1 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 MARCH 31, 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 May 11, 2000, there were 25,349,158 shares of PAREXEL International Corporation common stock outstanding, excluding 487,000 shares in treasury. 2 PAREXEL INTERNATIONAL CORPORATION INDEX ----- PAGE ---- PART I. FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited): Condensed Consolidated Balance Sheets - March 31, 2000 and June 30, 1999 3 Condensed Consolidated Statements of Operations - Three months ended March 31, 2000 and 1999; Nine months ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosure About Market Risk 16 Risk Factors 17 PART II. OTHER INFORMATION Item 1 Legal Proceedings 22 Item 6 Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT INDEX 24 2 3 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) MARCH 31, JUNE 30, 2000 1999 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 79,047 $ 62,005 Marketable securities 36,397 27,952 Accounts receivable, net 149,363 150,520 Prepaid expenses 7,400 7,917 Other current assets 17,886 16,432 --------- --------- Total current assets 290,093 264,826 Property and equipment, net 42,894 47,065 Other assets 21,784 21,674 --------- --------- $ 354,771 $ 333,565 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Credit arrangements $ 296 $ 1,057 Accounts payable 20,006 14,698 Advance billings 82,167 69,776 Other current liabilities 52,193 46,538 --------- --------- Total current liabilities 154,662 132,069 Other liabilities 9,265 9,464 --------- --------- Total liabilities 163,927 141,533 --------- --------- 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: 25,378,570 and 25,132,461 at March 31, 2000 and June 30, 1999, respectively; shares outstanding: 24,891,570 and 25,103,049 at March 31, 2000 and June 30, 1999, respectively 254 251 Additional paid-in capital 161,764 159,592 Retained earnings 39,840 35,785 Treasury stock, at cost (4,959) (17) Accumulated other comprehensive income (6,055) (3,579) --------- --------- Total stockholders' equity 190,844 192,032 --------- --------- $ 354,771 $ 333,565 ========= ========= See notes to condensed consolidated financial statements. 3 4 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED MARCH 31, MARCH 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- Net revenue $ 97,253 $ 90,032 $ 286,978 $ 260,722 --------- --------- --------- --------- Costs and expenses: Direct costs 67,110 59,424 196,033 172,051 Selling, general and administrative 20,117 18,398 58,566 52,792 Depreciation and amortization 5,755 4,507 16,006 13,222 Restructuring and other charges 13,400 - 13,088 - --------- --------- --------- --------- 106,382 82,329 283,693 238,065 --------- --------- --------- --------- Income (loss) from operations (9,129) 7,703 3,285 22,657 Other income, net 1,780 1,044 4,402 2,384 --------- --------- --------- --------- Income (loss) before provision (benefit) (7,349) 8,747 7,687 25,041 for income taxes Provision (benefit) for income taxes (1,901) 3,062 3,632 8,710 --------- --------- --------- --------- Net income (loss) ($ 5,448) $ 5,685 $ 4,055 $ 16,331 ========= ========= ========= ========= Earnings (loss) per share: Basic ($ 0.22) $ 0.23 $ 0.16 $ 0.66 Diluted ($ 0.22) $ 0.23 $ 0.16 $ 0.65 Shares used in computing earnings per share: Basic 24,883 24,834 24,977 24,777 Diluted 24,883 25,064 25,081 25,105 See notes to condensed consolidated financial statements. 4 5 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) FOR THE NINE MONTHS ENDED MARCH 31, --------- 2000 1999 ---- ---- Cash flows from operating activities: Net income $ 4,055 $ 16,331 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,006 13,222 Changes in operating assets and liabilities, net of effects of acquisition 23,938 (7,358) -------- -------- Net cash provided by operating activities 43,999 22,195 -------- -------- Cash flows from investing activities: Purchase of marketable securities (68,397) (68,840) Proceeds from sale of marketable securities 59,636 65,026 Other investing activities 235 - Acquisition of business (3,000) 633 Purchase of property and equipment (11,808) (13,431) -------- -------- Net cash used in investing activities (23,334) (16,612) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 2,175 3,858 Repurchase of common stock (4,941) - Repayments on credit arrangements (716) (1,386) -------- -------- Net cash (used in) provided by financing activities (3,482) 2,472 -------- -------- Effect of exchange rate changes on cash and cash equivalents (141) (1,836) -------- -------- Net increase in cash and cash equivalents 17,042 6,219 Cash and cash equivalents at beginning of period 62,005 39,941 -------- -------- Cash and cash equivalents at end of period $ 79,047 $ 46,160 ======== ======== See notes to condensed consolidated financial statements. 