1
Specified portions of the Registrant's Exhibit 13.1
2000 Annual Report to Stockholders
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
PAREXEL International Corporation (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.
The Company is managed through three reportable segments, namely, the clinical
research services group, the consulting services group and the medical marketing
services group. The clinical research services group ("CRS") constitutes the
Company's core business and includes clinical trials management, biostatistics
and data management, as well as related medical advisory, information
technology, and investigator site services. PAREXEL's consulting group ("PCG")
provides technical expertise in such disciplines as clinical pharmacology,
regulatory affairs, industry training, publishing, and drug development. These
consultants identify options and propose solutions to address clients' product
development, registration, and commercialization issues. The medical marketing
services group ("MMS") provides a full spectrum of market development, product
development, and targeted communications services in support of product launch.
The Company's contracts are typically fixed price, multi-year contracts that
require a portion of the fee to be paid at the time the contract is entered
into, with the balance of the fee paid in installments during the contract's
duration. Net revenue from contracts is generally recognized on a percentage of
completion basis as work is performed. The contracts may contain provisions for
renegotiation of cost overruns arising from changes in the scope of work.
Renegotiated amounts are included in net revenues when earned and realization is
assured.
Generally, the Company's contracts are terminable upon sixty days notice by the
client. Clients terminate or delay contracts for a variety of reasons,
including, among others, the failure of products being tested to satisfy safety
and/or efficacy requirements, unexpected or undesired clinical results of the
product, the client's decision to forego a particular study, insufficient
patient enrollment or investigator recruitment, or production problems resulting
in shortages of the drug.
As is customary in the industry, the Company routinely subcontracts with
independent physician investigators in connection with clinical trials and other
third party service providers for laboratory analysis and other specialized
services. Revenues and expenses are reported net of these fees since such fees
are granted by customers on a "pass-through basis" without risk or reward to the
Company.
Direct costs primarily consist of compensation and related fringe benefits for
project-related employees, other non-reimbursable project-related costs and
allocated facilities and information systems costs. Selling, general, and
administrative expenses primarily consist of compensation and related fringe
benefits for selling and administrative employees, professional services and
advertising costs, as well as allocated costs related to facilities and
information systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
RESULTS OF OPERATIONS
ACQUISITION AND IMPACT OF RESTRUCTURING AND OTHER CHARGES
In September 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. In connection with recording the assets and liabilities acquired,
the Company recorded approximately $2.4 million related to the excess cost over
the fair value of the net assets acquired. In connection with this transaction,
the Company paid approximately an additional $3.0 million to purchase certain
buildings in May 2000. This amount is reflected in property and equipment on the
Company's balance sheet as of June 30, 2000.
23
2
During the three months ended March 31, 2000, the Company announced that
Novartis, a key client, reduced the amount of work outsourced to the CRS
business segment, due to Novartis' reprioritization of its research pipeline. As
a result, the Company estimated that total revenues for fiscal 2000 and 2001
would be reduced by $50 million to $55 million in the aggregate.
Consequently, 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 changes 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 $10 million in the first quarter of
fiscal 2001. Overall, the Company anticipates these restructuring and other
charges will result in aggregate cost savings of $15 to $20 million once
implemented.
During 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.
Current year activity against the restructuring and other charges accrual (which
is included in "Other current liabilities" in the Consolidated Balance Sheet)
was as follows (in thousands):
Balance, Net Balance,
June 30, 1999 Provisions Charges June 30, 2000
------------- ---------- ------- -------------
Employee severance costs $ -- $ 7,157 $(2,974) $4,183
Facilities related charges 2,557 4,317 (1,898) 4,976
Other charges -- 1,614 (1,629) (15)
------- ------- ------- ------
$ 2,557 $13,088 $(6,501) $9,144
======= ======= ======= ======
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Net revenue increased $29.7 million (8.5%) to $378.2 million for fiscal 2000
from $348.5 million for 1999. This net revenue growth was primarily attributable
to an increase in the volume of projects serviced by the Company. In fiscal
2000, net revenue from North American and Asian operations increased 14% and
61%, respectively, over the prior year while net revenue from European
operations for fiscal was flat. On a segment basis, fiscal 2000 net revenues
from CRS and PCG increased by 9.7% and 15.4%, respectively, over the prior year.
Net revenues from the MMS segment decreased by 4.7% compared with the prior year
due to not having a current year counterpart to a large 1999 project.
Direct costs increased $27.2 million (11.7%) to $260.9 million for fiscal 2000
from $233.7 million for 1999. On a segment basis, CRS direct costs increased
$22.2 million to $173.5 million for fiscal 2000 from $151.3 million; PCG direct
costs increased $10.8 million to $52.0 million from $41.2 million; and MMS
direct costs decreased $5.8 million to $35.4 million from $41.2 million. The
higher direct costs for CRS and PCG were primarily due to an increased level of
hiring and personnel costs coupled with related facilities and information
systems costs necessary to support growth in realized and expected levels of
operations. As a percentage of net revenue, direct costs increased to 66.1% and
78.1% in fiscal 2000 from 63.2% and 71.5% in 1999 for CRS and PCG, respectively.
Direct costs for MMS decreased as a percentage of net revenue to 72.3% in fiscal
2000 from 80.2% in 1999 due to improved cost management and the absence of
certain wind-down costs incurred on a project in fiscal 1999 (see above).
Selling, general, and administrative ("SG&A") expenses increased by $7.3 million
(10.1%) to $79.0 million for fiscal 2000 from $71.7 million in 1999. This rise
was primarily due to increased personnel hiring and facilities costs, directly
connected to the infrastructure build-up required to accommodate the Company's
realized and expected growth. As a percentage of net revenue, SG&A expenses
increased to 20.9% in fiscal 2000 from 20.6% in fiscal 1999.
Depreciation and amortization expense increased $3.7 million (20.4%) to $21.6
million for fiscal 2000 from $17.9 million for fiscal 1999. This increase was
primarily due to an increase in capital spending on information technology and
facility improvements necessary to support higher operating levels. In addition,
the Company recorded accelerated depreciation charges in conjunction with the
reduction in estimated useful lives of leasehold improvements on abandoned
facilities related to the Company's restructuring efforts. As a percentage of
net revenue, depreciation and amortization expense increased to 5.7% in fiscal
2000 from 5.1% in fiscal 1999.
Income from operations decreased $16.9 million (82.4%) to $3.6 million in fiscal
2000 from $20.6 million in fiscal 1999. Excluding restructuring and other
charges, income from operations decreased $11.0 million (38.3%) to $17.7 million
for fiscal 2000 from $28.7 million in fiscal 1999. Excluding the impact of these
charges, income from operations decreased to 4.7% of net revenue for fiscal 2000
from 8.2% in 1999, primarily due to higher direct and SG&A expenses, as noted
above.
Interest income increased $1.4 million in fiscal 2000 primarily due to higher
average cash balances and the mix between taxable and tax-exempt securities held
during the year. Other income increased $1.6 million primarily due to realized
foreign exchange gains and the sale of a minority investment in a company.
