UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to
(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, 2000
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 Identification
incorporation or organization) 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 10, 2000, there
were 24,516,690 shares of PAREXEL International Corporation common stock
outstanding, excluding 890,412 shares in treasury.
Note: This 10-Q/A is being filed to restate certain financial statements
included with the Form 10-Q for the quarter ended September 30, 2000.
The corrected information was identified in connection with the closing
of the books for the first quarter of fiscal 2001. See note 1 to the
financial statements included in Item 1 for further information.
2
PAREXEL INTERNATIONAL CORPORATION
INDEX
-----
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
- September 30, 2000 and June 30, 2000 4
Condensed Consolidated Statements of
Operations - Three months ended
September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash
Flows - Three months ended September 30,
2000 and 1999 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosure About
Market Risk 17
Risk Factors 17
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, JUNE 30,
2000 2000
(Restated) (Restated)
------------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 58,873 $ 53,508
Marketable securities 29,067 37,022
Accounts receivable, net 176,316 162,105
Prepaid expenses 10,420 10,186
Other current assets 17,909 17,244
--------- ---------
Total current assets 292,585 280,065
Property and equipment, net 40,871 43,829
Other assets 29,009 28,046
--------- ---------
Total Assets $ 362,465 $ 351,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 248 $ 269
Accounts payable 24,950 19,587
Advance billings 93,062 86,223
Other current liabilities 51,040 50,306
--------- ---------
Total current liabilities 169,300 156,385
Other liabilities 9,981 9,422
--------- ---------
Total liabilities 179,281 165,807
--------- ---------
Minority interest in subsidiary 553 -
--------- ---------
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized:
5,000,000; none issued and outstanding - -
Common stock--$.01 par value; shares authorized:
50,000,000 at September 30, 2000 and
June 30, 2000; shares issued: 25,404,466
at September 30, 2000 and 25,399,570 at
June 30, 2000; shares outstanding: 24,724,054
at September 30, 2000 and 24,719,158 at
June 30, 2000 254 254
Additional paid-in capital 162,064 162,057
Treasury stock, at cost (6,424) (6,424)
Retained earnings 39,943 40,173
Accumulated other comprehensive loss (13,206) (9,927)
--------- ---------
Total stockholders' equity 182,631 186,133
--------- ---------
Total liabilities and stockholders' equity $ 362,465 $ 351,940
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
(Restated) (Restated)
--------------------------
Net revenue $ 88,215 $ 91,768
---------- ----------
Costs and expenses:
Direct costs 64,290 62,133
Selling, general and administrative 20,171 19,185
Depreciation and amortization 5,635 5,095
Restructuring and other charges (768) (312)
---------- ----------
89,328 86,101
---------- ----------
Income (loss) from operations (1,113) 5,667
Other income (expense), net 1,302 315
---------- ----------
Income before provision for income taxes 189 5,982
Provision for income taxes 290 2,112
---------- ----------
Net income (loss) $ (101) $ 3,870
========== ==========
Earnings per share:
Basic $ (0.00) $ 0.15
Diluted $ (0.00) $ 0.15
Weighted average shares outstanding:
per share:
Basic 24,721 25,153
Diluted 24,721 25,285
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
(Restated) (Restated)
--------------------------
Cash flows from operating activities:
Net income (loss) $ (101) $ 3,870
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,684 5,095
Change in assets and liabilities, net of
effects of acquisitions (1,446) 6,425
-------- --------
Net cash provided by operating activities 4,137 15,390
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (28,145) (34,555)
Proceeds from sale of marketable securities 36,051 26,203
Purchase of property and equipment (2,407) (5,573)
Acquisition of a business (2,994) (3,000)
Other investing activities - (159)
-------- --------
Net cash provided (used) by investing activities 2,505 (17,084)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 7 1,448
Net repayments under credit arrangements (33) (573)
-------- --------
Net cash (used) provided by financing activities (26) 875
-------- --------
Elimination of net cash activities of
subsidiary for a change in fiscal year (126) -
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (1,125) 847
-------- --------
Net increase in cash and cash equivalents 5,365 28
Cash and cash equivalents at beginning of period 53,508 62,005
-------- --------
Cash and cash equivalents at end of period $ 58,873 $ 62,033
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the June 30, 2000 financial statements, the
Company determined that at June 30, 2000, its intercompany accounts did not
fully eliminate in consolidation. The unreconciled difference, amounting to $7.6
million, was originally classified as a reduction to advance billings on the
consolidated balance sheet. Based on subsequent analysis, the Company has now
determined the appropriate accounts to which the difference previously included
in advance billings should have been recorded. Accordingly, the financial
statements for the year ended June 30, 2000 have been restated to reflect these
changes. The restatement resulted in a decrease to the June 30, 2000 working
capital of $4.1 million principally related to currency translation adjustments
which increased the previously reported balance for advance billings and
correspondingly decreased stockholders' equity. In addition, total assets at
June 30, 2000 increased by $1.0 million primarily due to adjustments to unbilled
and trade receivables for the same reason.
