Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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 Number)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant:
The aggregate market value of Common Stock held by nonaffiliates was
$163,596,275 as of August 22, 2002.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of September 20, 2002, there were 25,175,358 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 21, 2002 are incorporated by reference into
Part III of this report.
PAREXEL INTERNATIONAL CORPORATION
FORM 10-K ANNUAL REPORT
INDEX
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 22
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Controls and Procedures 55
Item 15. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 56
SIGNATURES 57
PART I
ITEM 1. BUSINESS
GENERAL
PAREXEL International Corporation ("PAREXEL" or the "Company") is a leading
biopharmaceutical services company, providing a broad range of knowledge-based
contract research, medical marketing, consulting and technology products and
services to the worldwide pharmaceutical, biotechnology, and medical device
industries. The Company's primary objective is to provide solutions for managing
the biopharmaceutical product lifecycle with the goal of reducing the time, risk
and cost associated with the development and commercialization of new therapies.
Over the past nineteen years, PAREXEL has developed significant expertise in
processes and technologies supporting this strategy. The Company's product and
service offerings include: clinical trials management, data management,
biostatistical analysis, medical marketing, clinical pharmacology, regulatory
and medical consulting, performance improvement, industry training and
publishing, web-based portal solutions, interactive voice response systems
("IVRS"), electronic data capture solutions, medical diagnostics services, and
other drug development consulting services. The Company believes that its
integrated services, depth of therapeutic area expertise, and sophisticated
information technology, along with its experience in global drug development and
product launch services, represent key competitive strengths.
The Company complements the research and development ("R&D") and marketing
functions of pharmaceutical, biotechnology, and medical device companies.
Through its contract research and product launch services, PAREXEL seeks to help
clients maximize the return on their significant investments in research and
development by reducing the time, risk and cost of clinical development and
launch of new products. Outsourcing these types of services to PAREXEL provides
clients with a variable cost alternative to the fixed costs associated with
internal drug development. Clients no longer need to staff to peak periods and
can benefit from PAREXEL's technical resource pool, broad therapeutic area
expertise, global infrastructure designed to expedite parallel, multi-country
clinical trials, and other advisory services focused on accelerating
time-to-market. The Company's vision is to integrate and build critical mass in
the complementary businesses of clinical research, medical marketing, drug
development consulting, and information technology products and services. The
Company's goal is to provide significant benefits to sponsor clients from this
strategy, namely, a faster and less expensive development and launch process, as
well as a clinical development strategy that optimally supports the marketing
strategy for the new medical products.
The Company is one of the largest biopharmaceutical services company in the
world, based upon annual service revenue. Headquartered near Boston,
Massachusetts, the Company manages 56 locations and has approximately 4,930
employees throughout 37 countries around the world. The Company has established
subsidiaries in the major health care markets around the world, including the
United States, Japan, Germany, the United Kingdom ("U.K."), France, Italy,
Spain, Sweden, Australia, South Africa, Argentina, Brazil, Israel, Norway, The
Netherlands, and Central and Eastern Europe including Russia, Poland, the Czech
Republic, Lithuania and Hungary. The Company believes it is one of the largest
biopharmaceutical services companies in both Europe and Japan based upon annual
service revenue. During fiscal year 2002, PAREXEL derived 42.8% of its service
revenue from its international operations.
The Company was founded in 1983 as a regulatory affairs consulting firm and is a
Massachusetts corporation. Josef H. von Rickenbach, Chairman of the Board and
Chief Executive Officer of PAREXEL, was a co-founder. Since its inception, the
Company has executed a focused growth strategy embracing internal expansion as
well as strategic acquisitions to expand or enhance the Company's portfolio of
services, geographic presence, therapeutic area knowledge, information
technology capabilities, and client relationships. Acquisitions have been and
may continue to be an important component of PAREXEL's growth strategy. The
Company has completed ten acquisitions over the past five fiscal years.
