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, 1999
Commission File Number: 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
Massachusetts 04-2776269
(State or other (I.R.S. Employer Identification Number)
jurisdiction of incorporation
or organization)
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 8, 1999, there
were 25,265,109 shares of PAREXEL International Corporation common stock
outstanding.
PAREXEL INTERNATIONAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets-- September 30, 1999 and June 30,
1999 3
Condensed Consolidated Statements of Operations-- Three months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows-- Three months ended 5
September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
Risk Factors 14
Part II. Other Information 21
Item 1 Legal Proceedings 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
Part I. Financial Information
Item 1 - Financial Statements
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, June 30,
1999 1999
-------------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $62,033 $62,005
Marketable securities 36,304 27,952
Accounts receivable, net 170,776 150,520
Prepaid expenses 6,653 7,917
Other current assets 17,355 16,432
-------------------- ----------------
Total current assets 293,121 264,826
Property and equipment, net 48,409 47,065
Other assets 24,106 21,674
==================== ================
$365,636 $333,565
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Credit arrangements $ 464 $ 1,057
Accounts payable 19,362 14,698
Advance billings 88,094 69,776
Other current liabilities 49,690 46,538
-------------------- ----------------
Total current liabilities 157,610 132,069
Other liabilities 9,424 9,464
-------------------- ----------------
Total liabilities 167,034 141,533
-------------------- ----------------
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; shares issued: 25,288,121 and 25,132,461 at
September 30, 1999 and June 30, 1999, respectively; shares
outstanding: 25,258,709 and 25,103,049 at September 30, 1999
and June 30, 1999, respectively 252 251
Additional paid-in capital 161,022 159,575
Retained earnings 40,224 35,785
Accumulated other comprehensive income (2,896) (3,579)
-------------------- ----------------
Total stockholders' equity 198,602 192,032
==================== ================
$365,636 $333,565
==================== ================
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
For the three months ended
September 30,
---------------------------------------
1999 1998
---------------- -----------------
Net revenue $91,768 $82,835
---------------- -----------------
Costs and expenses:
Direct costs 62,133 53,737
Selling, general and administrative 18,765 17,179
Depreciation and amortization 5,095 4,242
Facilities charge (benefit) (312) -
---------------- -----------------
85,681 75,158
---------------- -----------------
Income from operations 6,087 7,677
Other income, net 774 713
---------------- -----------------
Income before provision for income taxes 6,861 8,390
Provision for income taxes 2,422 2,885
---------------- -----------------
Net income $4,439 $5,505
================ =================
Earnings per share:
Basic $0.18 $0.22
Diluted $0.18 $0.22
Shares used in computing earnings per share:
Basic 25,153 24,677
Diluted 25,285 25,097
See notes to condensed consolidated financial statements.
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the three months ended
September 30,
--------------------------------------
1999 1998
---------------- -----------------
Cash flows from operating activities:
Net income $ 4,439 $ 5,505
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,095 4,242
Changes in operating assets and liabilities, net of effects of acquisition 5,687 (14,092)
---------------- -----------------
Net cash provided by (used in) operating activities 15,221 (4,345)
---------------- -----------------
Cash flows from investing activities:
Purchase of marketable securities (34,555) (18,856)
Proceeds from sale of marketable securities 26,203 27,820
Other investing activities (159) (290)
Acquisition of business (3,000) -
Purchase of property and equipment (5,566) (5,029)
---------------- -----------------
Net cash (used in) provided by investing activities (17,077) 3,645
---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,448 2,172
Repayments on credit arrangements (573) (1,081)
---------------- -----------------
Net cash provided by financing activities 875 1,091
---------------- -----------------
Effect of exchange rate changes on cash and cash equivalents 1,009 (448)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 28 (57)
Cash and cash equivalents at beginning of period 62,005 39,941
---------------- -----------------
Cash and cash equivalents at end of period $62,033 $39,884
================ =================
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, 1999, are
not necessarily indicative of the results that may be expected for other
quarters or the entire fiscal year. 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, 1999.