As part of the adjustments described above, the Company also identified certain
charges that should have been made to its consolidated statement of income for
the fiscal year ended June 30, 2000 of $1.6 million on a pre-tax basis,
resulting in a $1.1 million reduction to net income for the year. Net income for
the quarter ended September 30, 1999 was reduced by $0.6 million as part of the
restatement. This adjustment reduced earnings per share on a diluted basis to
$0.15 from $0.18 for the quarter ended September 30, 1999.
The impact of this restatement on the condensed consolidated financial
statements for the quarter ended September 30, 2000 is as follows:
($ in thousands)
As Reported As Restated
----------- -----------
Balance Sheet
Property and equipment, net $ 40,826 $ 40,871
Accounts payable 26,008 24,950
Advance billings 90,067 93,062
Other current liabilities 51,745 51,040
Accumulated other comprehensive loss (13,119) (13,206)
Retained earnings 41,043 39,943
Stockholders' equity 183,818 182,631
Comprehensive loss (6,216) (3,380)
NOTE 2 -- 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, 2000, 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, 2000.
NOTE 3 -- EARNINGS (LOSS) PER SHARE
The following table outlines the basic and diluted earnings (loss) per common
share computations (in thousands, except per share data):
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
(Restated) (Restated)
--------------------------
Net income (loss) attributable to
common shares $ (101) $ 3,870
======== ========
BASIC (LOSS) EARNINGS PER COMMON SHARE
COMPUTATION:
Weighted average common shares outstanding 24,721 25,153
======== ========
Basic earnings (loss) per common share $ (0.00) $ 0.15
======== ========
DILUTED (LOSS) EARNINGS PER COMMON SHARE
COMPUTATION:
Weighted average common shares outstanding
Shares attributable to common stock
outstanding 24,721 25,153
Shares attributable to common stock
options - 132
-------- --------
24,721 25,285
======== ========
Diluted earnings (loss) per common share $ (0.00) $ 0.15
======== ========
7
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) has been calculated by the Company in accordance
with FASB Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." Comprehensive income (loss), which is
comprised of net income (loss) and foreign currency translation adjustments,
totaled $(3.4) million and $4.4 million for the three months ended September 30,
2000 and 1999, respectively.
NOTE 5 - SEGMENT INFORMATION
The Company is managed through four reportable segments, namely, the Clinical
Research Services, the Consulting Group, Medical Marketing Services, and
Perceptive Informatics, Inc. Clinical Research Services constitutes the
Company's core business and includes clinical trials management, biostatistics
and data management, as well as related medical advisory, and investigator site
services. PAREXEL's Consulting Group 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. Medical Marketing Services provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive Informatics, Inc. provides a variety of
web-based portal solutions designed to accelerate and enhance the clinical
development and product launch processes, as well as a range of voice and data
systems. It also offers an industry-leading medical imaging service supporting
the use of advanced imaging techniques in clinical development.