3
SERVICES
The Company provides a broad range of knowledge-based contract research, medical
marketing, consulting and technology services to the worldwide pharmaceutical,
biotechnology, and medical device industries. The Company is managed through
four business segments: Clinical Research Services ("CRS"), the PAREXEL
Consulting Group ("PCG"), Medical Marketing Services ("MMS"), and Perceptive
Informatics, Inc. ("Perceptive"), a majority owned subsidiary of the Company.
CRS constitutes the Company's core business and includes clinical trials
management and biostatistics and data management, as well as related medical
advisory and investigator site services. PCG provides technical expertise in
such disciplines as clinical pharmacology, regulatory affairs, clinical and
manufacturing compliance and validation services, industry training, publishing,
and management consulting. PCG consultants identify options and propose
solutions to address clients' product development, regulatory approval, and
commercialization issues. MMS provides a full spectrum of brand positioning,
market development, product development, targeted communications, and strategic
reimbursement services in support of product launch. Perceptive provides
technology solutions to improve clients' product development and
commercialization processes. Perceptive offers a portfolio of products and
services that include web-based portals, IVRS, electronic data capture
solutions, and medical diagnostics. Financial data on a business unit and
geographic basis are included in Note 17 to the consolidated financial
statements included in Item 8 of this annual report.
CLINICAL RESEARCH SERVICES
The Company's CRS business unit provides clinical trials management and
biostatistical and data management services. Revenue from these services
represented approximately $261.7 million, or 58.9%, of the Company's
consolidated service revenue for fiscal year 2002.
Clinical Trials Management Services
The CRS business unit offers complete services for the design, initiation and
management of clinical trials programs, a critical element in obtaining
regulatory approval for biopharmaceutical products. The Company has performed
services in connection with trials in most therapeutic areas, including
Cardiology, Oncology, Infectious Diseases, Neurology, Allergy/Immunology,
Endocrinology/ Metabolism, Gastroenterology, Obstetrics/Gynecology, Orthopedics,
Pediatrics, Psychiatry, and Transplantation. PAREXEL's multi-disciplinary
clinical trials group examines a product's existing preclinical and clinical
data to design clinical trials to provide evidence of the product's safety and
efficacy.
PAREXEL's CRS business unit can manage every aspect of clinical trials,
including study and protocol design, Case Report Forms ("CRFs") design, site and
investigator recruitment, patient enrollment, study monitoring and data
collection, report writing and medical services. See "Government Regulations"
for additional information. CRS's clinical trials projects involve Phase II,
III, or IV clinical trials, which are generally larger, longer and more complex
than Phase I trials.
Clinical trials are monitored for and with strict adherence to good clinical
practice ("GCP"). The design of efficient CRFs, detailed operations manuals and
site monitoring by PAREXEL's clinical research associates seek to ensure that
clinical investigators and their staff follow the established protocols of the
studies. The Company has adopted standard operating procedures ("SOPs") which
are intended to satisfy regulatory requirements and serve as a tool for
controlling and enhancing the quality of PAREXEL's worldwide clinical services.
Clinical trials represent one of the most expensive and time-consuming parts of
the overall biopharmaceutical development process. The information generated
during these trials is critical for gaining marketing approval from the Food and
Drug Administration ("FDA") and other regulatory agencies and market acceptance
by clinicians and patients. The CRS business unit clinical trials management
group assists clients with one or more of the following steps:
.. STUDY PROTOCOL DESIGN. The protocol defines the medical issues the study
seeks to examine and the statistical tests that will be conducted.
Accordingly, the protocol also defines the frequency and type of laboratory
and clinical measures that are to be tracked and analyzed. The protocol
also defines the number of patients required to produce a statistically
valid result, the period of time over which they must be tracked and the
frequency and dosage of drug administration. The study's success depends on
the protocol's ability to predict correctly the requirements of the
regulatory authorities.
.. CRF DESIGN. Once the study protocol has been finalized, the CRF must be
developed. The CRF is the critical source document for collecting the
necessary clinical data as dictated by the study protocol. The CRF may
change at different stages of a trial. The CRFs for one patient in a given
study may consist of 100 or more pages.