Note 2 -- Earnings per Share
The following table outlines the basic and diluted earnings per common share
computations (in thousands, except per share data):
For the three months
ended September 30,
1999 1998
------------- -------------
Net income attributable to common shares $4,439 $5,505
============= ============
Basic Earnings Per Common Share Computation:
Weighted average common shares outstanding 25,153 24,677
============= ============
Basic earnings per common share $0.18 $0.22
============= ============
Diluted Earnings Per Common Share Computation:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 25,153 24,677
Shares attributable to common stock options 132 420
------------- ------------
25,285 25,097
============= ============
Diluted earnings per common share $0.18 $0.22
============= ============
Note 3 - Comprehensive Income
Comprehensive income has been calculated by the Company in accordance with FASB
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Comprehensive income, which is comprised of net income
and foreign currency translation adjustments, totaled $5.1 million for both the
three months ended September 30, 1999 and 1998.
Note 4 - Segment Information
The Company is managed through three reportable segments, namely, the contract
research services group, consulting services group and the medical marketing
group. The contract research services group ("CRS") constitutes the Company's
core business and includes clinical trials management, biostatistics and data
management, as well as related medical advisory, information technology, and
investigator site services. PAREXEL's consulting group ("PCG") provides
technical expertise in such disciplines as clinical pharmacology, regulatory
affairs, industry training, publishing, and management consulting. These
consultants identify options and propose solutions to address clients' product
development, registration, and commercialization issues. The medical marketing
services group ("MMS") provides a full spectrum of market development, product
development, and targeted communications services in support of product launch.
The Company evaluates its segment performance and allocates resources based on
revenue and gross profit (net revenue less direct costs), while other operating
costs are evaluated on a geographical basis. Accordingly, the Company does not
include selling, general and administrative expenses, depreciation and
amortization expense, nonrecurring and merger-related costs, interest income
(expense), other income (expense), and income tax expense in segment
profitability.
For the three months ended
September 30,
--------------------------------------------------------------------------------------------------------
($ in thousands) 1999 1998
------------------------------------------------------------------------------------------------------
Net revenue:
Contract Research Services $65,093 $55,775
Consulting Group 15,335 13,249
Medical Marketing Services 11,340 13,811
=================== ===================
$91,768 $82,835
=================== ===================
Gross profit:
Contract Research Services $23,446 $21,086
Consulting Group 3,143 4,156
Medical Marketing Services 3,046 3,856
=================== ===================
$29,635 $29,098
=================== ===================
Note 5 - Acquisition
On September 1, 1999, the Company acquired CEMAF S.A., a leading Phase I
clinical research and bioanalytical laboratory located in Poitiers, France. The
Company acquired the business and related facilities for an initial cash payment
of approximately $3.0 million in a transaction accounted for as a purchase
business combination. The purchase agreement also provides for the payment of an
additional $3.0 million in May 2000 to purchase certain buildings contingent
upon certain events. In accordance with the terms of the asset purchase
agreement, the Company is contingently obligated to pay up to an additional $4
million in contingent purchase price if CEMAF achieves certain established
earnings targets for the three years ending June 30, 2002. In connection with
recording the assets and liabilities acquired, the Company recorded
approximately $2.4 million related to the excess cost over the fair value of the
net assets acquired. Pro forma results of operations of the Company, assuming
this acquisition was recorded at the beginning of each period presented, would
not be materially different from actual results presented.
Note 6 - Facility benefit
During the fourth quarter of fiscal 1999, the Company recorded a $2.8 million
charge in connection with the centralization of certain facilities. The charge
consisted of future noncancellable lease payments partially offset by estimated
sublease income.
During the three months ended September 30, 1999, the Company recorded $447,000
against the accrued costs while also recording a $312,000 benefit primarily
attributable to the favorable impact of a lease buyout agreement not previously
anticipated. At September 30, 1999, the accrual totaled approximately $2.4
million.
Note 7 - Stock Repurchase Program
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20 million of the Company's common stock. The
repurchases will be made in the open market subject to market conditions. There
were no treasury stock acquisitions for the three months ended September 30,
1999
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.
The statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations 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, the Company's Year 2000 readiness and the Company's
desire to continue to expand through acquisitions. The forward-looking
statements contained in this section include, but are not limited to, any
statements containing the words "expects," "anticipates," "estimates,"
"believes," "may," "will," "should" and similar expressions, and the negatives
thereof. The Company's actual experience may differ materially from the
Company's expectation as discussed in the forward-looking statement. Factors
that could cause such a difference include, but are not limited to, the
Company's ability to efficiently execute the realignment of the CRS business;
the potential loss or cancellation of, or delay of work under, one or more large
contracts; the adequacy and effectiveness of the Company's sales force in
winning new business; the ability to attract, train and retain qualified
employees; the Company's ability to manage adequately its continued expansion;
the potential for significant liability to clients and third parties; the
Company's ability to meet its deadlines regarding Year 2000 readiness and
achieve such readiness within its expected expense range; the Company's ability
to complete additional acquisitions and to integrate newly acquired businesses;
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; and those discussed below.
Overview
The Company is a leading contract research, medical marketing and consulting
services organization providing a broad spectrum of services from first-in-human
clinical studies through product launch to the pharmaceutical, biotechnology and
medical device industries around the world. The Company's primary objective is
to help its clients rapidly obtain the necessary regulatory approvals for their
products and market those products successfully. The Company provides the
following services to its clients:
o clinical trials management;
o data management;
o biostatistical analysis;
o medical marketing;
o clinical pharmacology;
o regulatory and medical consulting;
o performance improvement;
o industry training and publishing; and
o other drug development consulting services.
The Company is managed through three reportable segments, namely, the contract
research services group, consulting services group and the medical marketing
group. The contract research services group ("CRS") constitutes the Company's
core business and includes clinical trials management, biostatistics and data
management, as well as related medical advisory, information technology, and
investigator site services. PAREXEL's consulting group ("PCG") provides
technical expertise in such disciplines as clinical pharmacology, regulatory
affairs, industry training, publishing, and management consulting. These
consultants identify options and propose solutions to address clients' product
development, registration, and commercialization issues. The medical marketing
services group ("MMS") provides a full spectrum of market development, product
development, and targeted communications services in support of product launch.
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. The contracts may contain provisions for
renegotiation of cost overruns arising from changes in the scope of work.
Renegotiated amounts are included in net revenues when earned and realization is
assured.
Generally, the Company's clients can terminate their contracts with the Company
upon sixty days' notice or can delay execution of services. Clients terminate or
delay contracts for a variety of reasons, including, among others:
o the failure of products being tested to satisfy safety requirements,
o unexpected or undesired clinical results of the product,
o the client's decision to forego a particular study,
o insufficient patient enrollment or investigator recruitment, or
o production problems resulting in shortages of the drug.
As is customary in the industry, the Company routinely subcontracts with
independent physician investigators in connection with clinical trials and other
third party service providers for laboratory analysis and other specialized
services. These fees are not reflected in net revenues or expenses since such
fees are granted by customers on a "pass through basis" without risk or reward
to the Company.
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 quoted on the Nasdaq Stock Market under the symbol
"PRXL."
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net revenue increased by $9.0 million, or 10.8%, to $91.8 million for the three
months ended September 30, 1999 from $82.8 million for the three months ended
September 30, 1998. Growth occurred across each of the Company's geographic
regions with 16.7% revenue growth in the Contract Research Service group and
15.7% growth in the Consulting Group, partially offset by a 17.9% decrease in
the Medical Marketing Services revenue growth due to the wind down of a
significant project at the end of fiscal 1999. Net revenue growth of $8.9
million was primarily attributable to an increase in the volume of projects
serviced by the Company in addition to $1.4 million of incremental revenue
resulting from the PharMedicom and CEMAF acquisitions. 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 $8.4 million, or 15.6%, to $62.1 million for the three
months ended September 30, 1999 from $53.7 million for the three months ended
September 30, 1998. This increase in direct costs was primarily due to the 10.8%
increase in net revenue which required increases in hiring and personnel costs
along with related facilities and information systems costs necessary to support
current and future increased levels of operation. Direct costs as a percentage
of net revenue increased to 67.7% for the three months ended September 30, 1999
from 64.9% for the three months ended September 30, 1998, reflecting an increase
in overall operational capacity.
Selling, general and administrative expenses increased by $1.6 million, or 9.2%,
to $18.8 million for the three months ended September 30, 1999 from $17.2
million for the three months ended September 30, 1998. This increase was
primarily due to increased personnel, hiring expenses, and facilities costs
necessary to accommodate the Company's growth. Selling, general and
administrative expenses decreased as a percentage of net revenue to 20.4% for
the three months ended September 30, 1999 from 20.7% for the three months ended
September 30, 1998.