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, restructuring and other charges, interest income
(expense), other income (expense), and income tax expense in segment
profitability.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(in thousands) 2000 1999
--------------------------
Net revenue:
Clinical Research Services $ 54,759 $ 65,093 (a)
Medical Marketing Services 13,766 11,340
Consulting Group 17,261 15,335
Perceptive Informatics 2,429 -
--------- ----------
$ 88,215 $ 91,768
========= ==========
Gross profit:
Clinical Research Services $ 16,784 $ 23,446 (a)
Medical Marketing Services 4,501 3,046
Consulting Group 3,321 3,143
Perceptive Informatics (681) -
--------- ----------
$ 23,925 $ 29,635
========= ==========
(a) Includes results for Perceptive Informatics in fiscal 2000.
8
NOTE 6 - ACQUISITION
Effective September 1, 2000, the Company acquired a majority interest in
FARMOVS, a clinical pharmacology research business and bioanalytical laboratory
located in Bloemfontein, South Africa for approximately $3.0 million. The
minority interest in FARMOVS of $0.6 million is reported on the condensed
consolidated balance sheet for the first quarter of fiscal 2001. In connection
with this transaction, the Company recorded approximately $2.0 million related
to the excess cost over the fair value of the interest in the net assets
acquired. This goodwill is being amortized using a straight-line method over
15 years.
NOTE 7 - RESTRUCTURING AND OTHER CHARGES
During the year ended June 30, 2000, the Company recorded restructuring and
other charges of $13.1 million. These charges included $7.2 million for employee
severance costs related to the Company's decision to eliminate approximately 475
managerial and staff positions in order to reduce personnel costs as a result of
a material dollar volume of contract cancellations. The charges also included
$4.3 million for lease termination costs related to continued efforts to
consolidate certain facilities and reduce excess space in certain locations, in
addition to a benefit derived from a change in the Company's original estimate
of when certain facilities would be sublet. The remaining charges, totaling $1.6
million, primarily related to the write-off of certain intangible assets and
other investments, which are not expected to produce future value. The Company
is planning to further consolidate facilities to gain further cost savings. In
this regard, the Company plans to take an additional facilities-related charge
of between $5 and $7 million in fiscal 2001. Overall, the Company anticipates
these restructuring and other charges will result in aggregate cost savings of
$12 to $16 million once implemented.
During the three months ended September 30, 2000, the Company reversed $1.5
million of the restructuring reserve originally recorded in March 2000 because
of a change in estimate. Concurrently, the Company recorded a new restructuring
charge of $0.8 million related to the exit from a small business operation
located in the United States.
Current quarter activity against the restructuring and other charges accrual
(which is included in "Other current liabilities" in the Condensed Consolidated
Balance Sheet) was as follows (in thousands):
Balance
Balance as of Charges as of
June 30, Net and September 30,
2000 Provisions Reversals 2000
------------- ---------- --------- -------------
Employee severance costs $ 4,183 $100 $(2,664) $1,619
Facilities related charges 4,976 120 (265) 4,831
Other charges (15) 552 15 552
------- ---- ------- ------
$ 9,144 $772 $(2,914) $7,002
======= ==== ======= ======
9
NOTE 8 - CHANGE IN FISCAL YEAR OF CERTAIN SUBSIDIARIES
In the first quarter of fiscal 2001, the Company changed the fiscal year-end of
its MMS Europe unit and subsidiaries from May 31 to June 30 to be consistent
with the consolidated company. As such, the statements of operations for those
units for June 2000 are recorded as a net adjustment of approximately $126,000
to retained earnings of the Company.
NOTE 9 - 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 are made in the open market subject to market conditions. The
Company did not acquire any shares during the three months ended September 30,
2000. The Company has acquired 651,000 shares at a cost of $6.4 million since
the inception of the program.
NOTE 10 - RECENTLY ISSUED ACCOUNTING STANDARD
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" ("FIN 44"). FIN 44 clarifies the application of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for
certain issues such as the definition of an employee for the purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination, among other
issues. FIN 44 does not address any issues related to the application of the
fair value method in Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-based Compensation." FIN 44 is effective for
the Company this fiscal year. The adoption of FIN 44 did not have a material
impact on the Company's financial position or its results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition" ("SAB 101"). SAB 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues in financial statements. SAB 101, which was
delayed by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26,
2000, must be implemented by the Company by the fourth quarter of fiscal 2001.