4
SITE AND INVESTIGATOR RECRUITMENT. The product under investigation is
administered to patients by physicians, referred to as investigators, at
hospitals, clinics, or other locations, referred to as sites. Medical devices
are implemented or tested by investigators in similar settings. Potential
investigators may be identified and solicited by the product sponsor or the
contract research organization ("CRO"). A significant portion of a trial's
success depends on the successful identification and recruitment of experienced
investigators with an adequate base of patients who satisfy the requirements of
the study protocol. The Company has access to several thousand investigators who
have conducted clinical trials for the Company. The Company also provides
additional services at the clinical investigator site to assist physicians and
expedite the clinical research process.
.. PATIENT ENROLLMENT. The investigators, usually with the assistance of the
CRO, find and enroll patients suitable for the study. The speed with which
trials can be completed is significantly affected by the rate at which
patients are enrolled. Prospective patients are required to review
information about the drug and its possible side effects, and sign an
informed consent form to record their knowledge and acceptance of potential
side effects. Patients also undergo a medical examination to determine
whether they meet the requirements of the study protocol. Patients then
receive the product and are examined by the investigator as specified by
the study protocol. Investigators are responsible for administering the
products to patients, as well as examining patients and conducting
necessary tests.
.. STUDY MONITORING AND DATA COLLECTION. As patients are examined and tests
are conducted in accordance with the study protocol, data are recorded on
CRFs. CRFs are collected from study sites by specially trained persons
known as monitors. Monitors visit sites regularly to ensure that the CRFs
are completed correctly and that all data specified in the protocol are
collected. The monitors send completed CRFs to the study coordinating site,
where the CRFs are reviewed for consistency and accuracy before their data
are entered into an electronic database. The Company offers several remote
data entry ("RDE") technologies through Perceptive, which significantly
enhance both the quality and timeliness of clinical data collection while
achieving significant efficiency savings. The Company's study monitoring
and data collection services comply with the FDA's adverse events reporting
guidelines.
.. REPORT WRITING. The statistical analysis findings for data collected during
the trial together with other clinical data are included in a final report
generated for inclusion in a regulatory document.
.. MEDICAL SERVICES. Throughout the course of a development program, PAREXEL's
physicians provide a wide range of medical research and consulting services
to improve the speed and quality of clinical research, including medical
supervision of clinical trials, compliance with medical standards and
safety regulations, medical writing and strategy and product development.
Biostatistical and Data Management Services
PAREXEL's data management professionals provide a broad array of services to
support the accurate collection, organization, validation and analysis of
clinical data. For instance, they assist in the design of CRFs and investigator
training manuals to ensure that data are collected in an organized and
consistent format in compliance with the study protocol. Databases are designed
according to the analytical specifications of the project and the particular
needs of the client. Prior to data entry, PAREXEL personnel screen the data to
detect errors, omissions and other deficiencies in completed CRFs. The use of
RDE technologies to gather and report clinical data expedites data exchange
while minimizing data collection errors as a result of more timely verification
of data integrity. The CRS business unit provides clients with data abstraction,
data review and coding, data entry, database verification and editing and
resolution of data problems.
The CRS business unit has extensive experience throughout the world in the
creation of scientific databases for all phases of the drug development process,
including the creation of customized databases to meet client-specific formats,
integrated databases to support new drug application submissions and databases
in strict accordance with FDA, European and Asian specifications.
The CRS business unit biostatistics professionals assist clients with all phases
of drug development, including biostatistical consulting, database design, data
analysis and statistical reporting. These professionals develop and review
protocols, design appropriate analysis plans and design report formats to
address the objectives of the study protocol as well as the client's individual
objectives. Working with programming staff, biostatisticians perform appropriate
analyses and produce tables, graphs, listings and other applicable displays of
results according to an analysis plan. Frequently, the CRS business unit
biostatisticians represent clients during panel hearings at the FDA.