24
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The Company's effective income tax rate increased to 45.4% in fiscal 2000 from
34.8% in fiscal 1999. This increase was primarily attributable to changes in the
mix of taxable income within the different geographic jurisdictions in which the
Company operated in fiscal 2000 compared with fiscal 1999.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Net revenue increased $63.0 million (22.1%) to $348.5 million for fiscal 1999
from $285.4 million for 1998. On a segment basis, fiscal 1999 net revenues from
CRS and PCG of $239.5 million and $57.6 million increased by $51.5 million
(27.4%) and $11.8 million (25.8%), respectively, over the prior year. Fiscal
1999 net revenues from MMS of $51.4 million were flat compared to the prior
year. Net revenue growth from fiscal 1998 was primarily the result of an
increase in the volume of projects serviced by the Company.
Direct costs increased $47.9 million (25.8%) to $233.7 million for fiscal 1999
from $185.8 million for 1998. On a segment basis, CRS direct costs increased
$34.8 million to $151.3 million for fiscal 1999 from $116.5 million; PCG direct
costs increased $7.8 million to $41.2 million from $33.4 million; and MMS direct
costs increased $5.3 million to $41.2 million from $35.9 million. These
increases in direct costs were principally due to the increase in hiring and
personnel costs along with related facilities and information systems costs
necessary to support current and future increased levels of operations. As a
percentage of net revenue, direct costs increased to 67.8% in fiscal 1999 from
65.1% in fiscal 1998, reflecting an increase in the overall operational
capacity.
SG&A expenses increased by $10.7 million (17.5%) to $71.7 million for fiscal
1999 from $61.0 million for 1998. This increase was mainly due to increased
selling and administrative personnel hiring and facilities costs, as a result of
building infrastructure to accommodate the Company's growth. As a percentage of
net revenue, SG&A expenses decreased to 20.6% in fiscal 1999 from 21.4% in
fiscal 1998.
Depreciation and amortization expense increased $2.8 million (18.6%) to $17.9
million for fiscal 1999 from $15.1 million for fiscal 1998. This increase was
largely caused by an increase in capital spending on information technology,
facility improvements, and furnishings necessary to support an increased level
of operations. As a percentage of net revenue, depreciation and amortization
expense decreased to 5.1% in fiscal 1999 from 5.3% in fiscal 1998.
Income from operations increased $7.3 million (54.6%) to $20.6 million in fiscal
1999 from $13.3 million in fiscal 1998. Excluding merger-related and facilities
charges of $4.7 million in fiscal 1999 and $10.3 million in fiscal 1998, income
from operations increased $1.6 million (7.0%) to $25.2 million for fiscal 1999
from $23.6 million in fiscal 1998. Excluding the impact of these charges, income
from operations decreased to 7.2% of net revenue for fiscal 1999 from 8.3% in
1998, primarily due to an increase in direct costs and SG&A expenses as noted
above.
Interest income decreased $0.5 million in fiscal 1999 primarily due to lower
interest rates obtained due to a shift to tax-exempt securities in the second
half of fiscal 1998, partially offset by a shift back to taxable securities in
the third quarter of fiscal 1999.
The Company's effective income tax rate decreased to 34.8% in fiscal 1999 from
45.2% in fiscal 1998. Excluding the effect of certain non-deductible
merger-related charges, the effective tax rate for fiscal 1998 would have been
36.2%. This decrease was attributable to changes in the mix of taxable income
from the different geographic jurisdictions in which the Company operated in
fiscal 1999 compared with fiscal 1998.
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
acquisition costs and 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 signed and the balance in installments over
the contract's duration, usually on a milestone-achievement basis. Revenue from
contracts is recognized on a percentage-of-completion basis as the work is
performed. Accordingly, cash receipts do not necessarily correspond to costs
incurred and revenue recognized on contracts.
The Company's operating cash flow is heavily 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' sales outstanding in accounts
receivable, net of advance billings, was 60 days at June 30, 2000 and 1999.
Accounts receivable, net of the allowance for doubtful accounts, increased to
$161.4 million at June 30, 2000 from $150.5 million at June 30, 1999. Advance
billings increased to $78.7 million at June 30, 2000 from $69.8 million at June
30, 1999.
25
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During fiscal 2000, the Company's operations provided net cash of $29.6 million,
an increase of $0.5 million from the corresponding fiscal 1999 amount. Cash
flows from net income adjusted for non-cash activity provided $29.1 million
during fiscal 2000, down $3.8 million from the corresponding fiscal 1999 amount.
Change in net operating assets provided $0.6 million in cash during fiscal 2000,
primarily due to an increase in advance billings and other current liabilities
partially offset by an increase in accounts receivable. In comparison, for
fiscal 1999, the change in net operating assets used $3.8 million in cash.
Net cash used by investing activities totaled $33.1 million for fiscal 2000 as
compared with $8.4 million used by investing activities in fiscal 1999. The
primary use of net cash for investing activities represented purchase of
property and equipment of $20.1 million related to facility expansions and
investments in information technology in fiscal 2000, as compared to $18.9
million in fiscal 1999. Net purchases of marketable securities were $9.4 million
in fiscal 2000, as compared to net marketable security sales of $9.6 million in
fiscal 1999.
Net cash used by financing activities totaled $4.6 million for fiscal 2000 as
compared to $2.8 million provided by financing activities in fiscal 1999. Under
a stock repurchase program approved by the Board of Directors in September 1999,
the Company acquired 631,000 shares of its common stock at a total cost of $6.2
million. This spending was partially offset by $2.4 million in proceeds from the
issuance of common stock through stock option exercises and the employee stock
purchase plan. The Company has domestic and foreign lines of credit with banks
totaling approximately $3.2 million. At June 30, 2000, the Company had
approximately $2.4 million in available credit under these arrangements.
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company believes that its existing capital resources together with cash
flows from operations and borrowing capacity under existing lines of credit will
be sufficient to meet its foreseeable cash needs. In the future, the Company
will consider acquiring businesses to enhance its service offerings, expand its
therapeutic expertise, and/or increase its global presence. Any such
acquisitions may require additional external financing, and the Company may from
time to time seek to obtain funds from public or private issuances of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
The statements included in this annual report, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference to exhibit 13.1 hereto, 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, regarding future results and
events that involve a number of risks and uncertainties including 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 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; and those discussed
in "Risk Factors" included above in Part 1, Item 1 of the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000.
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.
FOREIGN CURRENCY EXCHANGE RATES
The Company derived approximately 40% of its net revenue for fiscal 2000, 43% of
its net revenue for fiscal 1999, and 39% of its net revenue for fiscal 1998,
from operations outside of North America. The Company does not have significant
operations in countries in which the economy is considered to be highly
inflationary. The Company's financial statements are denominated in U.S.
dollars, and accordingly, changes in the exchange rate between foreign
currencies and the U.S. dollar will affect the translation of such subsidiaries'
financial results into U.S. dollars for purposes of reporting the Company's
consolidated financial results.
The Company may be subject to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in the local
currency of the foreign subsidiary. Because expenses of the foreign subsidiaries
are generally paid in the local currency, such foreign subsidiaries' local
currency earnings are not materially affected by fluctuations in exchange rates.
In cases where the Company contracts for a multi-country clinical trial and a
significant portion of the contract expenses are in a currency other than the
contract currency, the Company seeks to contractually shift to its clients the
effect of fluctuations in the relative values of the contract currency and the
currency in which the expenses are incurred. To the extent the Company is unable
to shift the effects of currency fluctuations to its clients, these fluctuations
could have a material effect on the Company's results of operations. The Company
occasionally hedges against the risk of exchange rate fluctuations between the
G.B. pound and the U.S. dollar for three month periods.