The Company is currently in the process of evaluating the impact, if any, that
SAB 101 will have on its consolidated financial position or results of
operations.
10
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new standards
for the recognition of gains and losses on derivative instruments and provides
guidance as to whether a derivative may be accounted for as a hedging
instrument. Gain or loss from hedging transactions may be wholly or partially
recorded in earnings or comprehensive income as part of a cumulative translation
adjustment, depending upon the classification of the hedge transaction. Gain or
loss on a derivative instrument not classified as a hedging instrument is
recognized in earnings in the period of change. SFAS No. 133 is effective
for the Company this fiscal year. The Company does not believe 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.
The statements included in this quarterly report on Form 10-Q, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", may contain "forward-looking statements", within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the adequacy of the
Company's existing capital resources and future cash flows from operations,
statements regarding expected financial results, future growth and customer
demand. For this purpose, any statements that are not statements of historical
fact may be deemed forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. The Company's
actual operating performance, actual expense savings and other operating
improvements resulting from recent restructurings, and actual future results may
differ significantly from the results discussed in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, risks associated with: the cancellation, revision, or delay
of contracts, including those contracts in backlog; the Company's dependence on
certain industries and clients; the Company's ability to manage growth and its
ability to attract and retain employees; the Company's ability to complete
additional acquisitions and to integrate newly acquired businesses or enter into
new lines of business; government regulation of certain industries and clients;
competition and consolidation within the pharmaceutical industry; the potential
for significant liability to clients and third parties; the potential adverse
impact of health care reform; and the effects of exchange rate fluctuations.
These factors and others are discussed under "RISK FACTORS" below.
11
OVERVIEW
The Company is a leading clinical 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: 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 is managed through four reportable segments, namely, Clinical
Research Services ("CRS"), Consulting Group ("PCG"), Medical Marketing Services
("MMS"), and Perceptive Informatics Inc. CSR constitutes the Company's core
business and includes clinical trials management, biostatistics and data
management, as well as related medical advisory and investigator site services.
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. MMS provides a
full spectrum of market development, product development, and targeted
communications services in support of product launch. Perceptive Informatics
Inc. provides a variety of web-based portal solutions designed to accelerate and
enhance the clinical development and product launch processes, as well as a
range of voice and data systems. It also offers a medical imaging service
supporting the use of advanced imaging techniques in clinical development.
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 thirty to sixty days' notice or can delay execution of services. Clients
may terminate or delay contracts for a variety of reasons, including, among
others: merger or potential merger-related activities, 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.
12
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 paid 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.
Effective September 1, 2000, the Company acquired a majority interest in
FARMOVS, a clinical pharmacology research business and bioanalytical laboratory
located in Bloemfontein, South Africa for approximately $3.0 million. The
minority interest in FARMOVS of $0.6 million is reported on the condensed
consolidated balance sheet for the first quarter of fiscal 2001. In connection
with this transaction, the Company recorded approximately $2.0 million related
to the excess cost over the fair value of the interest in the net assets
acquired. This goodwill is being amortized using a straight-line method over
15 years.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Net revenue decreased by $3.6 million, or 3.9%, to $88.2 million for the three
months ended September 30, 2000 from $91.8 million for the same period one year
ago. CRS revenue decreased by $10.3 million, or 15.9%, to $54.8 million
primarily due to the impact of cancellations and delays. PCG revenue increased
by $1.9 million, or 12.6%, to $17.3 million, in part due to the addition of $0.6
million of incremental revenue resulting from the acquisition of a majority
interest in FARMOVS, a clinical pharmacology research business and bioanalytical
laboratory located in South Africa. MMS revenue increased by $2.4 million, or
21.4%, to $13.8 million primarily due to an increase in the volume of the
medical communications business. The total Company decrease in net revenue,
excluding the incremental revenue associated with the acquisition of the
majority interest in FARMOVS, was $4.2 million, or 4.6%. The Company began
reporting a fourth business segment, Perceptive Informatics, in the first
quarter of fiscal 2001. Net revenue for Perceptive Informatics was $2.4 million
for the three months ended September 30, 2000, but was included as part of
Clinical Research Services for the prior year quarter.
