<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission File Number: 0-27058
PAREXEL International Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2776269
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 West Street, Waltham, MA 02154
---------------------------- -----
(Address of principal executive offices) (Zip code)
(617) 487-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 10, 1997, there were 20,207,754 shares of
PAREXEL International Corporation common stock outstanding.
<PAGE> 2
PAREXEL INTERNATIONAL CORPORATION
INDEX
PAGE
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
September 30, 1997 and June 30, 1997 2
Condensed Consolidated Income Statements --
Three months ended September 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows --
Three months ended September 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Risk Factors 11
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:
Unrestricted $ 47,780 $ 28,368
Restricted 2,752 1,967
Marketable securities 37,478 66,891
Accounts receivable, net 66,119 63,009
Other current assets 11,980 11,632
-------- --------
Total current assets 166,109 171,867
Property and equipment, net 31,866 27,530
Other assets 1,632 1,604
-------- --------
$199,607 $201,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 328 $ 1,135
Accounts payable 6,353 7,999
Advance billings 28,662 32,592
Other current liabilities 19,581 19,680
-------- --------
Total current liabilities 54,924 61,406
Long-term debt 27 55
Other liabilities 1,685 1,715
-------- --------
Total liabilities 56,636 63,176
-------- --------
Stockholders' equity:
Preferred stock - $.01 par value; shares
authorized: 5,000,000 -- --
Common stock - $.01 par value; shares
authorized: 50,000,000 at September 30,
1997, and at June 30, 1997; shares issued:
20,133,807 at September 30, 1997, and
20,066,867 at June 30, 1997; shares
outstanding: 20,104,395 at September 30,
1997, and 20,037,455 at June 30, 1997 201 200
Additional paid-in capital and other
stockholders' equity 132,296 130,648
Retained earnings 10,474 6,977
-------- --------
Total stockholders' equity 142,971 137,825
-------- --------
$199,607 $201,001
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue $ 62,911 $ 43,152
Reimbursed costs (11,700) (10,122)
-------- --------
Net revenue 51,211 33,030
-------- --------
Costs and expenses:
Direct costs 34,723 22,821
Selling, general and administrative 9,884 6,617
Depreciation and amortization 1,978 883
-------- --------
46,585 30,321
-------- --------
Income from operations 4,626 2,709
Other income, net 956 364
-------- --------
Income before provision for income taxes 5,582 3,073
Provision for income taxes 1,954 1,137
-------- --------
Net income $ 3,628 $ 1,936
======== ========
Net income per share $ 0.18 $ 0.11
======== ========
Weighted average common and
common equivalent shares outstanding 20,591 17,256
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,628 $ 1,936
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,978 883
Change in operating assets and liabilities,
net of effects from acquisitions (9,860) (8,934)
-------- --------
Net cash used by operating activities (4,254) (6,115)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (39,020) (10,849)
Proceeds from sale of marketable securities 68,302 13,773
Cash related to acquisition activities -- 251
Purchase of property and equipment (6,554) (2,657)
-------- --------
Net cash provided by investing activities 22,728 518
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,431 1,429
Repayments of long-term debt (82) (2,755)
-------- --------
Net cash provided (used) by financing activities 1,349 (1,326)
-------- --------
Effect of exchange rate changes on unrestricted cash
and cash equivalents (411) (39)
-------- --------
Net increase (decrease) in unrestricted cash
and cash equivalents 19,412 (6,962)
Unrestricted cash and cash equivalents at beginning
of period 28,368 16,243
-------- --------
Unrestricted cash and cash equivalents at end of period $ 47,780 $ 9,281
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 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 to 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 (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the fiscal year
ended June 30, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997.
The balance sheet at June 30, 1997, has been derived from the audited financial
statements at that date but does not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements.
The Company's stock is currently quoted on the Nasdaq National Market under the
symbol "PRXL."
Note 2 -- Earnings per Share
Earnings per share calculations for the three months ended September 30, 1997
are based on 20,054,938 weighted average common shares outstanding, plus 536,408
common share equivalents attributable to common stock options. See Exhibit 11
for further information on the computation of earnings per common and common
equivalent share. All share and per share data have been restated to reflect the
February 1997 two-for-one stock split, in the form of a 100% stock dividend.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaces primary and fully diluted earnings per share with basic
and diluted earnings per share. SFAS 128 will be effective for the Company's
second quarter of fiscal 1998 and requires the restatement of all previously
reported earnings per share data presented. Early adoption of this Statement is
not permitted. The Company expects that basic and diluted earnings per share
amounts will not be materially different from the Company's respective primary
and fully diluted earnings per share amounts.