5 6 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 and nine months ended March 31, 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, 1999. NOTE 2 -- 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 FOR THE NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2000 1999 2000 1999 ---- ---- ---- ---- Net income (loss) attributable to common shares ($5,448) $5,685 $4,055 $16,331 ======= ====== ====== ======= BASIC EARNINGS (LOSS) PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding 24,883 24,834 24,977 24,777 ======= ====== ====== ======= Basic earnings (loss) per common share ($ 0.22) $ 0.23 $ 0.16 $ 0.66 ======= ====== ====== ======= DILUTED EARNINGS (LOSS) PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding: Shares attributable to common stock outstanding 24,883 24,834 24,977 24,777 Shares attributable to common stock options -- 230 104 328 ======= ====== ====== ======= 24,883 25,064 25,081 25,105 ======= ====== ====== ======= Diluted earnings (loss) per common share ($ 0.22) $ 0.23 $ 0.16 $ 0.65 ======= ====== ====== ======= 6 7 NOTE 3 - 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 $(6.8) million and $4.5 million for the three months ended March 31, 2000 and 1999, respectively, and $1.6 million and $14.0 for the nine months ended March 31, 2000 and 1999, respectively. NOTE 4 - SEGMENT INFORMATION The Company is managed through three reportable segments, namely, the Contract Research Services group, the Consulting Group and the Medical Marketing Group. The Contract Research Services group constitutes the Company's core business and includes clinical trials management, biostatistics and data management, as well as related medical advisory, information technology, and investigator site services. PAREXEL's Consulting Group provides technical expertise in such disciplines as clinical pharmacology, regulatory affairs, industry training, publishing, and management consulting. These consultants identify options and propose solutions to address clients' product development, registration, and commercialization issues. The Medical Marketing Services group provides a full spectrum of market development, product development, and targeted communications services in support of product launch. The Company evaluates its segment performance and allocates resources based on revenue and gross profit (net revenue less direct costs), while other operating costs are evaluated on a geographical basis. Accordingly, the Company does not include selling, general and administrative expenses, depreciation and amortization expense, restructuring and other charges, interest income (expense), other income (expense), and income tax expense in segment profitability. FOR THE THREE FOR THE NINE MONTHS ENDED MARCH 31, MONTHS ENDED MARCH 31, ---------------------- ---------------------- ($ in thousands) 2000 1999 2000 1999 ---------------- ---- ---- ---- ---- NET REVENUE: CONTRACT RESEARCH SERVICES $ 67,766 $ 60,899 $202,329 $174,801 CONSULTING GROUP 17,477 14,710 49,676 42,344 MEDICAL MARKETING SERVICES 12,010 14,423 34,973 43,577 -------- -------- -------- -------- $ 97,253 $ 90,032 $286,978 $260,722 ======== ======== ======== ======== GROSS PROFIT: CONTRACT RESEARCH SERVICES $ 22,478 $ 22,745 $ 69,817 $ 64,480 CONSULTING GROUP 4,173 3,933 11,372 12,426 MEDICAL MARKETING SERVICES 3,492 3,930 9,756 11,765 -------- -------- -------- -------- $ 30,143 $ 30,608 $ 90,945 $ 88,671 ======== ======== ======== ======== 7 8 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 a charge of 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 - RESTRUCTURING AND OTHER CHARGES During the three months ended March 31, 2000, the Company recorded restructuring and other charges of $13.4 million. These charges include $7.2 million of 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 include $4.6 million for lease termination costs related to continued efforts to consolidate certain facilities and reduce excess space in certain locations in addition to changes in the Company's original estimate of when certain facilities would be sublet. The remaining charges, totaling $1.6 million, primarily relate to the write-off of certain intangible assets and other investments which will not produce future value. In addition, the Company is actively reviewing plans to further consolidate facilities to gain further cost savings. As these plans are finalized, the Company plans to take an additional facilities related charge of between $5 and $10 million sometime before the end of calendar year 2000. Overall, the Company anticipates these restructuring and other charges will result in aggregate cost saving of $15 to $20 million in fiscal 2001. During the three months ended June 30, 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 a benefit against the accrual balance of $312,000 attributed to the favorable impact of a lease buyout agreement not previously anticipated. Current year activity against the restructuring and other charges accrual (which is included in "Other current liabilities" in the Condensed Consolidated Balance Sheet) has been as follows (in thousands): Balance Net Balance June 30, 1999 Provisions Charges March 31, 2000 ------------- ---------- ------- -------------- Employee severance costs -- $ 7,157 $ 350 $ 6,807 Facility related charges $ 2,557 4,317 1,443 5,431 Other Charges -- 1,614 1,088 526 ======= ======= ======= ======= Total $ 2,557 $13,088 $ 2,881 $12,764 ======= ======= ======= ======= As of March 31, 2000, approximately 50% of the planned positions had been eliminated, with the remainder scheduled to occur through the second quarter of fiscal year 2001. 