Direct costs increased by $2.2 million, or 3.5%, to $64.3 million for the three
months ended September 30, 2000 from $62.1 million for the same period one year
ago. On a segment basis, CRS direct costs decreased $3.6 million to $38.0
million from $41.6 million in the prior year quarter; PCG direct costs increased
$1.7 million to $13.9 million from $12.2 million; MMS direct costs increased
$1.0 million to $9.3 million from $8.3 million; and Perceptive Informatics
reported direct costs of $3.1 million in the current quarter. The decrease in
direct costs of CRS was primarily due, in part, to the creation of the fourth
business segment, Perceptive Informatics, in the current quarter. PCG direct
costs increased as a result of increased volume of business. Despite an increase
in direct costs for MMS, margins increased due to a more profitable contract
mix, improved cost management, and the impact of currency fluctuations on the
European cost base.
13
Selling, general and administrative expenses increased by $1.0 million, or 5.2%,
to $20.2 million for the three months ended September 30, 2000 from $19.2
million for the same period one year ago. The increase was due to increased
personnel, hiring, and facilities costs necessary to accommodate the Company's
future growth. Selling, general and administrative expenses as a percentage of
net revenue increased to 22.9% for the three months ended September 30, 2000
from 20.9% for the same period one year ago.
Depreciation and amortization expense increased by $0.5 million, or 10.6%, to
$5.6 million for the three months ended September 30, 2000 from $5.1 million for
the same period one year ago. During the quarter ended September 30, 2000, the
Company adjusted downward the estimated useful life of furniture related to
certain facilities which it plans to consolidate and abandon, resulting in
accelerated depreciation expense of $0.3 million. Depreciation and amortization
expense as a percentage of net revenues increased to 6.4% for the three months
ended September 30, 2000 from 5.6% for the same period last fiscal year.
The Company incurred an operating loss of $1.1 million for the three months
ended September 30, 2000 versus income from operations of $5.7 million for the
same period last year. Excluding restructuring and other charges of $ (0.7)
million recorded during the quarter (see RESTRUCTURING AND OTHER CHARGES below),
and the additional depreciation expense of $0.3 million related to the Company's
decision to abandon certain facilities, the operating loss would have been $1.5
million for the three months ended September 30, 2000.
Income from operations (excluding restructuring and other charges and the
additional depreciation expense) decreased as a percentage of net revenue to a
negative 2.1% for the three months ended September 30, 2000 from a positive 5.8%
for the same period last year.
Other income, net was $1.3 million for the quarter, an increase of $1.0 million
over the same period last year. The increase was primarily due to foreign
exchange gains.
The Company's effective income tax rate was 153% for the three months ended
September 30, 2000 due to a relatively low level of profitability and losses in
some of the Company's European affiliates. The current period tax rate was
impacted by these foreign losses where the Company will not be able to take a
tax benefit. During the same quarter one year ago, the tax rate was 35.3%.
RESTRUCTURING AND OTHER CHARGES
During the year ended June 30, 2000, the Company recorded restructuring and
other charges of $13.1 million. These charges included $7.2 million for employee
severance costs related to the Company's decision to eliminate approximately 475
managerial and staff positions in order to reduce personnel costs as a result of
a material dollar volume of contract cancellations. The charges also included
$4.3 million for lease termination costs related to continued efforts to
consolidate certain facilities and reduce excess space in certain locations, in
addition to a benefit derived from a change in the Company's original estimate
of when certain facilities would be sublet. The remaining charges, totaling $1.6
million, primarily related to the write-off of certain intangible assets and
other investments, which are not expected to produce future value. The Company
is planning to further consolidate facilities to gain future cost savings. In
this
14
regard, the Company plans to take an additional facilities-related charge of
between $5 and $7 million in fiscal 2001. Overall, the Company anticipates these
restructuring and other charges will result in aggregate cost savings of $12 to
$16 million once implemented.