Depreciation and amortization expense increased by $0.9 million, or 20.1%, to
$5.1 million for the three months ended September 30, 1999 from $4.2 million for
the three months ended September 30, 1998. This increase was primarily due to an
increase in capital spending on information technology, facility improvements
and furnishings necessary to support the increased level of operations, and due
to an increase in goodwill amortization due to the PharMedicom and CEMAF
acquisitions. Depreciation and amortization expense increased as a percentage of
net revenue to 5.6% for the three months ended September 30, 1999 from 5.1% for
the three months ended September 30, 1998.
Income from operations decreased $1.6 million, or 20.7%, to $6.1 million for the
three months ended September 30, 1999 from $7.7 million for the three months
ended September 30, 1998. Income from operations decreased as a percentage of
net revenue to 6.6% for the three months ended September 30, 1999 from 9.3% for
the three months ended September 30, 1998, primarily due to the increase in
direct costs noted above.
The Company had an income tax provision of $2.4 million and an effective income
tax rate of 35.3% for the three months ended September 30, 1999 in comparison to
an effective income tax rate of 34.4% for the three months ended September 30,
1998. The increase was due to changes in the mix of taxable income from the
different jurisdictions in which the Company operates.
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. As a result, 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, increased to 62 days at September 30, 1999 compared to
60 days at June 30, 1999.
The Company's cash and cash equivalents remained constant at $62.0 million at
September 30, 1999 and at June 30, 1999. Net cash provided by operating
activities of $15.2 million resulted primarily from net income excluding
depreciation and amortization expense of $9.5 million and a $6.8 million
increase in accounts payable and accrued expenses, slightly offset by a net $1.7
million increase in accounts receivable net of deferred revenue.
Net cash used in investing activities of $17.1 million consisted primarily of
capital expenditures of $5.6 million related to information technology, facility
improvements and furnishings, net purchases of marketable securities of $8.4
million, and a $3.0 million cash payment related to a business acquisition.
Financing activities consisted primarily of net proceeds from the issuance of
common stock of $1.4 million, partially offset by the repayment of credit
arrangements of $0.6 million.
The Company has domestic and foreign line of credit arrangements with banks
totaling approximately $14.3 million. At September 30, 1999, the Company had
approximately $13.7 million in available credit under these arrangements.
The Company's primary 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. In addition, the Board of Directors has authorized
the repurchase of up to $20 million of the Company's common stock.
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, "99" to represent "1999" 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 established a Year 2000 Program in 1998 to address the Year 2000
issue. A multi-phase program was initiated that involved inventory analysis,
assessment and testing, remediation planning and execution, contingency and
transition planning. The scope of this program includes an assessment of
critical vendors and suppliers of services to assess whether their Year 2000
issues, if any, will affect the Company.
The Year 2000 Program is managed by a central program office which provides
strategy, methodology, tracking, communications, documentation control, quality
assurance and coordination of the multiple Year 2000 projects. This approach
ensures that each business unit has responsibility for its respective area and
works within a common framework. The program office has defined standard
deliverables for all Year 2000 projects and has established interim milestones
to monitor and measure weekly and monthly progress.
Existing information technology investment projects have been adjusted to
incorporate the needs of Year 2000 compliance and some of the Year 2000
remediation activities have been encompassed within existing upgrade and
replacement programs.
In addition to vendor certification, the Company has conducted time box testing
for systems deemed critical to its operations and to the integrity of clinical
data. Time box testing utilizes a test machine to test software in a simulated
environment where the clock on the machine is advanced to January 1, 2000 and
all applications are tested to ensure that the application is still functioning
correctly in a simulated Year 2000 environment.
The Year 2000 Program is on schedule for completion of all pre-requisite
activities to ensure that the Company's internal systems and services are fully
prepared for the century transition. Enterprise clinical data processing systems
achieved compliance by June 1999 and substantially all remaining systems
achieved compliance by October 4, 1999. A system wide configuration freeze
policy was implemented on that date to ensure that Year 2000 readiness will be
maintained during the next quarter. A small number of explicitly approved
residual remediation and compliance activities will continue through November
1999 necessitated by additional vendor provided software updates.
