SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
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 Number)
195 West Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-
9900
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 November 11, 1998, there were 24,791,879 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 -
September 30, 1998 and June 30, 1998 3
Condensed Consolidated Statements of
Operations - Three months ended September 4
30, 1998 and 1997
Condensed Consolidated Statements of Cash 5
Flows- Three months ended September 30,
1998 and 1997
Notes to Condensed Consolidated Financial 6
Statements
Management's Discussion and Analysis of
Item 2 Financial Condition and Results of 8
Operations
Quantitative and Qualitative Disclosures
Item 3 about Market Risk 12
Risk
Factors 13
Part Other information
II. 17
Exhibits and Reports on Form 8-K
Item 6 17
Signatu
res 18
Exhibit
Index 19
Part I. Financial Information
Item 1 - Financial Statements
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September June 30,
30, 1998 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39,884 $39,941
Marketable securities 28,515 37,479
Accounts receivable, net 123,050 109,741
Prepaid expenses 11,223 11,895
Other current assets 10,194 10,674
Total current assets 212,866 209,730
Property and equipment, net 46,313 45,311
Other assets 6,792 6,717
$265,971 $261,758
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit arrangements $ 298 $1,413
Accounts payable 10,166 10,923
Advance billings 45,316 45,273
Other current liabilities 31,751 33,184
Total current liabilities 87,531 90,793
Other liabilities 2,831 2,585
Total liabilities 90,362 93,378
Stockholders' equity:
Preferred stock - $0.01 par value; shares -- --
authorized: 5,000,000; none issued and
outstanding
Common stock - $0.01 par value; shares
authorized:
50,000,000 at September 30 and June 30, 1998;
shares issued: 24,790,843 and 24,657,637 at
September 30 and 248 246
June 30, 1998, respectively; shares
outstanding: 24,761,431 and
24,628,225 at September 30 and June 30, 1998,
respectively
Additional paid-in capital 152,091 149,921
Retained earnings and cumulative translation 23,270 18,213
adjustment
Total stockholders' equity 175,609 168,380
$265,971 $261,758
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three months ended
September 30,
1998 1997
Net revenue $82,835 $62,991
Costs and expenses:
Direct costs 53,737 41,309
Selling, general and 17,179 13,222
administrative
Depreciation and 4,242 2,630
amortization
75,158 57,161
Income from operations 7,677 5,830
Other income, net 713 1,158
Income before provision for 8,390 6,988
income taxes
Provision for income taxes 2,885 2,649
Net income $5,505 $4,339
Earnings per common share:
Basic $0.22 $0.18
Diluted $0.22 $0.18
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three months ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 5,505 $4,339
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,242 2,630
Changes in operating assets and liabilities (12,033) (14,092)
Net cash used in operating activities (4,345) (5,064)
Cash flows from investing activities:
Purchase of marketable securities (18,856) (39,020)
Proceeds from sale of marketable securities 27,820 68,456
Other investing activities (290) -
Purchase of property and equipment (5,029) (6,720)
Net cash provided by investing activities 3,645 22,716
Cash flows from financing activities:
Proceeds from issuance of common stock 2,172 1,431
Repayments on credit arrangements (1,081) (856)
Net cash provided by financing activities 1,091 575
Effect of exchange rate changes on cash and cash (448) (104)
equivalents
Net (decrease) increase in cash and cash (57) 18,123
equivalents
Cash and cash equivalents at beginning of period 39,941 38,592
Cash and cash equivalents at end of period $39,884 $56,715
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
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 of 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 (primarily consisting of normal recurring
adjustments) considered necessary for a fair presentation have
been included. Operating results for the three months ended
September 30, 1998, are not necessarily indicative of the results
that may be expected for other quarters or the entire fiscal
year. The financial statements for the three months ended
September 30, 1997 have been restated to reflect fiscal 1998
acquisitions accounted for under the pooling of interests method.
Certain prior year balances have been reclassified in order to
conform to current year presentation. For further information,
refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
Note 2 - Earnings per Share
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). Earnings per share amounts for prior periods
presented have been restated to conform to the SFAS 128
requirements. The following table outlines the basic and diluted
earnings per common share computations (in thousands, except per
share data):
Three
months
ended
Septembe
r 30,
1998 1997
Net income attributable to common shares $5,505 $4,339
Basic Earnings Per Common Share
Computation:
Weighted average common shares 24,677 23,638
outstanding
Basic earnings per common share $0.22 $0.18
Diluted Earnings Per Common Share
Computation:
Weighted average common shares
outstanding:
A. Shares attributable to common stock 24,677 23,638
outstanding
B. Shares attributable to common stock 420 992
options
25,097 24,630
Diluted earnings per common share $0.22 $0.18
Note 3 - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended September 30, 1998. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its
components. The adoption of SFAS 130 had no impact on the
Company's net income or stockholders' equity. SFAS No. 130
requires the Company's foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the
requirements of this Statement. Total comprehensive income,
which was comprised of net income and foreign currency
translation adjustments, was $5.1 million and $4.6 million for
the three months ended September 30, 1998 and 1997, respectively.