26
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INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
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 FASB Statement No. 123, "Accounting for Stock-based
Compensation." FIN 44 will be effective for the Company beginning in fiscal
2001. The Company is currently in the process of evaluating the impact, if any,
that FIN 44 will have on its consolidated financial position or 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 now 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 Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes new standards for the recognition of
gains and losses on derivative instruments and provides guidance as to whether a
derivative may be accounted for as a hedging instrument. Gain or loss from
hedging transactions may be wholly or partially recorded in earnings or
comprehensive income as part of a cumulative translation adjustment, depending
upon the classification of the hedge transaction. Gain or loss on a derivative
instrument not classified as a hedging instrument is recognized in earnings in
the period of change. SFAS No. 133 will be effective for the Company beginning
in fiscal 2001. The Company does not believe adoption of SFAS No. 133 will have
a material impact on its financial position or its results of operations.
27
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PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
--------------------------------------
($ in thousands, except per share data) 2000 1999 1998
- --------------------------------------- --------- --------- ----------
NET REVENUE $ 378,150 $ 348,486 $ 285,442
--------- --------- ---------
Costs and expenses:
Direct costs 260,885 233,650 185,718
Selling, general and administrative 78,965 71,690 61,036
Depreciation and amortization 21,583 17,932 15,114
Restructuring and other charges 13,088 4,650 10,273
--------- --------- ---------
374,521 327,922 272,141
--------- --------- ---------
INCOME FROM OPERATIONS 3,629 20,564 13,301
--------- --------- ---------
Interest income 4,370 3,018 3,511
Interest expense (312) (351) (195)
Other income (expense), net 2,358 720 382
--------- --------- ---------
6,416 3,387 3,698
--------- --------- ---------
Income before provision for
income taxes 10,045 23,951 16,999
Provision for income taxes 4,560 8,329 7,680
--------- --------- ---------
NET INCOME $ 5,485 $ 15,622 $ 9,319
--------- --------- ---------
Earnings per share:
Basic $ 0.22 $ 0.63 $ 0.39
Diluted $ 0.22 $ 0.62 $ 0.38
--------- --------- ---------
Weighted average shares outstanding:
per share:
Basic 24,981 24,848 23,939
Diluted 25,140 25,128 24,825
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
7
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------
($ in thousands, except share data) 2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 53,191 $ 62,005
Marketable securities 37,022 27,952
Accounts receivable, net 161,447 150,520
Prepaid expenses 10,186 7,917
Deferred tax assets 15,370 14,011
Other current assets 1,874 2,421
--------- ---------
Total current assets 279,090 264,826
Property and equipment, net 43,783 47,065
Other assets 28,046 21,674
--------- ---------
Total Assets $ 350,919 $ 333,565
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 269 $ 1,057
Accounts payable 20,979 14,698
Advance billings 78,743 69,776
Other current liabilities 51,353 46,538
--------- ---------
Total current liabilities 151,344 132,069
Long-term debt 104 79
Other liabilities 9,318 9,385
--------- ---------
Total liabilities 160,766 141,533
--------- ---------
Commitments (Note 14)
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized:
5,000,000; none issued and outstanding -- --
Common stock--$.01 par value; shares authorized:
50,000,000 at June 30, 2000 and 1999; shares
issued: 25,399,570 at June 30, 2000 and
25,132,461, at June 30, 1999; shares outstanding:
24,719,158 at June 30, 2000 and 25,103,049 at
June 30, 1999 254 251
Additional paid-in capital 162,057 159,593
Treasury stock, at cost (6,424) (18)
Retained earnings 41,270 35,785
Accumulated other comprehensive loss (7,004) (3,579)
--------- ---------
Total stockholders' equity 190,153 192,032
--------- ---------
Total liabilities and stockholders' equity $ 350,919 $ 333,565
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
8
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------- Accumulated
Retained Other Total
Additional Treasury Earnings Comprehen- Stock-
Number Par Paid-in Stock, (Accumulated sive (Loss) holders' Comprehensive
($ in thousands, except share data) Of Shares Value Capital At Cost Deficit) Income Equity Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 23,991,670 $240 $136,567 $ (18) $11,488 $ (829) $147,448 $11,629
=======
Shares issued under stock option/
purchase plans 420,120 4 7,803 7,807
Deferred compensation 2,198 2,198
Income tax benefit from exercise
of stock options 2,400 2,400
Acquisitions (Note 3) 216,435 2 1,227 311 1,540
Acquisition costs reimbursed by
shareholders 300 300
Elimination of PPS and MIRAI
net activity duplicated for
the six months ended November 30,
and December 31, 1997, respectively
(Note 3) (556) (1,040) (1,596)
Effect of change in fiscal year
of foreign operation (Note 2) 85 85
Net unrealized loss on marketable
securities (140) (140) (140)
Foreign currency translation (981) (981) (981)
Net income 9,319 9,319 9,319
---------- ---- -------- ------ ------- ------- -------- -------
Balance at June 30, 1998 24,628,225 246 149,939 (18) 20,163 (1,950) 168,380 8,198
=======
Shares issued under stock option/
purchase plans 275,256 3 4,145 4,148
Income tax benefit from exercise
of stock options 765 765
Acquisition (Note 3) 199,568 2 4,744 4,746
Net unrealized loss on marketable
securities (4) (4) (4)
Foreign currency translation (1,625) (1,625) (1,625)
Net income 15,622 15,622 15,622
---------- ---- -------- ------ ------- ------- -------- -------
Balance at June 30, 1999 25,103,049 251 159,593 (18) 35,785 (3,579) 192,032 13,993
=======
Shares issued under stock option/
purchase plans 267,109 3 2,354 2,357
Income tax benefit from exercise
of stock options 110 110
Shares repurchased (651,000) (6,406) (6,406)
Net unrealized gain on marketable
securities 2 2 2
Foreign currency translation (3,427) (3,427) (3,427)
Net income 5,485 5,485 5,485
----------- ---- -------- ------- ------- ------- -------- -------
Balance at June 30, 2000 24,719,158 $254 $162,057 $(6,424) $41,270 (7,004) 190,153 $ 2,060
---------- ---- -------- ------- ------- ------- -------- =======
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
9
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
-------------------------------------
($ in thousands) 2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,485 $ 15,622 $ 9,319
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 21,934 17,932 15,114
Loss (Gain) on disposal of assets 1,638 (647) --
Stock compensation charges of acquired companies -- -- 4,844
Change in assets and liabilities, net of effects from
acquisitions:
Restricted cash -- -- 1,967
Accounts receivable, net (10,495) (35,970) (26,829)
Deferred tax assets (1,359) (6,142) (4,618)
Prepaid expenses and other current assets (1,439) 899 (2,691)
Other assets (4,955) (5,892) (1,637)
Accounts payable 5,506 2,700 498
Advance billings 8,784 23,033 (897)
Other current liabilities 4,587 11,168 5,022
Other liabilities (68) 6,421 (15)
--------- --------- ---------
Net cash provided by operating activities 29,618 29,124 77
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (83,090) (76,641) (118,533)
Proceeds from sale of marketable securities 73,670 86,168 148,634
Cash of acquired companies -- 633 --
Purchase of property and equipment (20,067) (18,910) (27,736)
Acquisition of a business (3,000) -- --
Proceeds from sale of assets 587 1,287 --
Other investing activities (1,244) (921) (1,377)
--------- --------- ---------
Net cash provided (used) by investing activities (33,144) (8,384) 988
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,357 4,148 4,906
Payments to repurchase common stock (6,225) -- --
Net borrowings (repayments) under line of credit (787) 1,057 (866)
Repayments of long-term debt 25 (2,378) (100)
Dividends paid by acquired companies -- -- (1,293)
--------- --------- ---------
Net cash (used) provided by financing activities (4,630) 2,827 2,647
--------- --------- ---------
Elimination of net cash activities of acquired companies for
duplicated periods -- -- 672
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (658) (1,503) (1,069)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (8,814) 22,064 3,315
Cash and cash equivalents at beginning of year 62,005 39,941 36,626
--------- --------- ---------
Cash and cash equivalents at end of year $ 53,191 $ 62,005 $ 39,941
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 22 $ 84 $ 188
Income taxes $ 14,159 $ 7,201 $ 4,730
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit from exercise of stock options $ 110 $ 765 $ 2,400
Common stock issued in connection with acquisitions $ -- $ 4,746 $ 3,928
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
The Company is a leading contract research organization providing a broad range
of knowledge-based product development and product launch services on a contract
basis to the worldwide pharmaceutical, biotechnology, and medical device
industries. The Company has developed expertise in such disciplines as: clinical
trials management, biostatistical analysis and data management, medical
marketing, clinical pharmacology, regulatory and medical consulting, industry
training and publishing, and other drug development consulting services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of PAREXEL
International Corporation and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. In fiscal year
1998, the Company's German subsidiary changed its fiscal year end from May 31 to
June 30 in order to conform to the Company's fiscal year end. Results of
operations for the month ended June 30, 1998, were credited directly to Retained
Earnings.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosures of contingent assets and liabilities. Actual results may differ from
those estimates.