Contingency plans have been defined for critical business processes and the
Program team is finalizing logistics for the millenium transition period, which
will be coordinated by a Command Center to be activated during December 1999.
The Company estimates that the aggregate cost of its Year 2000 program will be
approximately $3.0 million. Through the quarter ended September 30, 1999, the
Company has incurred approximately $2.9 million of these costs. The Company's
estimates regarding the cost, timing and impact of addressing the Year 2000
issue are based on numerous assumptions of future events, including the
continued availability of certain resources, the ability of the Company to meet
its deadlines and the cooperation of third parties. However, if the Company
cannot continue to utilize certain resources or rely on third parties to respond
timely, or the Company fails to meet its deadlines among other things, actual
results could differ materially from those expected by the Company.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market risk is the potential loss arising from adverse changes in the market
rates and prices, such as foreign currency rates, interest rates, and other
relevant market rate or price changes. In the ordinary course of business, the
Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates, and the Company regularly evaluates
its exposure to such changes. The Company's overall risk management strategy
seeks to balance the magnitude of the exposure and the costs and availability of
appropriate financial instruments. 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. The Company does not hold derivative
instruments for trading purposes.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and it's business,
including forward-looking statements made in the section of this report entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other forward-looking statements that the Company may make from
time to time.
The Loss, Modification, or Delay of Large Contracts May Negatively Impact the
Company's Financial Performance
Generally, the Company's clients can terminate their contracts with the Company
upon sixty days' notice or can delay execution of services. Clients terminate or
delay their contracts for a variety of reasons, including:
o products being tested fail to satisfy safety requirements;
o products have unexpected or undesired clinical results;
o the client decides to forego a particular study, perhaps for economic
reasons;
o not enough patients enroll in the study;
o not enough investigators are recruited; or
o production or formulation problems cause shortages of the drug.
In addition, the Company believes that drug companies may proceed with fewer
clinical trials if they are trying to reduce costs. These factors may cause drug
companies to cancel or delay contracts with contract research organizations at a
higher rate than in the past. The loss or delay of a large contract or the loss
or delay of multiple contracts could have a material adverse effect on the
Company's financial performance.
The Company's Operating Results Have Fluctuated Between Quarters and Years and
May Continue to Fluctuate in the Future
The Company's quarterly operating results have varied, and will continue to
vary. Factors that affect these variations include:
o the level of new business authorizations in a particular quarter or year;
o the timing of the initiation, progress, delay or cancellation of
significant projects;
o exchange rate fluctuations between quarters or years;
o the mix of services offered in a particular quarter or year;
o the timing of the opening of new offices;
o the timing of other internal expansion costs;
o the timing and amount of costs associated with integrating acquisitions;
and
o the timing and amount of startup costs incurred in connection with the
introduction of new products and services.
A high percentage of the Company's operating costs are fixed. Therefore, the
timing of the completion, delay or loss of contracts, or in the progress of
client projects, can cause the Company's operating results to vary substantially
between reporting periods.
The Company Depends on a Small Number of Industries and Clients for All of its
Business
The Company primarily depends on research and development expenditures by
pharmaceutical and biotechnology companies. The Company's operations could be
materially and adversely affected if:
o its clients' businesses experience financial problems or are affected by a
general economic downturn;
o consolidation in the drug or biotechnology industries leads to a smaller
client base for the Company; or
o its clients reduce their research and development expenditures.
Furthermore, the Company has benefited to date from the increasing tendency of
pharmaceutical companies to out-source large clinical research projects. If this
trend slows or reverses, the Company's operations would be materially and
adversely affected. In fiscal 1999, the Company's five largest clients accounted
for 44% of its consolidated net revenue, and one client accounted for 20% of
consolidated revenue. For the three months ended September 30, 1999, the
Company's five largest clients accounted for 49% of its consolidated net
revenue, and one client accounted for 26% of consolidated revenue representing
an increase of 6% and 9%, respectively, over previous preliminary disclosures.
The Company could suffer a material adverse effect if it lost the business of a
significant client.