5
PAREXEL CONSULTING GROUP
The PCG business unit offers a number of consulting and advisory services in
support of product development, regulatory and marketing processes. This group
brings together experts from relevant disciplines focused on designing
meaningful solutions and helping clients make the best business decisions with
respect to their product lifecycle strategies. This group also serves as a
valuable resource for the Company's internal operations. PCG includes four
business units, KMI, Worldwide Regulatory Affairs ("WRA"), Clinical Pharmacology
and Barnett International ("Barnett"). Service revenue from the PCG business
represented approximately $97.8 million, or 22.0%, of consolidated service
revenue for fiscal year 2002.
KMI
KMI offers manufacturing and information technology related services to the
pharmaceutical, biopharmaceutical and medical device industries in the United
States and Europe. Employing an experienced team of former FDA investigators and
experienced engineers, the Company uses its established methodologies and
innovative information systems to assist clients in satisfying regulatory
standards for manufacturing and quality systems processes throughout a product's
lifecycle. KMI has a staff of senior consultants with extensive experience and
recognized expertise in good manufacturing practices ("GMP") and other FDA
requirements. KMI can evaluate clients' existing systems, help prepare for FDA
inspections, conduct new drug application ("NDA") integrity audits, and develop
regulatory correctional action plans.
KMI also has the resources and experience to test processes, laboratory systems,
automated unit operations, utilities, distributed control systems, and IS/IT
management systems for manufacturing, laboratory, clinical and research
applications for compliance with regulatory standards.
Worldwide Regulatory Affairs
Before a product can be launched in a particular country, it must be approved by
the regulatory agency having jurisdiction in that country. WRA provides
comprehensive regulatory product registration services for pharmaceutical and
biotechnology products and medical devices in major jurisdictions in North
America, Europe, and Japan. These services include regulatory strategy
formulation, regulatory document preparation and review, clinical quality
assurance audits, regulatory training for client personnel, and expert liaison
with the FDA and other regulatory agencies.
WRA works closely with clients to devise regulatory strategies and comprehensive
registration programs. The Company's regulatory affairs experts review existing
published literature, assess the scientific background of a product, assess the
competitive and regulatory environment, identify deficiencies and define the
steps necessary to obtain regulatory authority approvals in the most expeditious
manner. Through these services, the Company helps its clients obtain regulatory
approval for particular products or product lines in certain specific markets
throughout the clinical trial process.
Clinical Pharmacology
Clinical pharmacology encompasses the early stages of clinical testing, when the
product is first evaluated to prove safety and efficacy. These tests vary from
"first in man" to "proof of concept studies" in Phases I and IIa of development.
See "Governmental Regulations" for additional information. PCG's Clinical
Pharmacology group provides drug development consulting, drug administration and
monitoring, bioanalytical services, and patient recruitment. PAREXEL's Clinical
Pharmacology international network is located in Berlin (Germany), Poitiers
(France), Baltimore, Maryland (U.S.), Bloemfontein (South Africa) and Harrow
(U.K.), and includes two bioanalytical laboratories in the Poitiers and
Bloemfontein locations which perform bioanalytical analyses according to Good
Laboratory Practices ("GLP") principles. With these locations, PCG's Clinical
Pharmacology group offers clinical pharmacology services (including
bioanalytical services) with a total of 280 dedicated beds (cooperating partners
not included) on three continents. The network also cooperates with a
pharmageriatrics center in Germany and a location which specializes in renal and
hepatic impairment operating in Poland, Hungary, and the Czech Republic.
Barnett International
PCG's Barnett group offers a wide range of specialized clinical consulting,
training, and publication services to the health care industry. Barnett provides
management consulting in the clinical research area, offering a wide range of
solutions that help pharmaceutical and biotechnology companies improve their own
in-house clinical performance. These services include clinical process
optimization, benchmarking and performance management, outsourcing management,
design and development of SOPs, human performance assessment and management,
technological analysis and implementation, and clinical training.
6
Barnett also provides conferences, seminars and educational materials, covering
a multitude of topics in the clinical research field. The publications group
produces several recognized periodicals and special publications covering
regulatory and drug development matters.