Revenue
Fixed price contract revenue is recognized using the percentage-of-completion
method based on the ratio that costs incurred to date bear to estimated total
costs at completion. Revenue from other contracts is recognized as services are
provided. Revenue related to contract modifications is recognized when
realization is assured and the amounts are reasonably determinable. Adjustments
to contract cost estimates are made in the periods in which the facts that
require the revisions become known. When the revised estimate indicates a loss,
such loss is provided in the current period in its entirety. Unbilled accounts
receivable represents revenue recognized in excess of amounts billed. Advance
billings represent amounts billed in excess of revenue recognized.
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. Revenues and expenses are reported net of these fees since such fees
are granted by customers on a "pass-through basis" without risk or reward to the
Company.
Cash, Cash Equivalents, Marketable Securities, and Financial Instruments
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Marketable securities
include securities purchased with original maturities of greater than three
months. Cash equivalents and marketable securities are classified as "available
for sale" and are carried at fair market value. Unrealized gains and losses are
recorded as part of stockholders' equity.
The Company occasionally purchases securities with seven-day put options that
allow the Company to sell the underlying securities in seven days at par value.
The Company uses these derivative financial instruments on a limited basis to
shorten contractual maturity dates, thereby managing interest rate risk.
Approximately $3.9 million of securities held at June 30, 2000 were subject to
seven-day put options; no securities held at June 30, 1999 were subject to such
put options. The Company does not hold derivative instruments for trading
purposes.
The fair value of the Company's financial instruments are not materially
different from their carrying amounts at June 30, 2000 and 1999.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of
credit risk include trade accounts receivable. However, such risk is limited due
to the large number of clients and their international dispersion. In addition,
the Company maintains reserves for potential credit losses and such losses, in
the aggregate, have not exceeded management expectations. One customer,
Novartis, accounted for 21%, or $80.9 million, of consolidated net revenue for
fiscal 2000, primarily in the contract research services group. In fiscal 1999,
the same customer accounted for 20% of consolidated net revenue.
Property and Equipment
F-5
11
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method based on estimated useful lives of 40 years for buildings,
3 to 8 years for computer hardware and software, and 5 years for office
furniture, fixtures and equipment. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the improvements or the remaining lease
term. Repair and maintenance costs are expensed as incurred.
Intangible Assets
Intangible assets consist principally of goodwill, customer lists, covenants not
to compete, and other intangible assets attributable to acquired businesses.
Goodwill represents the excess of the cost of businesses acquired over the fair
value of the related net assets at the date of acquisition for acquisitions
accounted for under the purchase method. Intangible assets are amortized using
the straight-line method over their expected useful lives ranging from five to
twenty-five years.
Intangible assets of $13.1 million and $13.3 million, included in Other Assets,
are net of accumulated amortization of $1.6 million and $1.8 million as of June
30, 2000 and 1999, respectively. Amortization expense was $1.5 million, $0.6
million, and $0.4 million for the fiscal years ended June 30, 2000, 1999, and
1998, respectively.
Comprehensive Income
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 established new
standards for the reporting and display of comprehensive income and its
components. SFAS No. 130 requires the Company's foreign currency translation
adjustments and unrealized gains (losses) on marketable securities, which prior
to adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. The Company presents comprehensive income in its
Consolidated Statement of Stockholders' Equity. The adoption of SFAS No. 130 had
no impact on the Company's net income or stockholders' equity.
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences, utilizing current tax rates, of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets are recognized, net of any valuation allowance, for the
estimated future tax effects of deductible temporary differences and tax
operating loss and credit carryforwards. Deferred income tax expense represents
the change in the net deferred tax asset and liability balances.
Foreign Currency
Assets and liabilities of the Company's international operations are translated
into U.S. dollars at exchange rates in effect at the balance sheet date. Income
and expense items are translated at average exchange rates in effect during the
year. Translation adjustments are accumulated in a separate component of
stockholders' equity.
Earnings Per Share
Earnings per share has been calculated in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is calculated based on the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated based on the weighted average number of common
shares and dilutive common equivalent shares assumed outstanding during the
period.
Stock-Based Compensation
The Company accounts for employee stock awards using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense is
recognized because the exercise price of the Company's stock options was equal
to the market price of the underlying stock on the date of grant. The Company
has adopted the provisions of SFAS No. 123, "Accounting for Stock-based
Compensation," for disclosure only.
Reclassifications
Certain 1999 amounts have been reclassified to conform with the fiscal 2000
presentation.
Recently Issued Accounting Standards
In March 2000, the Financial Accounting Standards Board ("FASB") issued
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 FASB Statement No. 123, "Accounting for Stock-based
Compensation." FIN 44 will be effective for the Company beginning in fiscal
2001. The Company is currently in the process of evaluating the impact, if any,
that FIN 44 will have on its consolidated financial position or 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 now 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,
SAB 101 will have on its consolidated financial position or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("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. Gains or loss from
hedging transactions may be wholly or partially recorded in earnings or
comprehensive income as part of a cumulative translation adjustment, depending
upon the classification of the hedge transaction. Gain or loss on a derivative
instrument not classified as a hedging instrument is recognized in earnings in
the period of change. SFAS No. 133 will be effective for the Company beginning
in fiscal 2001. The Company does not believe adoption of SFAS No. 133 will have
a material impact on its financial position or its results of operations.