8 9 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 are made in the open market subject to market conditions. The Company acquired 127,000 shares at a total cost of $1.2 million during the three months ended March 31, 2000 and 487,000 shares at a cost of $4.9 million since the inception of the program. NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARD In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the Staff's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in the Company's second quarter of the fiscal year 2001. The effects of applying this guidance will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not expect the application to have a material effect on their financial statements, however the final evaluation of SAB 101 is not yet complete. 9 10 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 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. Important 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 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 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 under "RISK FACTORS" 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: - - 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. 10 11 The Company is managed through three reportable segments, namely, the Contract Research Services group, the Consulting Group and the Medical Marketing Services group. The Contract Research Services group 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 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 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 thirty to sixty days' notice or can delay execution of services. Clients terminate or delay contracts for a variety of reasons, including, among others: - - the failure of products being tested to satisfy safety requirements, - - unexpected or undesired clinical results of the product, - - the client's decision to forego a particular study, - - insufficient patient enrollment or investigator recruitment, or - - production problems resulting in shortages of the drug. During the nine months ended March 31, 2000 the Company experienced contract cancellations of $140 million, including $36 million related to the Novartis contracts discussed below, compared to contract cancellations of $41 million for the same nine month period last year. In March 2000, the Company announced that Novartis, a key customer, had reduced the amount of work being outsourced to PAREXEL's Contract Research Services group due to Novartis' reprioritization of its research pipeline. As a result, Contract Research Services revenue was impacted by approximately $1 to $2 million in the third quarter of fiscal 2000 and will be impacted by approximately $9 million in the fourth quarter of fiscal 2000, and by $40 to $45 million in fiscal 2001. The Company recorded a restructuring charge of $13.4 million in the third quarter of fiscal 2000 to reduce employee costs and facility expenses to match the reduced contract revenue volume. See further discussion of this charge under "RESTRUCTURING AND OTHER CHARGES" below. 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 11 12 selling and administrative employees, professional services and advertising costs, as well as allocated costs related to facilities and information systems. RESULTS OF OPERATIONS Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Net revenue increased by $7.2 million, or 8.0%, to $97.3 million for the three months ended March 31, 2000 from $90.0 million for the same period one year ago. Contract Research Service revenue increased by $6.9 million, or 11.3%, to $67.8 million primarily due to an increase in the number of contracts being serviced by the Company, offset partially by the impact of reduced contract revenue from Novartis. The Consulting Group revenue increased by $2.8 million, or 18.8%, to $17.5 million primarily due to the addition of $2.5 million of incremental revenue resulting from the acquisitions of Groupe PharMedicom S. A.("PharMedicom") (in March 1999) and CEMAF (in September 1999). Medical Marketing Services revenue declined by $2.4 million, or 16.7%, to $12.0 million primarily due to the wind-down of a significant project at the end of fiscal 1999. The total Company increase in net revenue, excluding the incremental revenue associated with the acquisitions of PharMedicom and CEMAF, was $4.7 million, or 5.3%. There can be no assurance that the Company can sustain this rate of increase in total Company net revenue from continuing operations in future periods. See "Risk Factors." Direct costs increased by $7.7 million, or 12.9%, to $67.1 million for the three months ended March 31, 2000 from $59.4 million for the same period one year ago. The increase is primarily related to the 8.0% increase in net revenues which necessitated increases in hiring and personnel costs, along with facilities and information system costs necessary to support the increased level of operations. Direct costs as a percentage of net revenue increased to 69.0% for the three months ended March 31, 2000 from 66.0% for the same period last year. This increase is primarily