MEDICAL MARKETING SERVICES
Various pressures on the pharmaceutical industry have resulted in a greater
focus on decreasing the time to peak sales in order to maximize revenue and
profits over limited patent lives. MMS's strategy is to assist clients in
achieving optimal market penetration for their products by providing customized,
integrated and expert product pre-launch and launch services in the U.S.,
Europe, and internationally. Service revenue from the MMS business represented
approximately $64.8 million, or 14.6%, of consolidated service revenue in fiscal
year 2002.
The Company's experience indicates that clients need assistance in creating
awareness and understanding of their products in the marketplace and in
addressing their products' rapid acceptance by opinion leaders, physicians,
managed care organization and patient groups leading to accelerated product
acceptance and market penetration. MMS provides comprehensive, value-added pre
and post-launch services, including market and opinion leader development,
market preparation, and targeted communications support to clients. An
integrated communications plan can detail external and internal strategies,
including communications objectives, target audiences, communications priorities
and timing, key messages, key meetings and events, and target publications and
media. Other services include meetings and exhibitions planning, continuing
medical education ("CME") programs to help keep medical professionals apprised
of current medical developments, strategies for medical manufacturers regarding
reimbursement from insurance companies and managed care providers, and
telecommunications and call center support for patient assistance programs.
PERCEPTIVE INFORMATICS, INC.
Perceptive, a majority owned subsidiary of the Company which was created by the
Company in fiscal year 2001, is a developing business that provides a variety of
technology products and services designed to improve clients' product
development and commercialization processes. Perceptive currently offers a
portfolio of information technology solutions that include web-based portal
solutions, IVRS, electronic data capture solutions, medical diagnostics, and
other related products and services that can be customized to clients' needs.
Perceptive's web solutions support clinical trials management, viewing of
clinical trial data, and the launch of new products. IVRS solutions support
patient enrollment and randomization, and are used to manage study drug
inventory. Electronic data capture solutions have a potential to accelerate
visibility of clinical data and decrease time to database lock. Medical
diagnostic services coordinate the use of a variety of medical imaging
modalities (e.g., radiographs, ultrasound, computed tomography, magnetic
resonance imaging, etc.) to evaluate product safety and efficacy. Perceptive
performs ongoing market surveillance to identify and support new technologies to
benefit clients as well as the Company's internal processes. Service revenue
from the business represented approximately $20.0 million, or 4.5%, of
consolidated service revenue for fiscal year 2002.
INFORMATION SYSTEMS
PAREXEL is committed to investing in information technology designed to help the
Company provide high quality services in a cost-effective manner and to manage
its internal resources. The Company has built upon its information technology
network by developing a number of proprietary information systems that address
critical aspects of its business, such as project proposals/budget generation,
time information management, revenue and resource forecasting, clinical data
entry and management, and project management.
The Company's internal Information Services group is responsible for technology
planning and procurement, applications development, program management,
operations, and management of the Company's worldwide computer network. The
Company's information systems are designed to work in support of and reinforce
the Company's SOPs. The Company's information technology system is open and
flexible, allowing it to be adapted to the multiple needs of different clients
and regulatory systems. This system also enables the Company to respond quickly
to client inquiries on the progress of projects and, in some cases, to gain
direct access to client data on client systems.
7
SALES AND MARKETING
PAREXEL has personnel based in the Americas, Europe, and Asia/Pacific to conduct
the Company's global business development activities. In addition to significant
selling experience, most of these personnel have technical and/or scientific
backgrounds. The Company's senior executives and project team leaders also
participate in maintaining key client relationships and engaging in business
development activities.
Each of the Company's business segments has an independent business development
team that focuses on its particular market segment, and while all teams may work
with the same client companies, the individuals they work with within the
Company can vary. In many cases, however, the business segment selling teams
work together in order to provide clients with the most appropriate service
offering to meet their needs.
Each business development employee is generally responsible for a specific group
of clients or client segment and for developing a strategy to maintain a
relationship with that client. Each individual is responsible for developing his
or her client base, responding to client requests for information, proposal
development and defense, and client presentations.