5
<PAGE> 7
Note 3 -- Subsequent Event
On October 22, 1997, the Company signed a definitive agreement to acquire
Kemper-Masterson, Inc. ("KMI"), a leading regulatory consulting firm, based in
Massachusetts. Under the terms of the agreement, all shares of KMI's voting and
nonvoting stock will be exchanged for approximately 577,000 shares of the
Company's common stock. The merger is to be accounted for as a pooling of
interests and is expected to close in December 1997.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth and discussed below for the three months ended
September 30, 1997, 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
(consisting of normal recurring adjustments) necessary for a fair presentation
of such information. The Company's results of operations for a particular
quarter may not be indicative of results expected during subsequent fiscal
quarters or for the entire year.
OVERVIEW
The Company is a leading contract research organization ("CRO") providing a
broad range of knowledge-based product development and product launch services
to the worldwide pharmaceutical, biotechnology and medical device industries.
The Company's primary objective is to help clients quickly obtain the necessary
regulatory approvals of their products and, ultimately, optimize the market
penetration of those products. The Company's service offerings include: clinical
trials management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, regulatory and medical consulting, performance
improvement, industry training and publishing, and other drug development
consulting services.
The Company's contracts are typically fixed price, multi-year contracts that
require a portion of the fee to be paid at the time the contract is entered
into, with the balance of the fee paid in installments during the contract's
duration. Net revenue from contracts is generally recognized on a percentage of
completion basis as work is performed.
As is customary in the industry, the Company routinely subcontracts with third
party investigators in connection with clinical trials and other third party
service providers for laboratory analysis and other specialized services. These
and other reimbursable costs are paid by the client and, in accordance with
industry practice, are included in revenue. Reimbursed costs vary from contract
to contract. Accordingly, the Company views net revenue, which consists of
revenue less reimbursed costs, as its primary measure of revenue growth.
Direct costs 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 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenue increased by $18.2 million, or 55.0%, from $33.0 million for the
three months ended September 30, 1996, to $51.2 million for the three months
ended September 30, 1997. This net
7
<PAGE> 9
revenue growth was primarily attributable to an increase in the volume and
average contract value of clinical research projects serviced by the Company.
For the three months ended September 30, 1997, net revenue from North American
and European operations increased by $13.4 million and $4.2 million,
respectively, over the corresponding prior year period. 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 $11.9 million, or 52.2%, from $22.8 million for the
three months ended September 30, 1996, to $34.7 million for the three months
ended September 30, 1997. This increase in direct costs was due to the increase
in the number of project-related personnel, hiring, facilities and information
system costs necessary to support the increased level of operations. Direct
costs as a percentage of net revenue decreased from 69.1% for the three months
ended September 30, 1996, to 67.8% for the three months ended September 30,
1997, primarily due to improved performance of the Company's North American
operations.
Selling, general and administrative expenses increased by $3.3 million, or
49.4%, from $6.6 million for the three months ended September 30, 1996 to $9.9
million for the three months ended September 30, 1997. This increase was
primarily due to increased administrative personnel, hiring, and facilities
costs necessary to accommodate the Company's growth. Selling, general and
administrative expenses as a percentage of net revenue decreased slightly from
20.0% for the three months ended September 30, 1996, to 19.3% for the three
months ended September 30, 1997.
Depreciation and amortization expense increased by $1.1 million, or 124.0%, from
$883,000 for the three months ended September 30, 1996 to $2.0 million for the
three months ended September 30, 1997. The increase is primarily due to
increased capital spending on computer equipment and facilities to support the
increase in project-related personnel.
Income from operations for the three months ended September 30, 1997, increased
by $1.9 million, or 70.8%, from $2.7 million for the three months ended
September 30, 1996, to $4.6 million for the three months ended September 30,
1997.
Other income, net increased by $592,000 from $364,000 for the three months ended
September 30, 1996, to $956,000 for the three months ended September 30, 1997.
This increase resulted from higher average balances of cash, cash equivalents
and marketable securities due primarily to proceeds from the Company's December
1996 public offering.
The Company's effective income tax rate was 35.0% for the three months ended
September 30, 1997, compared to 37.0% for the three months ended September 30,
1996. This decrease was due to changes in the mix of taxable income from the
different jurisdictions in which the Company operates and the impact of
tax-exempt interest income from securities held by the Company.