due to Contract Research Services which was impacted by the reduction of Novartis contract volume and the initiative to realign management and operations along client lines, and to the Consulting Group as part of the Company's geographic expansion efforts. Selling, general and administrative expenses increased by $1.7 million, or 9.3%, to $20.1 million for the three months ended March 31, 2000 from $18.4 million for the same period one year ago. The increase is due to increased personnel, hiring expenses, and facilities costs necessary to accommodate the Company's growth. Selling, general and administrative expenses as a percentage of net revenue increased to 20.7% for the three months ended March 31, 2000 from 20.4% for the same period one year ago. Depreciation and amortization expense increased by $1.2 million, or 27.7%, to $5.8 million for the three months ended March 31, 2000 from $4.5 million for the same period one year ago. This increase was primarily due to an increase in capital spending on information systems technology, facility improvements and furnishings to support the increased level of operations. The Company also adjusted downward the estimated useful life of leasehold improvements related to certain facilities which it plans to consolidate and abandon, resulting in additional depreciation expense of $0.5 million. Depreciation and amortization expense as a percentage of net revenues increased to 5.9% for the three months ended March 31, 2000 from 5.0% for the same period last fiscal year. The Company incurred an operating loss of $9.1 million for the three months ended March 31, 2000 versus income from operations of $7.7 million for the same period last year. Excluding restructuring and other charges of $13.4 million recorded during the quarter (see RESTRUCTURING AND OTHER CHARGES below) and the aforementioned additional depreciation expense of $0.5 million related to the Company's 12 13 decision to abandon certain facilities, operating income would have been $4.8 million for the three months ended March 31, 2000. Income from operations, excluding restructuring and other charges and the additional depreciation expense, decreased as a percentage of net revenue to 4.9% for the three months ended March 31, 2000 from 8.6% for the same period last year. Other income, net was $1.8 million for the quarter, an increase of $0.7 million over the same period last year. The increase was primarily due to interest income based on higher average balances of cash and marketable securities and to foreign exchange gains. The Company had an effective income tax rate of 40.1% for the three months ended March 31, 2000 based on pre-tax results excluding the impact of restructuring and other charges and the additional depreciation expense, compared to 35.0% for the same period last fiscal year. The increase is attributed to an unfavorable change in the geographic mix of taxable income to tax jurisdictions with less favorable tax rates and some foreign losses where the Company can not record a tax benefit. Nine months Ended March 31, 2000 Compared to Nine months Ended March 31, 1999 Net revenues increased by $26.3 million, or 10.1%, to $287.0 million for the nine months ended March 31, 2000 compared to $260.7 million from the same period last year. Contract Research Services revenue increased by $27.5 million, or 15.7%, to $202.3 million due primarily to an increase in the number of contracts being serviced by the Company. The Consulting Group revenue increased by $7.3 million, or 17.3%, to $49.7 million primarily due to the addition of $7.1 million of incremental revenue resulting from the acquisitions of PharMedicom (in March 1999) and CEMAF (in September 1999). Medical Marketing Services revenue decreased by $8.6 million, or 19.7%, to $35.0 million primarily due to the wind down of a significant project at the end of fiscal 1999. The total company increase in net revenue, excluding the incremental revenue associated with the acquisitions of PharMedicom and CEMAF, was $19.2 million, or 7.4%. 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 $24.0 million, or 13.9%, to $196.0 million for the nine months ended March 31, 2000 compared to $172.1 million for the same nine month period last year. The increase in direct costs is primarily due to the 10.1% increase in net revenues which necessitated increases in hiring and personnel costs, along with facilities and information system costs necessary to support operations. Direct costs as a percentage of net revenue increased to 68.3% for the nine months ended March 31, 2000 from 66.0% for the same period last year. The increase is primarily due to Contract Research Services which was impacted by the reduction of Novartis contract volume and the initiative to realign management and operations along client lines and to the Consulting Group as part of the Company's geographic expansion efforts. Selling, general and administrative expenses increased by $5.8 million, or 10.9%, to $58.6 million for the nine months ended March 31, 2000 versus $52.8 million for the same period last year. The increase is due to increased personnel, hiring expenses, and facilities costs necessary to accommodate