NOTE 3. ACQUISITIONS
Fiscal 2000
F-6
12
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. In connection with this transaction, the Company paid
approximately an additional $3.0 million to purchase certain buildings in May
2000. This amount is reflected in property and equipment on the Company's
balance sheet as of June 30, 2000. In accordance with the terms of the asset
purchase agreement, the Company is obligated to make additional payments in
contingent purchase price if CEMAF achieves certain established annual earnings
targets in each fiscal year through June 30, 2002. No payments were required in
fiscal 2000. The remaining maximum contingent obligation is $3.2 million. In
connection with recording the assets and liabilities acquired, the Company
recorded approximately $2.4 million related to the excess cost over the fair
value of the net assets acquired. This goodwill is being amortized using the
straight-line method over 25 years. 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.
Fiscal 1999
On March 31, 1999, the Company acquired the stock of Groupe PharMedicom S.A. in
exchange for approximately 199,600 shares of the Company's common stock in a
transaction accounted for as a purchase business combination. Groupe PharMedicom
S.A. is a leading French provider of post-regulatory services to pharmaceutical
manufacturers. The Company recorded approximately $8.5 million related to the
excess cost over the fair value of the net assets acquired. This goodwill is
being amortized using the straight-line method over 25 years. 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.
Fiscal 1998
In March 1998 the Company acquired four companies in separate transactions. PPS
Europe Limited, subsequently renamed PAREXEL MMS Europe Limited ("MMS Europe"),
a leading medical marketing firm based in the United Kingdom, was acquired by
the issuance of 2,774,813 shares of the Company's common stock in exchange for
all of the outstanding ordinary shares of PPS and 134,995 of the Company's
common stock options in exchange for all of the outstanding ordinary share
options of PPS. MIRAI B.V. ("MIRAI"), a full service, pan-European contract
research organization based in the Netherlands, was acquired by the issuance of
682,345 shares of the Company's common stock in exchange for all of the
outstanding shares of MIRAI. The Company acquired Genesis Pharma Strategies
Limited ("Genesis"), a physician-focused marketing and clinical communications
firm servicing the international pharmaceutical industry, and LOGOS GmbH
("LOGOS"), a provider of regulatory services to pharmaceutical manufacturers, by
issuing a total of 184,819 shares of the Company's common stock in exchange for
all of the outstanding shares of Genesis and LOGOS. In December 1997, the
Company acquired Kemper-Masterson, Inc. ("KMI"), a leading regulatory consulting
firm based in Massachusetts, by issuing 581,817 shares of the Company's common
stock in exchange for all of the outstanding shares of KMI.
All of the above fiscal 1998 acquisitions were accounted for as poolings of
interests. The Company's historical consolidated financial statements have been
restated to include the financial position and results of operations of MMS
Europe, MIRAI and KMI for all periods prior to the acquisitions. The historical
results of operations and financial position of Genesis and LOGOS are not
material, individually or in aggregate, to the Company's historical financial
statements. Therefore, prior period amounts have not been restated and results
of operations of Genesis and LOGOS have been included in the consolidated
results since acquisition.
In March 1998, the Company changed the fiscal year end of PPS from November 30
to May 31 and the fiscal year ends of MIRAI and KMI from December 31 to June 30.
As such, the statement of operations for the fiscal year ended June 30, 1998,
includes the results of operations of MMS Europe and MIRAI for the twelve months
ended May 31 and June 30, 1998, respectively. As a result of conforming fiscal
year ends, the results of operations of MMS Europe and MIRAI for the six months
ended November 30 and December 31, 1997, respectively, are duplicated in the
combined statements of operations for fiscal 1997 and 1998. KMI's results of
operations for the six months ended December 31, 1996 (including revenue,
operating income, and net income of $5.0 million, $167,000, and $117,000,
respectively) were duplicated in the consolidated statements of operations for
fiscal 1997. Accordingly, net income and equity activity for one of the
duplicated periods has been eliminated from stockholders' equity.
The following represents the duplicated amounts included in both the results of
operations for fiscal 1998:
($ IN THOUSANDS) MMS EUROPE MIRAI TOTAL
- ---------------- ---------- ----- -----
Net revenue $13,205 $4,891 $18,096
Operating income 1,553 438 1,991
Net income 697 343 1,040
F-7
13
In connection with the acquisitions during fiscal 1998, the Company incurred
acquisition-related charges of $10.3 million consisting principally of non-cash
compensation attributed to stock options of KMI and MMS Europe, granted prior to
the acquisition by the Company, an accelerated compensation payment to a PPS
executive pursuant to a pre-existing employment agreement, and legal,
accounting, and other transaction-related fees. In addition, the Company
recorded a $1.6 million provision during fiscal 1998 which has been reflected in
selling, general, and administrative expense in the accompanying consolidated
statement of operations to increase the accounts receivable reserves of PPS and
MIRAI to conform reserve estimates with Company policy.
NOTE 4. INVESTMENTS
Available-for-sale securities included in cash equivalents as of June 30, 2000
and 1999, consisted of the following:
($ IN THOUSANDS) 2000 1999
-------- -------
Money market instruments $ 2,665 $ 9,869
Municipal and corporate debt securities 12,374 4,600
Repurchase agreements 10,436 16,143
------- -------
$25,475 $30,612
======= =======
Available-for-sale securities included in marketable securities at June 30, 2000
and 1999,consisted of the following:
($ IN THOUSANDS) 2000 1999
------- -------
Municipal securities $36,337 $27,261
Federal government securities 380 398
Corporate debt securities 305 293
-------- -------
$37,022 $27,952
======= =======
The Company's investments are reflected at fair market value. During fiscal
2000, gross realized gains totaled $2.2 million and gross realized losses
totaled $2.0 million. Unrealized gains and losses as of June 30, 1999 and 1998
were not material.
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2000 and 1999, consisted of the following:
($ IN THOUSANDS) 2000 1999
-------- --------
Billed $ 89,208 $ 81,590
Unbilled 75,939 74,057
Allowance for doubtful accounts (3,700) (5,127)
-------- --------
$161,447 $150,520
======== ========
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 and 1999, consisted of the following:
($ IN THOUSANDS) 2000 1999
------- -------
Computer and office equipment $48,914 $46,850
Computer software 19,445 16,206
Furniture and fixtures 19,283 17,762
Leasehold improvements 8,512 7,021
Buildings 6,012 2,757
Other 1,763 1,854
------- -------
103,929 92,450
Less accumulated depreciation
and amortization 60,146 45,385
------- -------
$43,783 $47,065
======= =======
Depreciation and amortization expense relating to property and equipment was
$20.1 million, $17.3 million, and $14.7 million for the years ended June 30,
2000, 1999, and 1998, respectively, of which $1.2 million in fiscal 1998 related
to amortization of property and equipment under capital leases. The depreciation
expense for the year ended June 30, 2000 includes $1.0 million of accelerated
depreciation due to the restructuring charge taken in the third quarter of
fiscal 2000 and the consequent changes in the estimated useful lives of
leasehold improvements on abandoned leased facilities.
In fiscal 1998, the Company recorded a $1.7 million charge to depreciation and
amortization expense resulting from a change in estimate of the remaining
service lives of certain computer equipment arising from integration activities
associated with acquisitions and a company-wide program implemented to upgrade
and standardize its information technology platform.