The business development group is supported by PAREXEL's global marketing
organization, which is primarily based at the Company's headquarters in Waltham,
Massachusetts. The Company's marketing activities consist primarily of brand
management, collateral development, participation in industry conferences,
advertising, public relations, website development and maintenance, market
information development and analysis, and strategic planning.
CLIENTS
During fiscal year 2002, the Company provided services to most of the world's
top 20 pharmaceutical and top 10 biotechnology companies (as determined by 2001
revenue). The Company has in the past derived, and may in the future derive, a
significant portion of its service revenue from a core group of major projects
or clients. Concentrations of business in the biopharmaceutical services
industry are not uncommon and the Company expects to experience such
concentration in future years. In fiscal year 2002, the Company's five largest
clients accounted for 34% of its consolidated service revenue, while in fiscal
year 2001, the Company's five largest clients accounted for 37% of its
consolidated service revenue. In fiscal year 2002, one client, Astra Zeneca PLC,
accounted for 11% of consolidated service revenue. In fiscal year 2001, one
client, Novartis AG, accounted for 10% of consolidated service revenue. The loss
of business from a significant client could materially and adversely affect the
Company's service revenue and results of operations.
For fiscal 2002, approximately 57.2% of the Company's service revenue was
attributed to operations in the United States and approximately 42.8% of the
Company's service revenue was attributed to operations outside the United
States. Financial data on a geographic basis are included in Note 17 of the
consolidated financial statements in this report.
BACKLOG
Backlog represents anticipated service revenue from work not yet completed or
performed under signed contracts, letter of intent agreements, and certain
verbal commitments. Once work commences, revenue is generally recognized over
the life of the contract as services are provided. Backlog at June 30, 2002 was
approximately $540.0 million, compared with $504.4 million at June 30, 2001. The
Company anticipates that approximately $240 million of the backlog as of June
30, 2002 will be recognized as revenue after fiscal year 2003 concludes.
The Company believes that its backlog as of any date is not necessarily a
meaningful predictor of future results. Projects under contracts included in
backlog are subject to termination, revision, or delay. Clients terminate,
delay, or change the scope of projects for a variety of reasons including, among
others, the failure of products being tested to satisfy safety requirements,
unexpected or undesirable clinical results of the product, the clients' decision
to forego a particular study, insufficient patient enrollment or investigator
recruitment or production problems resulting in shortages of the drug.
Generally, the Company's contracts are terminable upon thirty to sixty days'
notice by the client. The Company typically is entitled to receive certain fees
for winding down a project, which is terminated or delayed, and, in some cases,
a termination fee.
8
COMPETITION
The Company competes with other biopharmaceutical services companies and other
organizations that provide one or more of the services currently being offered
by the Company. Some of the larger biopharmaceutical services companies, such as
Quintiles Transnational Corporation, Covance Inc., and Pharmaceutical Product
Development Inc., offer services that compete directly with the Company's
services at many levels.
PAREXEL believes that the synergies arising from integrating the products and
services offered by its different business units, coupled with its global
operations and depth of experience differentiate it from its competitors.
Although there are no guarantees that the Company will continue to do so, the
Company believes that it competes favorably in all of its business areas.
Increased competition could adversely affect operating results.
CRS
The clinical outsourcing services industry is very fragmented, with several
hundred providers offering varying levels of service, skills and capabilities.
The Company's CRS group primarily competes against in-house departments of
pharmaceutical companies, other full service biopharmaceutical services
companies, small specialty CROs, and to a lesser extent, universities, teaching
hospitals, and other site organizations. The Company believes CRS's key
competitive strengths are it's global reach and the therapeutic knowledge and
expertise of its employees. The primary competitors for the CRS business include
Quintiles Transnational Corporation, Covance Inc., Pharmaceutical Product
Development Inc., Kendle International Inc. and ICON PLC.