The Company's Business Has Expanded Rapidly and the Company Must Properly Manage
that Expansion
The Company's business has expanded substantially, particularly over the past
few years. This may strain the Company's operational, human and financial
resources. In order to manage expansion, the Company must:
o continue to improve its operating, administrative and information systems;
o accurately predict its future personnel and resource needs to meet client
contract commitments;
o track the progress of ongoing client projects; and
o attract and retain qualified management, sales, professional, scientific
and technical operating personnel.
In addition, the Company recently realigned its contract research services
business into discrete operating units. If the Company cannot execute the
realignment of the contract research services business efficiently, the Company
could experience a material adverse effect.
The Company will face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
o assimilate differences in foreign business practices;
o hire and retain qualified personnel; and
o overcome language barriers.
If an acquired business does not meet the Company's performance expectations,
the Company may have to restructure the acquired business or write-off the value
of some or all of the assets of the acquired business. If the Company fails to
properly manage its expansion, the Company could experience a material adverse
effect.
The Company May Not Be Able to Make Strategic Acquisitions in the Future
The Company relies on its ability to make strategic acquisitions to sustain its
growth. The Company has made a number of acquisitions and will continue to
review future acquisition opportunities. The Company may not be able to acquire
companies on terms and conditions acceptable to the Company. In addition, the
Company faces several obstacles in connection with the acquisitions it
consummates, including:
o The Company may encounter difficulties and will encounter expenses in
connection with the acquisitions and the subsequent assimilation of the
operations and services or products of the acquired companies;
o The Company's management will necessarily divert attention from other
business concerns; and
o The Company could lose some or all of the key employees of the acquired
company.
The Company may also face additional risks when acquiring foreign companies,
such as adapting to different business practices and overcoming language
barriers. In the event that the operations of an acquired business do not meet
the Company's performance expectations, the Company may have 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 its operations.
The Company Relies on Highly Qualified Management and Technical Personnel Who
May Not Remain with the Company
The Company relies on a number of key executives, including Josef H. von
Rickenbach, its President, Chief Executive Officer and Chairman. The Company
maintains key man life insurance on Mr. von Rickenbach. The Company has entered
into agreements containing non-competition restrictions with its senior
officers. However, the Company does not have employment agreements with most of
its senior officers and if any of these key executives leave the company, it
could have a material adverse effect on the Company. In addition, in order to
compete effectively, the Company must attract and maintain qualified sales,
professional, scientific and technical operating personnel. Competition for
these skilled personnel, particularly those with a medical degree, a Ph.D. or
equivalent degrees is intense. The Company may not be successful in attracting
or retaining key personnel.
The Company May Not Have Adequate Insurance and May Have Substantial Exposure to
Payment of Personal Injury Claims
Clinical research services primarily involve the testing of experimental drugs
on consenting human volunteers pursuant to a study protocol. Such services
involve a risk of liability for personal injury or death to patients who
participate in the study or who use a drug approved by regulatory authorities
after the clinical research has concluded, due to, among other reasons, possible
unforeseen adverse side effects or improper administration of the new drug by
physicians. In certain cases, these patients are already seriously ill and are
at risk of further illness or death. The Company's financial stability could be
materially and adversely affected if the Company had to pay damages or incur
defense costs in connection with a claim that is outside the scope of an
indemnity or insurance coverage. The Company's financial stability could also be
materially and adversely affected in cases where the indemnity, although
applicable, is not performed in accordance with its terms. In addition, the
Company could be adversely and materially affected if its liability exceeds the
amount of its insurance. The Company may not be able to continue to secure
insurance on acceptable terms.
The Company's Stock Price Is Volatile and Could Decline
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future in response to quarter-to-quarter
variations in:
o operating results;
o earnings estimates by analysts;
o market conditions in the industry;
o prospects of health care reform;
o changes in government regulation; and
o general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
historically traded at a relatively high price-earnings multiple, due in part to
analysts' expectations of continued earnings growth, the price of the stock
could quickly and substantially decline as a result of even a relatively small
shortfall in earnings from, or a change in, analysts' expectations. Investors in
the Company's common stock must be willing to bear the risk of such fluctuations
in earnings and stock price.