F-8
14
NOTE 7. OTHER CURRENT LIABILITIES
Other current liabilities at June 30, 2000 and 1999, consisted of the following:
($ IN THOUSANDS) 2000 1999
------- -------
Accrued compensation and
withholding $16,240 $14,645
Income taxes payable 11,834 10,328
Other 23,279 21,565
------- -------
$51,353 $46,538
======= =======
NOTE 8. 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 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 included
$4.3 million for lease termination costs related to continued efforts to
consolidate certain facilities and to 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 related to the write-off of certain intangible assets and other
investments, which is not expected to produce future value. In addition, the
Company is planning to further consolidate facilities to gain further cost
savings. The Company plans to take an additional facilities related charge of
between $5 and $10 million in the first quarter of fiscal 2001. Overall, the
Company anticipates these restructuring and other charges will result in
aggregate cost savings of $15 to $20 million once implemented.
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. Current year activity against the restructuring and other
charges accrual (which is included in "Other current liabilities" in the
Consolidated Balance Sheet) was as follows:
Balance, Net Balance,
(In thousands) June 30, 1999 Provisions Charges June 30, 2000
------------- ---------- -------- -------------
Employee severance costs $ - $ 7,157 $(2,974) $ 4,183
Facilities related charges 2,557 4,317 (1,898) 4,976
Other charges - 1,614 (1,629) (15)
-------- -------- ------- --------
$ 2,557 $ 13,088 $(6,501) $ 9,144
======= ======== ======== ========
NOTE 9. CREDIT ARRANGEMENTS
The Company has domestic and foreign lines of credit with banks totaling
approximately $3.2 million. The lines are collateralized by accounts receivable
and fixed assets, are payable on demand, and bear interest at rates ranging from
1.1% to 9.0%. The lines of credit expire at various dates through December 2000
and are renewable. At June 30, 2000, $0.8 million was outstanding under these
credit arrangements and included in accounts and notes payable. At June 30,
2000, $2.4 million was available under these lines of credit.
NOTE 10. STOCKHOLDERS' EQUITY
As of June 30, 2000 and 1999, there were five million shares of preferred stock,
$0.01 per share, authorized; but none were issued or outstanding. Preferred
stock may be issued at the discretion of the Board of Directors (without
stockholder approval) with such designations, rights and preferences as the
Board of Directors may determine.
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 651,000 shares at a total cost of $6.4 million during the year
ended June 30, 2000. As of June 30, 2000, $0.2 million of the $6.4 million was
accrued for the repurchase of 20,000 shares.
F-9
15
NOTE 11. EARNINGS PER SHARE
The following table is a summary of shares used in calculating basic and diluted
earnings per share:
YEARS ENDED JUNE 30,
--------------------------------------
(IN THOUSANDS) 2000 1999 1998
-------- -------- ------
Weighted average number of shares
outstanding, used in computing
basic earnings per share 24,981 24,848 23,939
Contingently issuable common shares -- -- 381
Dilutive common stock options 159 280 505
-------- ------- ------
Weighted average shares used in computing
diluted earnings per share 25,140 25,128 24,825
====== ====== ======
NOTE 12. STOCK AND EMPLOYEE BENEFIT PLANS
The Stock Option Committee of the Board of Directors is responsible for
administration of the Company's stock option plans and determines the term of
each option, the option exercise price, the number of option shares granted, and
the rate at which options become exercisable.
1998 Stock Plan
In February 1998, the Company adopted the 1998 Nonqualified, Non-officer Stock
Option Plan (the "1998 Plan") which provides for the grant of nonqualified
options to purchase up to an aggregate of 500,000 shares of common stock to any
employee or consultant of the Company who is not an executive officer or
director of the Company. In January 1999, the Company's Board of Directors
approved an increase in the number of shares issuable under the 1998 Plan to
1,500,000 shares. Options under the 1998 Plan expire in eight years from the
date of grant and vest at dates ranging from the issuance date to five years.
F-10
16
1995 Stock Plan
The 1995 Stock Plan ("1995 Plan") provides for the grant of incentive stock
options for the purchase of up to an aggregate of 3,160,344 shares of common
stock to directors, officers, employees, and consultants to the Company. Options
under the 1995 Plan expire in eight years from the date of grant and vest over
ninety days to five years.
In November 1997, the stockholders of the Company approved an amendment to the
1995 Plan. In connection therewith, the Company terminated the 1995 Non-Employee
Director Stock Option Plan (the "Director Plan") and transferred all remaining
shares under the Director Plan to the 1995 Plan, without increasing the
aggregate number of shares available for grant under all of the Company's stock
option plans. In November 1999, the Company's stockholders approved an amendment
to increase the number of shares issuable under the 1995 Plan by 800,000 shares.
Both the November 1997 and November 1999 amendments are reflected in the
3,160,344 shares noted above.
Employee Stock Purchase Plan
In September 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(the "Purchase Plan"). Under the Purchase Plan, employees have the opportunity
to purchase common stock at 85% of the average market value on the first or last
day of the plan period (as defined by the Purchase Plan), whichever is lower, up
to specified limits. An aggregate of 600,000 shares may be issued under the
Purchase Plan. The Purchase Plan terminated in fiscal 2000.
In March 2000, the Board of Directors of the Company adopted the 2000 Employee
Stock Purchase Plan (the "2000 Purchase Plan"). Under the 2000 Purchase Plan,
employees will continue to have the opportunity to purchase common stock at 85%
of the average market value on the first or last day of the plan period (as
defined by the Purchase Plan), whichever is lower, up to specified limits. An
aggregate of approximately 800,000 shares were issued under the 2000 Purchase
Plan.
Stock Options of Acquired Companies
All outstanding options under the Kemper-Masterson, Inc. Stock Option Plan ("KMI
Plan") were exercised in connection with the acquisition of KMI. KMI recorded
compensation expense of $4.1 million in December 1997 as a result of these
exercises. In conjunction with the acquisition of MMS Europe, all outstanding
MMS Europe options became fully vested, and accordingly the Company recognized
compensation expense of $1.6 million in March 1998. Aggregate compensation
expense under the various stock option plans was $5.4 million for the year ended
June 30, 1998.
Aggregate stock option activity for all plans for the three years ended June 30,
2000 is as follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- --------
Outstanding at June 30, 1997 1,515,799 $13.76
Granted 1,011,495 29.78
Exercised (332,174) 6.72
Canceled (129,585) 24.27
--------- ------
Outstanding at June 30, 1998 2,065,535 22.13
Granted 648,700 22.10
Exercised (128,344) 8.35
Canceled (227,631) 25.26
-------- -----
Outstanding at June 30, 1999 2,358,260 22.55
Granted 945,850 9.88
Exercised (56,718) 4.75
Canceled (588,897) 21.77
-------- ------
Outstanding at June 30, 2000 2,658,495 $18.38
--------- ------
Exercisable at June 30, 2000 1,076,312 $19.51
--------- ------
Available for future grant 1,920,009
--------- ------
F-11
17
Summary information related to options outstanding and exercisable as of June
30, 2000, is as follows:
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF LIFE EXERCISE AS OF EXERCISE
PRICES JUNE 30, 2000 (YEARS) PRICE JUNE 30, 2000 PRICE
- ------------- -------------- ------------ -------- ------------- --------
$0.01-10.00 596,653 6.4 $ 7.49 242,153 $ 5.62
10.01-20.00 792,837 6.6 13.58 185,486 18.40
20.01-30.00 893,588 5.9 23.98 537,101 23.37
30.01-37.81 375,417 4.9 32.51 111,572 32.91
--------- --- ------ -------- -------
2,658,495 1,076,312
========= === ------ ========= =======
The fair value for options granted was estimated at the time of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the three years ended June 30, 2000: Risk free interest rates of
6.10% in fiscal 2000, 4.58% in fiscal 1999 and 5.84% in fiscal 1998, dividend
yield of 0.0% for each year, volatility factor of the expected market price of
the Company's common stock of 72% for fiscal 2000, 71% for fiscal 1999, and 45%
for fiscal 1998, and an average holding period of five years. During fiscal
2000, 1999 and 1998, the weighted-average grant-date fair value of the stock
options granted during the fiscal year was $6.30, $17.20, and $15.28 per share,
respectively.