During the three months ended September 30, 2000, the Company reversed $1.5
million of the restructuring reserve originally recorded in March 2000 because
of a change in estimate. Concurrently, the Company recorded a new restructuring
charge of $0.8 million related to the exit from a small business operation
located in the United States.
Current quarter activity against the restructuring and other charges accrual
(which is included in "Other current liabilities" in the Condensed Consolidated
Balance Sheet) was as follows (in thousands):
Balance
Balance as of Charges as of
June 30, Net and September 30,
2000 Provisions Reversals 2000
------------- ---------- --------- -------------
Employee severance costs $4,183 $100 $(2,664) $1,619
Facilities related charges 4,976 120 (265) 4,831
Other charges (15) 552 15 552
----- ---- ------- ------
$9,144 $772 $(2,914) $7,002
====== ==== ======= ======
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 63 days at September 30, 2000 compared to
55 days at June 30, 2000. The number of days revenue outstanding in accounts
receivable, net of advanced billings, can vary based on contractual milestones
and the timing and size of cash receipts.
15
In September 1999, the Board of Directors authorized the repurchase of up to $20
million of the Company's common stock. As of September 30, 2000 a total of
651,000 shares at a total cost of $6.4 million had been repurchased.
The Company's cash and cash equivalents were $58.9 million at September 30,
2000, an increase of $5.4 million from $53.5 million at June 30, 2000.
Net cash provided by operating activities of $4.1 million for the three months
ended September 30, 2000 resulted primarily from depreciation and amortization
of $5.7 million in addition to an increase of $5.0 million in accounts payable
offset by an increase in accounts receivable net of advanced billings of $6.5
million.
Net cash provided by investing activities of $2.5 million for the three months
ended September 30, 2000 consisted primarily of net sales of marketable
securities of $7.9 million offset by capital expenditures of $2.4 million and a
$3.0 million cash payment for a business acquisition.
Financing activities for the three months ended September 30, 2000 were not
material.
The Company has domestic and foreign line of credit arrangements with banks
totaling approximately $3.2 million. At September 30, 2000, the Company had
approximately $2.9 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,
and restructuring related costs. 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" ("FIN 44"). FIN 44 clarifies the application of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for
certain issues such as the definition of an employee for the purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination, among other
issues. FIN 44 does not address any issues related to the application of the
fair value method in Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-based Compensation." FIN 44 is effective for
the Company this fiscal year. The adoption of FIN 44 did not have a material
impact on the Company's financial position or its results of operations.
16
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition" ("SAB 101"). SAB 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues in financial statements. SAB 101, which was
delayed by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26,
2000, must be implemented by the Company by the fourth quarter of fiscal 2001.
The Company is currently in the process of evaluating the impact, if any, that
SAB 101 will have on its consolidated financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new standards
for the recognition of gains and losses on derivative instruments and provides
guidance as to whether a derivative may be accounted for as a hedging
instrument. Gain or loss from hedging transactions may be wholly or partially
recorded in earnings or comprehensive income as part of a cumulative translation
adjustment, depending upon the classification of the hedge transaction. Gain or
loss on a derivative instrument not classified as a hedging instrument is
recognized in earnings in the period of change. SFAS No. 133 is effective for
the Company this fiscal year. The Company does not believe adoption of SFAS No.
133 will have a material impact on its financial position or its results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in 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 its 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 thirty to sixty days' notice or can delay execution of services. Clients
terminate or delay their contracts for a variety of reasons, including, but not
limited to:
. products being tested fail to satisfy safety requirements;
. products have unexpected or undesired clinical results;
. the client decides to forego a particular study, perhaps for economic
reasons;
. not enough patients enroll in the study;
. not enough investigators are recruited; or
. production problems cause shortages of the drug.