The Company's Business Depends on Continued Comprehensive Governmental
Regulation of the Drug Development Process
In the United States, governmental regulation of the drug development process
has become more extensive. In Europe, governmental authorities are coordinating
common standards for clinical testing of new drugs, leading to changes in the
various requirements currently imposed by each country. In April 1997, Japan
legislated good clinical practices and legitimatized the use of contract
research organizations. The Company's business could be materially and adversely
affected if governments relaxed their regulatory requirements or simplified
their drug approval procedures, since such actions would eliminate much of the
demand for the Company's services. In addition, if the Company was unable to
comply with any applicable regulation, the relevant governmental agencies could
terminate the Company's ongoing research or disqualify research data.
The Company Faces Intense Competition
The Company primarily competes against in-house departments of drug companies,
full service contract research organizations, 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. Contract research organizations generally compete on the basis of:
o previous experience;
o medical and scientific expertise in specific therapeutic areas;
o the quality of services;
o the ability to organize and manage large-scale trials on a global basis;
o the ability to manage large and complex medical databases;
o the ability to provide statistical and regulatory services;
o the ability to recruit investigators and patients;
o the ability to integrate information technology with systems to improve
the efficiency of contract research;
o an international presence with strategically located facilities;
o financial strength and stability; and
o price.
The contract research organizations industry is fragmented, with several hundred
small, limited-service providers and several large, full-service contract
research organizations with global operations. The Company competes against
large contract research organizations, including Quintiles Transnational
Corporation, Covance Inc., and Pharmaceutical Product Development, Inc., for
both clients and acquisition candidates. In addition, the Company competes for
contract research organizations contracts as a result of the consolidation
within the drug industry and the growing tendency of drug companies to out
source to a small number of preferred contract research organizations.
The Company May Lose Business Opportunities as a Result 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 drug companies. In the last few years, the U.S. Congress has
entertained several comprehensive health care reform proposals. The proposals
were generally intended to expand health care coverage for the uninsured and
reduce the growth of total health care expenditures. While the U.S. Congress did
not adopt any of the proposals, members of Congress may raise similar proposals
in the future. If any of these proposals are approved by the U.S. Congress, drug
and biotechnology companies may react by spending less on research and
development. If this were to occur, the Company would have fewer business
opportunities. The Company is unable to predict the likelihood that health care
reform proposals will be enacted into law or the effect such laws would have on
the Company's business.
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 foreign
health care reform proposals may have on its business in other countries.
The Company is Subject to Currency Translation Risks
The Company derived approximately 43% of its net revenue for fiscal 1999 from
operations outside of North America. For the three months ended September 30,
1999, the Company derived approximately 42% of its net revenue from operations
outside of North America. The Company's revenues and expenses from foreign
operations are usually denominated in local currencies. The Company is therefore
subject to exchange rate fluctuations between local currencies and the United
States dollar. To the extent that the Company cannot shift this currency
translation risk to other parties, the Company's operating results could be
materially and adversely affected.
The Company does not currently hedge against the risk of exchange rate
fluctuations.
Third Party May Have Difficulty Acquiring the Company
Certain provisions of the Company's Restated Articles of Organization, as
amended, and Restated By-Laws contain provisions that 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, the Board of Directors of the Company may issue preferred stock in the
future without further stockholder approval. The Board of Directors of the
Company would determine the terms and conditions, as well as the rights,
privileges and preferences of such preferred stock. The holders of common stock
would be subject to, and may be adversely affected by, the rights of any holders
of preferred stock that the Board of Directors of the Company may issue. The
Company benefits from its Board of Directors' ability to issue the preferred
stock by affording the Company desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, the Company's Board of
Directors' ability to issue the preferred stock could also 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 1. Legal Proceedings
The Company has been named as one of many defendants in approximately
20 actions pending in the courts of two states related to a drug for
which the Company provided clinical research services. These actions
were brought by individual plaintiffs and not as class actions. The
Company has provided notice of these matters to its insurance carrier
and has submitted requests for indemnification to the companies for
whom the Company provided clinical research services pursuant to the
Company's contracts with such companies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 2, 1999
reporting the termination by mutual consent of the Agreement and
Plan of Merger, dated as of April 28, 1999, between the Company
and Covance, Inc.
The Company filed a Current Report on Form 8-K dated August 19,
1999 reporting fourth quarter and fiscal 1999 financial results.
The Company filed a Current Report on Form 8-K dated October 26,
1999 reporting first quarter fiscal 2000 financial results and the
realignment of its contract research services business into
discrete operating units.
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 11th day of November, 1999.
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