If the compensation cost for the Company's stock options and the Purchase Plan
had been determined based on the fair value at the date of grant, as prescribed
in SFAS No. 123, the Company's net income and net income per share would have
been as follows:
(IN THOUSANDS, EXCEPT PER
SHARE DATA) 2000 1999 1998
------------------------- ---- ------ ------
Pro forma net income $ 40 $9,214 $8,215
Pro forma income per diluted
weighted average share $ -- $0.37 $0.33
As stock options vest over several years and additional stock option grants are
expected to be made each year, the above pro forma disclosures are not
necessarily representative of pro forma effects on results of operations for
future years.
401(K) PLAN
The Company sponsors an employee savings plan ("the Plan") as defined by Section
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all employees in the U.S. who elect to participate. Participants
have the opportunity to invest on a pre-tax basis in a variety of mutual fund
options. The Company matches 100% of each participant's voluntary contributions
up to 3% of gross salary per payroll period. Company contributions vest to the
participants in 20% increments for each year of employment and become fully
vested after five years of continuous employment. Company contributions to the
Plan were $2.4 million, $1.8 million, and $1.4 million, for the years ended June
30, 2000, 1999, and 1998, respectively.
NOTE 13. INCOME TAXES
Domestic and foreign income before income taxes for the three years ended June
30, 2000, are as follows:
($ IN THOUSANDS) 2000 1999 1998
---------------- ------- ------- -------
Domestic $16,621 $ 3,475 $ 9,428
Foreign (6,576) 20,476 7,571
------- ------- -------
$10,045 $23,951 $16,999
======= ======= =======
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18
The provisions for income taxes for the three years ended June 30, 2000 are as
follows:
($ IN THOUSANDS) 2000 1999 1998
---------------- -------- ------- -------
Current:
Federal $ 5,520 $ 2,801 $5,402
State 2,053 1,506 1,144
Foreign 1,360 7,359 3,403
------- ------- ------
8,933 11,666 9,949
------- ------- ------
Deferred:
Federal (1,087) (2,526) (1,122)
State (362) (842) (384)
Foreign (2,924) 31 (763)
------- ------ ------
(4,373) (3,337) (2,269)
------- ------ ------
$ 4,560 $8,329 $7,680
======= ====== ======
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate as set forth below:
($ IN THOUSANDS) 2000 1999 1998
- ---------------- ------ ------ ------
Income tax expense computed at the federal
statutory rate $3,516 $8,383 $5,949
State income taxes, net of federal benefit 976 994 494
Foreign rate differential 454 (629) (141)
Use of foreign net operating loss carryforwards (801) (532) (1,117)
Foreign losses w/o current benefit 962 291 522
Foreign permanent tax adjustments 202 191
U.S. permanent tax adjustments (124) (287) 1,454
U.S. separate return limitation year loss (154) 160
Other (471) (242) 519
------ ------ ------
$4,560 $8,329 $7,680
====== ====== ======
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries as those earnings have been
permanently reinvested. Such taxes, if any, are not expected to be significant.
Significant components of the Company's net deferred tax asset as of June 30,
2000 and 1999 are as follows:
($ IN THOUSANDS) 2000 1999
- --------------- -------- --------
Deferred tax assets:
Foreign loss carryforwards $ 7,869 $ 4,869
Accrued expenses 15,872 9,480
Allowance for doubtful accounts 558 1,300
Deferred contract profit 6,699 8,852
Other 118 89
-------- --------
Gross deferred tax assets 31,116 24,590
Deferred tax asset valuation allowance (3,468) (3,563)
-------- --------
Total deferred tax assets 27,648 21,027
-------- --------
Deferred tax liabilities:
Property and equipment (4,822) (3,948)
Other (4,224) (5,364)
-------- --------
Total deferred tax liabilities (9,046) (9,312)
-------- --------
$ 18,602 $ 11,715
======== ========
The net deferred tax assets and liabilities are included in the consolidated
balance sheet as of June 30, 2000 and 1999, as follows:
($ IN THOUSANDS) 2000 1999
- ---------------- ------- -------
Other current assets $15,370 $14,011
Other assets 12,278 7,016
Other current liabilities (1,007) (1,175)
Other liabilities (8,039) (8,137)
------- -------
$18,602 $11,715
======= =======
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19
The net deferred tax asset includes a tax effect of approximately $8.1 million
for pre-acquisition and post-acquisition foreign tax loss carryforwards
available to offset future liabilities for foreign income taxes. Substantially
all of the foreign tax losses are carried forward indefinitely, subject to
certain limitations. A valuation allowance has been established for certain of
the future foreign income tax benefits primarily related to income tax loss
carryforwards and temporary differences based on management's assessment that it
is more likely than not that such benefits will not be realized. In fiscal 2000,
the valuation allowance decreased by $0.1 million due to use of foreign net
operating loss carryforwards. The ultimate realization of the remaining loss
carryforwards is dependent upon the generation of sufficient taxable income in
respective jurisdictions, primarily Germany.
NOTE 14. LEASE COMMITMENTS
The Company leases its facilities under operating leases that include renewal
and escalation clauses. Total rent expense was $20.3 million, $17.3 million, and
$13.9 million for the years ended June 30, 2000, 1999, and 1998,respectively.
Future minimum lease payments due under noncancellable operating leases totaled
$18.3 million, $14.1 million, $10.5 million, $7.5 million, $6.8 million, and
$22.2 million for fiscal 2001, 2002, 2003, 2004, 2005 and thereafter,
respectively. These future minimum lease payments are offset by future sublease
payments totaling $4.3 million and $1.4 million for fiscal 2001 and 2002,
respectively.
NOTE 15. RELATED PARTY TRANSACTIONS
During the three years ended June 30, 2000, certain members of the Company's
Board of Directors were associated with certain of the Company's customers. Net
revenue recognized from these customers was nil, $25.3 million and $25.2 million
in fiscal 2000, 1999 and 1998, respectively. Amounts due from these customers
included in accounts receivable at June 30, 1998 totaled $14.3 million. Related
party amounts included in accounts receivable were on standard terms and manner
of settlement. At June 30, 2000 and 1999, none of the Company's directors were
associated as related parties with any of its customers.
At June 30, 1998, the Company had notes receivable of $1.4 million from a
company owned by the former directors of MMS Europe. The notes bore interest at
8.0% and were payable on demand. The Company recorded interest income related to
these notes of $0.2 million for each of the years ended June 30, 1998. These
notes were settled in fiscal 1999.