the Company's growth. Selling, general and administrative as a percentage of net revenue increased slightly to 20.4% for the nine months ended March 31, 2000 compared to 20.2% for the same period last year. Depreciation and amortization expense increased by $2.8 million, or 21.1%, to $16.0 million for the nine months ended March 31, 2000 from $13.2 million for the same period last year. This increase is primarily due to an increase in capital spending on information technology, facility improvements and 13 14 furnishings necessary to support the increased level of operations, and due to an increase in goodwill amortization due to the PharMedicom and CEMAF acquisitions. The Company also adjusted downward the estimated useful life of leasehold improvements related to certain facilities it plans to abandon resulting in additional depreciation expense of $0.5 million. Depreciation and amortization expense as a percentage of net revenue increased to 5.6% for the nine months ended March 31, 2000 from 5.1% for the same period last fiscal year. Income from operations for the nine months ended March 31, 2000 was $3.3 million, including restructuring and other charges of $13.1 million (see RESTRUCTURING AND OTHER CHARGES below) and the aforementioned additional depreciation expense of $0.5 million related to the Company's decision to consolidate and abandon certain facilities. Excluding the restructuring and other charges and the additional depreciation expense, income from operations was $17.2 million, or 6.0% of net revenues, compared to $22.7 million, or 8.7% of net revenues, for the same period last year. Other income, net was $4.4 million for the nine months ended March 31, 2000, compared to $2.4 million for the same period last year. The increase is attributed to higher interest income due to higher average balances of cash and marketable securities, a non-recurring $0.6 million pre-tax gain on the sale of a minority interest held by the Company and foreign exchange gains. The Company had an effective tax rate of 37.8% for the nine months ended March 31, 2000 based on pre-tax results excluding the impact of restructuring and other charges and additional depreciation expense related to the Company's decision to abandon certain facilities. This compares to an effective tax rate of 34.8% for the nine months ended March 31, 1999. The increase relates to an unfavorable change in the geographic mix of taxable income to tax jurisdictions with less favorable tax rates and some foreign losses where the Company can not record a tax benefit. RESTRUCTURING AND OTHER CHARGES During the three months ended March 31, 2000, the Company recorded restructuring and other charges of $13.4 million. These charges include $7.2 million of 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 include $4.6 million for lease termination costs related to continued efforts to consolidate certain facilities and reduce excess space in certain locations in addition to changes in the Company's original estimate of when certain facilities would be sublet. the remaining charges, totaling $1.6 million, primarily relate to the write-off of certain intangible assets and other investments which will not produce future value. In addition, the Company is actively reviewing plans to further consolidate facilities to gain further cost savings. As these plans are finalized, the Company plans to take an additional facilities related charge of between $5 and $10 million sometime before the end of calendar year 2000. Overall, the Company anticipates these restructuring and other charges will result in aggregate cost saving of $15 to $20 million in fiscal 2001. 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 a benefit against the accrual balance of $312,000 attributed to the favorable impact of a lease buyout agreement not previously anticipated. 14 15 Current year activity against the restructuring and other charges accrual has been as follows (in thousands): Balance Net Balance June 30, 1999 Provisions Charges March 31, 2000 ------------- ---------- ------- -------------- Employee severance costs - $ 7,157 $ 350 $ 6,807 Facility related charges $ 2,557 4,317 1,443 5,431 Other Charges - 1,614 1,088 526 ------- ------- ------- ------- Total $ 2,557 $13,088 $ 2,881 $12,764 ======= ======= ======= ======= As of March 31, 2000, approximately 50% of the planned positions had been eliminated, with the remainder scheduled to occur through the second quarter of fiscal year 2001. 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, decreased to 47 days at March 31, 2000 compared to 60 days at June 30, 1999. The decrease is attributed to a mix of current projects with more favorable billable milestones and to management's efforts to improve cash flow. In September 1999 the Board of Directors authorized the repurchase of up to $20 million of the Company's common stock. As of March 31, 2000 a total of 487,000 shares at a total cost of $4.9 million had been repurchased. The Company's cash and cash equivalents were $79.0 million at March 31, 2000, an increase of $17.0 million from $62.0 million at June 30, 1999, despite the common stock repurchases. 