Note 4 - New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires selected information
to be reported on the Company's operating segments. Operating
segments are determined by the way management structures the
segments in making operating decisions and assessing performance.
The Company is currently reviewing what changes, if any, this
will require on the presentation of the financial statements for
fiscal year 1999. The adoption of this statement will not have
an effect on the Company's financial position or results of
operations but may result in additional disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
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. Gains
or losses from hedging transactions may be wholly or partially
recorded in earnings or comprehensive income as part of a
cumulative translation adjustment. Gains or losses on derivative
instruments not classified as hedging instruments are 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 that adoption of SFAS No. 133 will have a
material impact on its financial position or its results of
operations.
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The financial information discussed below 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
(primarily 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 and medical marketing
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.
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, which vary from contract to contract,
are paid by the client and, in accordance with industry practice,
are included in gross revenue. Reimbursed costs vary from
contract to contract. Accordingly, the Company views net
revenue, which consists of gross revenue less reimbursed costs,
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 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.
The Company's stock is currently quoted on the Nasdaq-Amex Market
Group under the symbol "PRXL."
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months
Ended September 30, 1997
Net revenue increased by $19.8 million, or 31.5%, from $63.0
million for the three months ended September 30, 1997 to $82.8
million for the three months ended September 30, 1998. This net
revenue growth was primarily attributable to an increase in the
volume of contract research, marketing and consulting projects
serviced by the Company across all geographic regions. 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 $12.4 million, or 30.1%, from $41.3
million for the three months ended September 30, 1997 to $53.7
million for the three months ended September 30, 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 65.6% for the three months ended September 30,
1997 to 64.9% for the three months ended September 30, 1998.
Selling, general and administrative expenses increased by $4.0
million, or 29.9%, from $13.2 million for the three months ended
September 30, 1997 to $17.2 million for the three months
September 30, 1998. This increase was due to increased selling
and administrative personnel, hiring expenses, and facilities
costs necessary to accommodate the Company's growth. As a
percentage of net revenue, selling, general and administrative
expenses decreased from 21.0% for the three months ended
September 30, 1997 to 20.7% for the three months ended September
30, 1998.
Depreciation and amortization expense increased by $1.6 million,
from $2.6 million for the three months ended September 30, 1997
to $4.2 million for the three months ended September 30, 1998.
The increase was due to capital spending on information
technology, facility improvements and furnishings to support the
increased level of operations.
Income from operations increased $1.8 million, or 31.7%, from
$5.8 million for the three months ended September 30, 1997 to
$7.7 million for the three months ended September 30, 1998. This
increase is primarily due to the 31.5% increase in net revenues
noted above. Income from operations as a percentage of net
revenue remained constant at 9.3%.
Other income, net decreased by $0.4 million from $1.1 million for
the three months ended September 30, 1997 to $0.7 million for the
three months ended September 30, 1998. This decrease resulted
from lower interest rates obtained due to a shift to tax-exempt
securities in fiscal 1998, along with lower average balances of
cash, cash equivalents, and marketable securities due primarily
to capital spending and to fund working capital for an increased
level of operations.
The Company had an income tax provision of $2.9 million for the
three months ended September 30, 1998. The effective income tax
rate for the three months ended September 30, 1998, was 34.4%
compared to 37.9% for the three months ended September 30, 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.
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 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 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 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 65 days at September 30,
1998 compared to 54 days at June 30, 1998. This increase was due
to a $13.3 million increase in accounts receivable, net of the
allowance for doubtful accounts, from $109.7 million at June 30,
1998 to $123.1 million at September 30, 1998, while advance
billings remained constant at $45.3 million at June 30 and
September 30, 1998.
The Company had cash and cash equivalents of $39.9 million at
September 30, 1998 and at June 30, 1998. Net cash used in
operating activities of $4.3 million resulted primarily from net
income excluding depreciation and amortization expense of $9.7
million offset primarily by a $13.3 million increase in accounts
receivable and decreases in payables.
Net cash provided by investing activities of $3.6 million
consisted primarily of net proceeds from sales of marketable
securities of $9.0 million, partially offset by capital
expenditures of $5.0 million related to facility expansions and
investments in information technology.
Financing activities consisted primarily of net proceeds from the
issuance of common stock of $2.2 million, partially offset by the
repayment of credit arrangements of $1.1 million.
The Company has domestic and foreign line of credit arrangements
with banks totaling approximately $15.1 million and a capital
lease line of credit with a U.S. bank for $2.4 million. At
September 30, 1998, the Company had approximately $16.6 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, acquisition-
related 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 financing and
the Company may from time to time seek to obtain funds from
public or private issuance of equity or debt securities. There
can be no assurance that such financing will be available on
terms acceptable to the Company.
