-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J6iMy1JdLJiGS3EmBgK1tMsSz8jYecmEb1s7NHR4FUaZq49nqMqH9a7NDwrGsUlf n+4scICR8rzOwUWJbSexvA== 0000950135-97-004547.txt : 19971113 0000950135-97-004547.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950135-97-004547 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAREXEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000799729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 042776269 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27058 FILM NUMBER: 97716765 BUSINESS ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6174879900 MAIL ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 QUARTERLY REPORTS 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. 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 3 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, JUNE 30, 1997 1997 ----------- -------- (UNAUDITED) 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 ======== ========
See notes to condensed consolidated financial statements. 2 4 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (in thousands, except share data)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 1997 1996 -------- -------- 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 ======== ========
See notes to condensed consolidated financial statements. 3 5 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 1997 1996 -------- -------- 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 ======== ========
See notes to condensed consolidated financial statements. 4 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 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 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 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 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 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 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 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 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 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 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 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 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 19 Exhibit No. Page - ----------- ---- 11 Computation of Earnings Per Common and Common Equivalent Share 19 27 Financial Data Schedule 20 EX-11 2 COMPUTATIONS OF EARNINGS PER SHARE 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS 3-MOS JUN-30-1998 JUL-01-1997 SEP-30-1997 1 50,532 37,478 68,702 2,583 0 166,109 48,268 16,402 199,607 54,924 0 0 0 201 142,770 199,607 0 51,211 0 34,723 0 80 38 5,582 1,954 3,628 0 0 0 3,628 0.18 0.18
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