8
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
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 to be paid at the time the contract is entered into and the balance in
installments over the contract's duration, in some cases on a milestone
achievement basis. Revenue from the contracts is generally recognized on a
percentage of completion basis as work is performed. Accordingly, cash receipts
do not necessarily correspond to costs incurred and revenue recognized on
contracts. The Company's cash flow is influenced by changes in the levels of
billed and unbilled receivables and advance billings. As a result, the number of
days revenue outstanding in accounts receivable, net of advance billings and the
related dollar values of these accounts, can vary due to the achievement of
contractual milestones and the timing and size of cash receipts. The number of
days revenue outstanding in accounts receivable, net of advance billings, was 54
days at September 30, 1997, compared to 45 days at June 30, 1997. The increase
in days revenue outstanding from June 30, 1997, to September 30, 1997, was
primarily due to the timing of the achievement of project milestones and related
billings. Accounts receivable, net of the allowance for doubtful accounts,
increased from $63.0 million at June 30, 1997, to $66.1 million at September 30,
1997, while advance billings decreased from $32.6 million to $28.7 million for
the same period.
Unrestricted cash and cash equivalents increased by $19.4 million during the
three months ended September 30, 1997 as a result of $22.7 million and $1.3
million in cash provided by investing and financing activities, respectively,
partially offset by $4.3 million in cash used by operating activities, and a
$411,000 unfavorable effect of exchange rate changes.
Net cash used by operating activities resulted from net income, excluding
noncash expenses, of $5.6 million, offset by increases in accounts receivable of
$4.0 million and decreases in advance billings, accounts payable, and other
current liabilities of $3.3 million, $1.5 million, and $1.0 million,
respectively.
Cash provided by investing activities consisted primarily of net proceeds from
sales of marketable securities of $29.3 million, partially offset by capital
expenditures of $6.6 million related to facility expansion and investments in
information technology.
Financing activities consisted primarily of net proceeds from the exercise of
stock options of $1.4 million.
The Company has domestic and foreign line of credit arrangements with banks
totaling approximately $12.4 million and a capital lease line of credit with a
U.S. bank for $2.4 million. At September 30, 1997, the Company had approximately
$13.8 million in available credit under these arrangements.
The Company's primary cash needs on both a short-term and long-term basis are
for the payment of salaries and fringe benefits, hiring and recruiting expenses,
business development costs, capital expenditures and facility-related expenses.
The Company believes that its existing capital resources, together with cash
flows from operations and borrowing capacity under its existing lines of credit,
9
<PAGE> 11
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 financings 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 financings will be available on
terms acceptable to the Company.
The foregoing statements include forward-looking statements which involve risks
and uncertainties. The Company's actual experience may differ materially from
that discussed above. Factors that might cause such differences include, but are
not limited to, those discussed in "Risk Factors" as well as future events that
have the effect of reducing the Company's available cash balances, such as
unexpected operating losses or capital expenditures or cash expenditures related
to possible future acquisitions.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the consolidated financial
statements. SFAS No. 131 establishes standards for reporting information on
operating segments in interim and annual financial statements. Both statements
are effective for the Company for fiscal 1999.
10
<PAGE> 12
RISK FACTORS
In addition to the other information in this report, the following risk factors
should be considered carefully in evaluating the company and its business.
Information provided by the Company from time to time may contain certain
"forward-looking" information, as that term is defined by (i) the Private
Securities Litigation Reform Act of 1995 (the "Act") and (ii) in releases made
by the Securities and Exchange Commission (the "SEC"). These risk factors are
being provided pursuant to the provisions of the Act and with the intention of
obtaining the benefits of the "safe harbor" provisions of the Act.