The foregoing statements include forward-looking statements that
involve risks and uncertainties. Such forward looking statements
include those related to the adequacy of the Company's existing
capital resources and future cash flows from operations as well
as the desire to continue to expand through acquisitions. 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 potential loss or delay of
one or more large contracts, the Company's ability to manage
adequately its continued expansion, and future events that have
the effect of reducing the Company's available cash balances,
such as unexpected operating losses, capital expenditures or cash
expenditures related to possible future acquisitions as well as
those discussed in Risk Factors.
Year 2000 Readiness Disclosure Statement
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
engineered in this manner 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. To date, 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 ensure 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 critical systems cannot be made fully
compliant 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 its analysis to date it does not believe
that the costs to be incurred will be material. However, until
the full analysis is complete, the Company is unable to
definitively determine whether or not future costs will be
material. Furthermore, as noted above, the Company is in the
process of 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 such third party systems are or will be Year 2000 compliant
and the Company is unable to estimate at this time the impact on
the Company if one or more third party systems is not Year 2000
compliant. For the foregoing reasons, the Company is not able to
definitively determine at this time whether the Year 2000 Issue
will materially affect its future financial results or financial
condition.
Euro Conversion
On January 1, 1999, certain member countries of the European
Union are scheduled to establish fixed conversion rates between
their existing currencies and the European Union's common
currency (Euro).
The transition period for the introduction of the Euro will be
between January 1, 1999 and January 1, 2002. The Company has
established a Euro Initiative Project Team to determine how this
will affect the Company with its business processes,
applications, and internal and external contracts. The project
team has begun the process of determining the many issues
involved with the introduction of the Euro, including the
conversion of information technology systems, recalculating
currency risk, and impacts on the processes for preparing
taxation and accounting records.
While the Company has not yet completed its full assessment of
the scope of the Euro Conversion Issue facing its systems and
dependencies, based on its analysis to date it does not believe
that the costs to be incurred will be material. However, until
the full analysis is complete, the Company is unable to
definitively determine whether or not future costs will be
material.
Item 3 Quantitative and Qualitative Disclosures about Market
Risk
The Company does not invest in market risk sensitive instruments.
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 contract
research organizations. 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. 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 1998, the Company's top five clients
accounted for 34% of the Company's consolidated net revenue. For
the three months ended September 30, 1998, the Company's top five
clients accounted for 44% of the Company's consolidated net
revenue. In fiscal 1998 one client accounted for 12% of
consolidated net revenue, and for the three months ended
September 30, 1998 a different client accounted for 18% of
consolidated net revenue. The loss of business from a
significant client could have a material adverse effect on the
Company.
Management of Business Expansion
The Company's business and operations have experienced
substantial expansion particularly over the past few 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 meet 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. Acquisition
candidates may not 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 meet 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. The Company may
experience difficulty integrating acquired companies 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 contract research
organizations 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
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.
The CRO industry is fragmented, with participants ranging from
several hundred small, limited-service providers to several
large, full-service CROs with global operations. Large CROs
against whom PAREXEL competes include Quintiles Transnational
Corporation, Covance Inc., and Pharmaceutical Product
Development, 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 few 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 governments outside the U.S. have also reviewed or
undertaken health care reform. The Company cannot predict the
impact that any pending or future health care reform proposals
may have on the Company's business in other countries.
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. The Company may not be able to
continue to attract and retain qualified staff.
Potential Liability; Possible Insufficiency of Insurance
Clinical research services involve the testing of experimental
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 by physicians. 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, such insurance may not continue to be available on
terms acceptable to the Company.
Adverse Effect of Exchange Rate Fluctuations
Approximately 41% and 44% of the Company's net revenue for fiscal
1998 and the three months ended September 30, 1998, 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, as amended, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
10.1 Employment Agreement dated October 20, 1998
between Josef H. von Rickenbach and the
Company.
10.2 Change-of-control Agreement dated October 20,
1998 between William T. Sobo and the Company.
10.3 Change-of-control Agreement dated October 20,
1998 between James Karis and the Company.
10.4 Change-of-control Agreement dated October 20,
1998 between Barry R. Philpott and the
Company.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
August 12, 1998 reporting financial results for the
three months and the fiscal year ended June 30, 1998.
The Company filed a Current Report on Form 8-K dated
October 29, 1998 reporting financial results for the
three months ended September 30, 1998.
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
12th day of November, 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 INDEX
Exhibit No. Description
10.1 Employment Agreement dated October 20, 1998
between Josef H. von Rickenbach and the Company.
10.2 Change-of-control Agreement dated October 20, 1998
between William T. Sobo and the Company.
10.3 Change-of-control Agreement dated October 20, 1998
between James Karis and the Company.
10.4 Change-of-control Agreement dated October 20, 1998
between Barry R. Philpott and the Company.
27 Financial Data Schedule