets of the Company's
German operations.
(4) Net income in fiscal 1994 includes $0.5 million related to the cumulative
effect of adopting Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(5) For the year ended June 30, 1995, shares used to compute diluted earnings
per share exclude common share equivalents (primarily convertible preferred
stock), as their inclusion would have anti-dilutive.