NOTE 16. GEOGRAPHIC AND SEGMENT INFORMATION
Financial information by geographic area for the three years ended June 30, 2000
is as follows:
($ IN THOUSANDS) 2000 1999 1998
- ---------------- --------- --------- ---------
Net revenue:
North America $ 225,478 $ 198,236 $ 175,045
United Kingdom 65,444 79,312 56,607
Europe 79,695 66,250 50,012
Asia/Pacific 7,533 4,688 3,778
--------- --------- ---------
$ 378,150 $ 348,486 $ 285,442
--------- --------- ---------
Income (loss) from
operations:
North America $ 6,007 $ 1,060 $ 6,334
United Kingdom (3,666) 16,545 4,747
Europe 2,134 3,368 2,519
Asia/Pacific (846) (409) (299)
--------- --------- ---------
$ 3,629 $ 20,564 $ 13,301
--------- --------- ---------
Identifiable assets:
North America $ 198,775 $ 218,625 $ 190,017
United Kingdom 64,994 54,360 42,804
Europe 81,348 58,086 28,710
Asia/Pacific 5,802 2,494 227
--------- --------- ---------
$ 350,919 $ 333,565 $ 261,758
--------- --------- ---------
The Company is managed through three reportable segments, namely, the clinical
research services group, the consulting services group and the medical marketing
services group. The clinical research services group ("CRS") constitutes the
Company's core business and includes clinical trials management, biostatistics
and data management, as well as related medical advisory, information
technology, and investigator site services. PAREXEL's consulting group ("PCG")
provides technical expertise in such disciplines as clinical pharmacology,
regulatory affairs, industry training, publishing, and drug development. These
consultants identify options and propose solutions to address clients' product
development, registration, and commercialization issues. The medical marketing
services group ("MMS") provides a full spectrum of market development, product
development, and targeted communications services in support of product launch.
F-14
20
The Company evaluates its segment performance and allocates resources based on
revenue and gross profit (net revenue less direct costs), while other operating
costs are evaluated on a geographical basis. Accordingly, the Company does not
include selling, general, and administrative expenses, depreciation and
amortization expense, nonrecurring and merger-related costs, interest income
(expense), other income (expense), and income tax expense in segment
profitability. The accounting policies of the reportable segments are the same
as those described in Note 2.
($ IN THOUSANDS) CRS PCG MMS TOTAL
---------------- -------- ------- ------- --------
Net revenue:
2000 $262,698 $66,525 $48,927 $378,150
1999 $239,502 $57,633 $51,351 $348,486
1998 $187,954 $45,831 $51,657 $285,442
Gross profit:
2000 $89,154 $14,562 $13,549 $117,265
1999 $88,227 $16,422 $10,187 $114,836
1998 $71,459 $12,452 $15,813 $ 99,724
F-15
21
Report of Independent Accountants
To the Board of Directors and Stockholders of PAREXEL International Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of PAREXEL
International Corporation and its subsidiaries at June 30, 2000 and June 30,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 30 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
August 18, 2000
F-16
22
QUARTERLY OPERATING RESULTS & COMMON STOCK INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
two years ended June 30, 2000.
FOR THE YEAR ENDED JUNE 30, 2000
------------------------------------------------------------------
(in thousands, except share data) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ---------------------------------- ------------- -------------- ------------- --------------
Net revenue $ 91,768 $ 97,957 $ 97,253 $ 91,172
Income (loss) from operations (1) 6,087 6,327 (9,129) 344
Net income (loss) 4,439 5,064 (5,448) 1,430
Diluted earnings (loss) per share 0.18 0.20 (0.22) 0.06
Range of common stock prices (2) $8.03-13.50 $7.62-12.56 $8.12-15.44 $8.25-10.37
FOR THE YEAR ENDED JUNE 30, 1999
------------------------------------------------------------------
(in thousands, except share data) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ---------------------------------- ------------- -------------- ------------- --------------
Net revenue $ 82,835 $ 87,855 $ 90,032 $ 87,764
Income (loss) from operations(3) 7,677 7,277 7,703 (2,093)
Net income (loss) 5,505 5,141 5,685 (709)
Diluted earnings (loss) per share 0.22 0.21 0.23 (0.03)
Range of common stock prices(2) $29.69-40.13 $20.25-45.50 $19.00-29.38 $10.48-26.81
(1) The Statement of Operations for the year ended June 30, 2000 includes
charges of $13.1 million related to restructuring and other charges,
consisting primarily of severance and lease termination costs and $1.0
million related to accelerated depreciation expense due to changes in the
estimated useful lives of leasehold improvements on abandoned leased
facilities.
(2) The range of common stock prices is based on the high and low sales price on
the Nasdaq National Market for the periods indicated.
(3) Income (loss) from operations for the year ended June 30, 1999 includes
$4.7 million in merger-related and facilities charges including $1.9
million in costs related to the terminated merger agreement with Covance
Inc. and $2.8 million in leasehold abandonment charges resulting primarily
from the centralization of certain facilities in North America and Europe.
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "PRXL."
As of September 11, 2000, there were approximately 127 stockholders of record.
The Company has never declared or paid any cash dividends on its common stock
and does not anticipate paying any cash dividends in the foreseeable future. The
Company intends to retain future earnings for the development and expansion of
its business.
SELECTED FINANCIAL DATA
(in thousands, except per share data and
number of employees) 2000 1999 1998 1997 1996
- ---------------------------------------- -------- ---------- ---------- -------- --------
OPERATIONS
Net revenue $378,150 $348,486 $285,442 $203,676 $125,053
Income from operations 3,629(1) 20,564(2) 13,301(3) 17,119 10,391
Net income 5,485 15,622 9,319 12,803 6,655
Diluted earnings per Share $ 0.22 $ 0.62 $ 0.38 $ 0.56 $ 0.39
FINANCIAL POSITION
Cash, cash equivalents
and marketable securities $ 90,213 $89,957 $76,634 $104,339 $52,022
Working capital 127,746 132,757 118,937 113,997 55,681
Total assets 350,919 333,565 261,758 240,544 135,721
Long-term debt 104 79 36 136 466
Stockholders' equity $ 190,153 $192,032 $168,380 $147,448 $69,788
OTHER DATA
Purchase of property and equipment $20,067 $ 18,910 $ 27,736 $ 25,112 $ 7,461
Depreciation and Amortization $21,934 $ 17,932 $ 15,114(4) $ 7,710 $ 4,280
Number of employees 4,200 4,198 3,705 2,928 1,767
Weighted average shares used in computing
diluted earnings (loss) per share 25,140 25,128 24,825 22,822 17,255
(1) The Statement of Operations for the year ended June 30, 2000 includes
charges of $13.1 million related to restructuring and other
F-17
23
charges, consisting primarily of severance and lease termination costs and $1.0
million related to accelerated depreciation expense due to changes in the
estimated useful lives of leasehold improvements on abandoned leased facilities.
(2) Income from operations for the year ended June 30, 1999 includes $4.7
million in nonrecurring charges including $1.9 million in costs related to the
terminated merger agreement with Covance Inc. and $2.8 million in leasehold
abandonment charges resulting primarily from the centralization of certain
facilities in North America and Europe.
(3) Income from operations for the year ended June 30, 1998 includes $13.6
million of nonrecurring charges, including $10.3 million pertaining to
acquisitions.
(4) Depreciation and amortization for the year ended June 30, 1998
includes a noncash charge of $1.7 million to reflect a change in estimate in the
remaining useful lives of certain computer equipment as a result of integration
activities of acquired companies and the Company's program to upgrade and
standardize its information technology platform.
F-18