17
In addition, the Company believes that pharmaceutical companies may proceed with
fewer clinical trials if they are trying to reduce costs. These factors may
cause pharmaceutical 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 Company's
financial performance. Refer to "Restructuring and Other Charges" above.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE
The Company's quarterly and annual operating results have varied, and will
continue to vary. Factors that cause these variations include:
. the level of new business authorizations in a particular quarter or year;
. the timing of the initiation, progress, or cancellation of significant
projects;
. exchange rate fluctuations between quarters or years;
. the mix of services offered in a particular quarter or year;
. the timing of the opening of new offices;
. the timing of other internal expansion costs;
. the timing and amount of costs associated with integrating acquisitions; and
. the timing and amount of startup costs incurred in connection with the
introduction of new products, services or subsidiaries.
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 depends on research and development expenditures by pharmaceutical
and biotechnology companies to sustain a large part of its business. The
Company's operations could be materially and adversely affected if:
. its clients' businesses experience financial problems or are affected by a
general economic downturn;
. consolidation in the pharmaceutical or biotechnology industries leads to a
smaller client base for the Company; or
. its clients reduce their research and development expenditures.
Furthermore, the Company has benefited in the past from the tendency of
pharmaceutical companies to out-source large clinical research projects. If this
tendency slows or reverses, the Company's operations would be materially and
adversely affected. In the first quarter of fiscal 2001, the Company's five
largest clients accounted for 39% of its consolidated net revenue, and one
client accounted for 14% of consolidated revenue. In the first quarter of fiscal
2000, the Company's five largest clients accounted for
18
49% of its consolidated net revenue, and one client accounted for 26% of
consolidated net revenue. The Company could suffer a material adverse effect if
it lost or experienced a material reduction in the business of a significant
client.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND THE
COMPANY MUST PROPERLY MANAGE THAT EXPANSION
The Company's business has expanded substantially in the past. Rapid expansion
could strain the Company's operational, human and financial resources. In order
to manage 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, sales, professional, scientific and
technical operating personnel.
The Company will face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
. assimilate differences in foreign business practices, exchange rates and
regulatory requirements;
. operate amid political and economic instability;
. hire and retain qualified personnel; and
. overcome language, tarrifs and other 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's growth depends on its ability to make strategic acquisitions. 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
acceptable terms and conditions. Additionally, the Company faces several
obstacles in connection with the acquisitions it consummates, including:
. Difficulties and expenses associated with assimilation of the operations and
services or products of the acquired companies;
. Management's attention will necessarily be diverted from other business
concerns; and
. The loss of some or all of the key employees of the acquired
company.
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 also experience difficulty integrating
acquired companies into its operations.
19
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 Chairman, President and Chief Executive Officer. The Company
maintains key man life insurance on Mr. von Rickenbach. 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. Additionally, 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:
. operating results;
. earnings estimates by analysts;
. market conditions in the industry;
. prospects of health care reform;
. changes in government regulations; and
. 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
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of 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.
20
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 complicated and more extensive. However, the FDA recently
announced regulatory changes intended to streamline the approval process for
biotechnology products by applying the same standards for approval of
biotechnology products as are in effect for conventional drugs. 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 by relaxed government regulatory
requirements or simplified drug approval procedures, since such actions
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 its research data.
THE COMPANY FACES INTENSE COMPETITION
The Company primarily competes against in-house departments of drug companies,
other 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:
. 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 strength and stability; and
. price.
The contract research organization 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
research contracts arising out of the consolidation within the drug industry and
the growing tendency of drug companies to outsource to a small number of
preferred contract research organizations.
21
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,
pharmaceutical 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 42% of its net revenue for the three months
ended September 30, 2000 from operations outside of North America, the same
percentage as the comparable prior year period. 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.
PART II. OTHER INFORMATION
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 did not file any Current Reports on Form 8-K during the three
months ended September 30, 2000.
22
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 5th day of January 2001.
PAREXEL International Corporation
Date: January 5, 2001 By: /s/ Josef H. von Rickenbach
---------------------------------
Josef H. von Rickenbach
Chairman of the Board, President, and Chief
Executive Officer
Date: January 5, 2001 By: /s/ James F. Winschel, Jr.
--------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief Financial
Officer
23
EXHIBIT NO. DESCRIPTION
-----------
27 Financial Data Schedule
24