LOSS OR DELAY OF LARGE CONTRACTS
Most of the Company's contracts are terminable upon 60 to 90 days' notice by the
client. Clients terminate or delay contracts for a variety of reasons,
including, among others, the failure of products being tested to satisfy safety
requirements, unexpected or undesired clinical results of the product, the
client's decision to forego a particular study, such as for economic reasons,
insufficient patient enrollment or investigator recruitment or production
problems resulting in shortages of the drug. In addition, the Company believes
that cost-containment and competitive pressures have caused pharmaceutical
companies to apply more stringent criteria to the decision to proceed with
clinical trials and therefore may result in a greater willingness of these
companies to cancel contracts with CROs. The loss or delay of a large contract
or the loss or delay of multiple contracts could have a material adverse effect
on the financial performance of the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have been subject to variation, and
will continue to be subject to variation, depending upon factors such as the
initiation, progress, or cancellation of significant projects, exchange rate
fluctuations, the mix of services offered, the opening of new offices and other
internal expansion costs, the costs associated with integrating acquisitions and
the startup costs incurred in connection with the introduction of new products
and services. In addition, during the third quarter of fiscal 1995 and 1993, the
Company's results of operations were affected by a noncash write-down due to the
impairment of long-lived assets and a noncash restructuring charge,
respectively. See "Risks Associated with Acquisitions." Because a high
percentage of the Company's operating costs are relatively fixed, variations in
the initiation, completion, delay or loss of contracts, or in the progress of
client projects can cause material adverse variations in quarterly operating
results.
DEPENDENCE ON CERTAIN INDUSTRIES AND CLIENTS
The Company's revenues are highly dependent on research and development
expenditures by the pharmaceutical and biotechnology industries. The Company's
operations could be materially and adversely affected by general economic
downturns in its clients' industries, the impact of the current trend toward
consolidation in these industries or any decrease in research and development
expenditures. Furthermore, the Company has benefited to date from the increasing
tendency of pharmaceutical companies to outsource large clinical research
projects. A reversal or slowing of this trend would have a material adverse
effect on the Company. In fiscal 1997 and the three months
11
<PAGE> 13
ended September 30, 1997, the Company's top five clients accounted for 41% and
39%, respectively, of the Company's consolidated net revenue. In fiscal 1997 and
the three months ended September 30, 1997, one client accounted for 11% and 17%,
respectively, of the Company's net revenue. The loss of business from a
significant client could have a material adverse effect on the Company.
MANAGEMENT OF BUSINESS EXPANSION; NEED FOR IMPROVED SYSTEMS; ASSIMILATION OF
FOREIGN OPERATIONS
The Company's business and operations have recently experienced substantial
expansion over the past 15 years. The Company believes that such expansion
places a strain on operational, human and financial resources. In order to
manage such expansion, the Company must continue to improve its operating,
administrative and information systems, accurately predict its future personnel
and resource needs to meet client contract commitments, track the progress of
ongoing client projects and attract and retain qualified management,
professional, scientific and technical operating personnel. Expansion of foreign
operations also may involve the additional risks of assimilating differences in
foreign business practices, hiring and retaining qualified personnel, and
overcoming language barriers. In the event that the operation of an acquired
business does not live up to expectations, the Company may be required to
restructure the acquired business or write-off the value of some or all of the
assets of the acquired business. Failure by the Company to meet the demands of
and to manage expansion of its business and operations could have a material
adverse effect on the Company's business.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has made a number of acquisitions and will continue to review future
acquisition opportunities. No assurances can be given that acquisition
candidates will continue to be available on terms and conditions acceptable to
the Company. Acquisitions involve numerous risks, including, among other things,
difficulties and expenses incurred in connection with the acquisitions and the
subsequent assimilation of the operations and services or products of the
acquired companies, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired company.
Acquisitions of foreign companies also may involve the additional risks of
assimilating differences in foreign business practices and overcoming language
barriers. In the event that the operations of an acquired business do not live
up to expectations, the Company may be required to restructure the acquired
business or write-off the value of some or all of the assets of the acquired
business. In fiscal 1993 and 1995, the Company's results of operations were
materially and adversely affected by write-offs associated with the Company's
acquired German operations. There can be no assurance that any acquisition will
be successfully integrated into the Company's operations.
DEPENDENCE ON GOVERNMENT REGULATION
The Company's business depends on the comprehensive government regulation of the
drug development process. In the United States, the general trend has been in
the direction of continued or increased regulation, although the FDA recently
announced regulatory changes intended to streamline the approval process for
biotechnology products by applying the same standards as are in
12
<PAGE> 14
effect for conventional drugs. In Europe, the general trend has been toward
coordination of common standards for clinical testing of new drugs, leading to
changes in the various requirements currently imposed by each country. Japan
also legislated GCP and legitimatized the use of CRO's in April 1997. Changes in
regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, as well as anticipated
regulation, could materially and adversely affect the demand for the services
offered by the Company. In addition, failure on the part of the Company to
comply with applicable regulations could result in the termination of ongoing
research or the disqualification of data, either of which could have a material
adverse effect on the Company.