15 16 Net cash provided by operating activities of $44.0 million for the nine months ended March 31, 2000 resulted primarily from net income excluding depreciation and amortization of $20.1 million, a decrease of $13.8 million in accounts receivable net of advanced billings and an increase in the accrual for restructuring and other charges of $10.2 million. Net cash used for investing activities of $23.3 million for the nine months ended March 31, 2000 consisted primarily of capital expenditures of $11.8 million, net purchases of marketable securities of $8.8 million and a $3.0 million cash payment related to a business acquisition. Financing activities for the nine months ended March 31, 2000 consisted primarily of net proceeds from the issuance of common stock of $2.2 million which was more than offset by repurchases of the Company's common stock of $4.9 million and repayment under credit arrangements of $0.7 million. The Company has domestic and foreign line of credit arrangements with banks totaling approximately $14.3 million. At March 31, 2000 the Company had approximately $14.0 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 December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in the Company's second quarter of the fiscal year 2001. The effects of applying this guidance will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not expect the application to have a material effect on their financial statements, however the final evaluation of SAB 101 is not yet complete. 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. 16 17 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 sixty days' notice or can delay execution of services. Clients terminate or delay their contracts for a variety of reasons, including: - - products being tested fail to satisfy safety requirements; - - products have unexpected or undesired clinical results; - - the client decides to forego a particular study; - - not enough patients enroll in the study; - - not enough investigators are recruited; or - - 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. In March 2000, PAREXEL announced that Novartis, a key customer, had reduced the amount of work being outsourced to PAREXEL. As a result, Contract Research Services revenue was impacted by $1 to $2 million in the third quarter of fiscal year 2000 and will be impacted by approximately $9.0 million in the following quarter and by $40 to $45 million in fiscal year 2001. 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: - - the level of new business authorizations in a particular quarter or year; - - the timing of the initiation, progress, delay 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 and services. 17 18 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: - - its clients' businesses experience financial problems or are affected by a general economic downturn; - - consolidation in the drug 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 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 net consolidated revenue. For the nine months ended March 31, 2000, the Company's five largest clients accounted for 47% of its consolidated net revenue, and one client accounted for 23% of consolidated net revenue. The Company could suffer a material adverse effect if it were to lose 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: - - 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. 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: - - assimilate differences in foreign business practices; - - hire and retain qualified personnel; and - - overcome language barriers. 18 19 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: - 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; - The Company's management will necessarily divert attention from other business concerns; and - 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 19 20 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 honored 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: - operating results; - earnings estimates by analysts; - market conditions in the industry; - prospects of health care reform; - changes in government regulation; and - general economic conditions. In addition, the stock market has from time to time experienced significant price and volume fluctuations that 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 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: - previous experience; 20 21 - 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 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 outsource 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 nine months ended March 31, 2000, the Company also derived approximately 43% 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. 21 22 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 January 25, 2000 reporting financial results for the three months ended December 31, 1999. The Company filed a Current Report on Form 8-K dated March 9, 2000 discussing a reduction in the amount of work being outsourced from a key client. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 12th day of May 2000. 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 23 24 EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule 24