COMPETITION; CRO INDUSTRY CONSOLIDATION
The Company primarily competes against in-house departments of pharmaceutical
companies, full service CROs, and, to a lesser extent, universities, teaching
hospitals and other site organizations. Some of these competitors have greater
capital, technical and other resources than the Company. CROs generally compete
on the basis of previous experience, medical and scientific expertise in
specific therapeutic areas, the quality of services, the ability to organize and
manage large-scale trials on a global basis, the ability to manage large and
complex medical databases, the ability to provide statistical and regulatory
services, the ability to recruit investigators and patients, the ability to
integrate information technology with systems to improve the efficiency of
contract research, an international presence with strategically located
facilities, financial viability and price. PAREXEL believes that it competes
favorably in these areas. There can be no assurance that the Company will be
able to compete favorably in these areas.
The CRO industry is fragmented, with participants ranging from several hundred
small, limited-service providers to several large, full-service CROs with global
operations. PAREXEL believes that it is the fourth largest full-service CRO in
the world, based on annual net revenue. Other large CROs include Quintiles
Transnational Corporation, Covance Inc., IBAH, Inc., Pharmaceutical Product
Development, Inc. and ClinTrials Research, Inc. The trend toward CRO industry
consolidation has resulted in heightened competition among the larger CROs for
clients and acquisition candidates. In addition, consolidation within the
pharmaceutical industry as well pharmaceutical companies outsourcing to a fewer
number of preferred CROs has led to heightened competition for CRO contracts.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by analysts, market conditions in the industry,
prospects of health care reform, changes in government regulation and general
economic conditions. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that have been unrelated
to the operating performance of particular companies. These market fluctuations
may adversely affect the market price of the Company's Common Stock. Because the
Company's Common Stock currently trades at a relatively high price-earnings
multiple, due in part to analysts' expectations of continued earnings growth,
even
13
<PAGE> 15
a relatively small shortfall in earnings from, or a change in, analysts'
expectations may cause an immediate and substantial decline in the Company's
stock price. Investors in the Company's Common Stock must be willing to bear the
risk of such fluctuations in earnings and stock price.
POTENTIAL ADVERSE IMPACT OF HEALTH CARE REFORM
Numerous governments have undertaken efforts to control growing health care
costs through legislation, regulation and voluntary agreements with medical care
providers and pharmaceutical companies. In the last several years, several
comprehensive health care reform proposals were introduced in the U.S. Congress.
The intent of the proposals was, generally, to expand health care coverage for
the uninsured and reduce the growth of total health care expenditures. While
none of the proposals were adopted, health care reform may again be addressed by
the U.S. Congress. Implementation of government health care reform may adversely
affect research and development expenditures by pharmaceutical and biotechnology
companies, resulting in a decrease of the business opportunities available to
the Company. Management is unable to predict the likelihood of health care
reform proposals being enacted into law or the effect such law would have on the
Company.
Many European governments have also reviewed or undertaken health care reform.
For example, German health care reform legislation implemented in January 1993
contributed to an estimated 15% decline in German pharmaceutical industry sales
in calendar 1993 and led several clients to cancel contracts with the Company.
Subsequent to these events, in the third quarter of fiscal 1993, the Company
restructured its German operations and incurred a restructuring charge of
approximately $3.3 million. In addition, in the third quarter of fiscal 1995,
the Company's results of operations were affected by a non-cash write-down due
to the impairment of long-lived assets of PAREXEL GmbH, the Company's German
subsidiary, of approximately $11.3 million. The Company cannot predict the
impact that any pending or future health care reform proposals may have on the
Company's business in Europe.
DEPENDENCE ON PERSONNEL; ABILITY TO ATTRACT AND RETAIN PERSONNEL
The Company relies on a number of key executives, including Josef H. von
Rickenbach, its President, Chief Executive Officer and Chairman, upon whom the
Company maintains key man life insurance. Although the Company has entered into
agreements containing non-competition restrictions with its senior officers, the
Company does not have employment agreements with certain of these persons and
the loss of the services of any of the Company's key executives could have a
material adverse effect on the Company.
The Company's performance also depends on its ability to attract and retain
qualified professional, scientific and technical operating staff. The level of
competition among employers for skilled personnel, particularly those with M.D.,
Ph.D. or equivalent degrees, is high. There can be no assurance the Company will
be able to continue to attract and retain qualified staff.
POTENTIAL LIABILITY; POSSIBLE INSUFFICIENCY OF INSURANCE
Clinical research services involve the testing of new drugs on consenting human
volunteers pursuant
14
<PAGE> 16
to a study protocol. Such testing involves a risk of liability for personal
injury or death to patients due to, among other reasons, possible unforeseen
adverse side effects or improper administration of the new drug. Many of these
patients are already seriously ill and are at risk of further illness or death.
The Company could be materially and adversely affected if it were required to
pay damages or incur defense costs in connection with a claim that is outside
the scope of an indemnity or insurance coverage, or if the indemnity, although
applicable, is not performed in accordance with its terms or if the Company's
liability exceeds the amount of applicable insurance. In addition, there can be
no assurance that such insurance will continue to be available on terms
acceptable to the Company.
ADVERSE EFFECT OF EXCHANGE RATE FLUCTUATIONS
Approximately 36% and 31% of the Company's net revenue for fiscal 1997 and the
three months ended September 30, 1997, respectively, was derived from the
Company's operations outside of North America. Since the revenue and expenses of
the Company's foreign operations are generally denominated in local currencies,
exchange rate fluctuations between local currencies and the United States dollar
will subject the Company to currency translation risk with respect to the
results of its foreign operations. To the extent the Company is unable to shift
to its clients the effects of currency fluctuations, these fluctuations could
have a material adverse effect on the Company's results of operations. The
Company does not currently hedge against the risk of exchange rate fluctuations.
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Restated Articles of Organization and Restated By-Laws contain
provisions that may make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, the Company. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. In addition, shares of the Company's
Preferred Stock may be issued in the future without further stockholder approval
and upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of any holders of Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could adversely affect the
market price of the Common Stock and could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
15
<PAGE> 17
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) On September 26, 1997, the Company acquired subtstantially all of
the assets of Perceptive Systems, Inc., a Colorado corporation
doing business as Hayden Image Processing Group ("Hayden"). As
consideration for the transaction, the Company issued to Hayden
5,035 shares of the Company's Common Stock ("the Shares"). In
addition, Hayden will receive three annual contingent payments of
Common Stock of the Company calculated yearly and determined as a
percentage of net receipts generated by certain of the assets
acquired in the transaction. The Shares were issued in reliance
upon an exemption from the registration provisions of the
Securities Act of 1933, as amended ("the Act"), set forth in
Section 4(2) thereof. In connection with this issuance, Hayden
and its sole stockholder made certain representations to the
Company as to its investment intent and possessed a sufficient
level of sophistication and access to information. The Shares
issued were subject to restrictions on transfer absent
registration under the Act.
(d) Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11--Statement re Computation of Earnings Per Common and
Common Equivalent Share
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 7,
1997 reporting financial results for the three months ended June
30, 1997.
16
<PAGE> 18
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 10th day of October, 1997.
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
17
<PAGE> 19
Exhibit No. Page
- ----------- ----
11 Computation of Earnings Per Common and Common
Equivalent Share 19
27 Financial Data Schedule 20
<PAGE> 1
EXHIBIT 11
PAREXEL INTERNATIONAL CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(in thousands, except share data)
Three months ended
------------------
September 30,
-------------
1997 1996
---- ----
Net income attributable to common shares $ 3,628 $ 1,936
======= =======
Weighted average common shares outstanding
a. Shares attributable to common stock
outstanding 20,055 16,770
b. Shares attributable to common stock options
pursuant to APB 15, paragraph 38(b) 536 486
------- -------
Weighted average common shares outstanding 20,591 17,256
======= =======
Net income per share $ 0.18 $ 0.11
======= =======
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 50,532
<SECURITIES> 37,478
<RECEIVABLES> 68,702
<ALLOWANCES> 2,583
<INVENTORY> 0
<CURRENT-ASSETS> 166,109
<PP&E> 48,268
<DEPRECIATION> 16,402
<TOTAL-ASSETS> 199,607
<CURRENT-LIABILITIES> 54,924
<BONDS> 0
0
0
<COMMON> 201
<OTHER-SE> 142,770
<TOTAL-LIABILITY-AND-EQUITY> 199,607
<SALES> 0
<TOTAL-REVENUES> 51,211
<CGS> 0
<TOTAL-COSTS> 34,723
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 5,582
<INCOME-TAX> 1,954
<INCOME-CONTINUING> 3,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,628
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