CROs generally compete on the basis of:
.. previous experience with a client or in a specific therapeutic area;
.. medical and scientific expertise in a specific therapeutic areas;
.. quality of services;
.. breadth of services;
.. the ability to organize and manage large-scale clinical trials on a global
basis;
.. the ability to manage large and complex medical databases;
.. the ability to provide statistical and regulatory services;
.. the ability to recruit investigators and patients;
.. the ability to integrate information technology with systems to improve the
efficiency of contract research;
.. an international presence with strategically located facilities;
.. financial strength and stability; and
.. price.
PCG
PCG competes with a large and diverse group of specialty service providers,
including major consulting firms with pharmaceutical industry practices, large
and small biopharmaceutical services companies, smaller companies with a
specific service focus, and individual consultants. The Company believes that no
other company has the exact combination of services that PCG provides, and
because of its varied service offering, there is limited overlap of competitors
from one service to the other. The competition in this segment is generally
based on expertise, experience, reputation and price.
MMS
MMS competes with a large and fragmented group of companies including specialist
medical marketing companies, large international advertising companies that
offer medical education services, medical public relation firms, and small and
large biopharmaceutical services companies that offer medical marketing and
education services. The primary factors on which MMS competes include the
ability to understand the commercial, medical/scientific,
regulatory/reimbursement and communications issues involved in a successful
pharmaceutical product launch, the ability to develop global marketing and
communication strategies that accelerate product acceptance and market
penetration, and the ability to translate those strategies into actionable
activities and price. The Company believes that MMS's key competitive strength
is the expert combination of services provided and its varied service offerings
that are not offered elsewhere
9
Perceptive
The Perceptive business competes primarily with biopharmaceutical services
companies, information technology companies and software companies. Companies in
this segment compete based on the strength and usability of their technology
offerings, their expertise and experience, and their understanding of the
clinical development process. Perceptive's key competitive strength is its
combination of technological expertise with a deep knowledge of clinical
development. Its strategy of collaborating with other technology companies to
implement certain tools, rather than developing its own, allows Perceptive to
adapt more quickly to new technologies than many of its competitors.
Perceptive's market position may be affected over time by competitors' efforts
to develop and market new information technology products and services.
INTELLECTUAL PROPERTY
The Company has developed certain computer software and technically derived
procedures and products. In order to maximize the quality and effectiveness of
the Company's services, PAREXEL has sought to protect this intellectual property
through a combination of contracts, trademarks, trade secrets, and common law
copyrights. Although the Company's intellectual property rights are important to
the results of operations, the Company believes that such factors as the
technical expertise, knowledge, ability and experience of Company professionals
are more important, and provide significant benefits to the Company's clients.
EMPLOYEES
As of June 30, 2002, the Company had 4,930 employees. Approximately 42.6% of the
employees are located in North America and 57.4% are located throughout Europe,
Asia/Pacific and South America. The Company believes that its relations with its
employees are good.
The success of the Company's business depends on its ability to attract and
retain a qualified professional, scientific and technical staff. The level of
competition among employers for skilled personnel, particularly those with
Ph.D., M.D. or equivalent degrees, is high. The Company believes that its
multinational presence, which allows for international transfers, is an
advantage in attracting employees. In addition, the Company believes that the
wide range of clinical trials in which it participates allows the Company to
offer a broad experience to clinical researchers. There is no assurance that the
Company will be able to attract and retain qualified staff in the future.
GOVERNMENT REGULATIONS
PAREXEL provides clinical trial and diverse consulting services for the drug,
biologic and medical device industries. Lack of success in obtaining approval
for the conduct of clinical trials can adversely affect the business. Lack of
success in obtaining marketing approval or clearance for a product PAREXEL has
provided clinical trial or other regulatory services for can also adversely
affect the business, although PAREXEL makes no guarantees to its clients for
successful outcomes of the regulatory process.
The services provided by PAREXEL in the United States are subject to ongoing FDA
regulation. The Company is obligated to comply with FDA requirements governing
such activities as obtaining patient informed consents, verifying qualifications
of investigators, reporting patients' adverse reactions to products and
maintaining thorough and accurate records. The Company is also required to
ensure that the computer systems it uses to process human data from clinical
trials are validated in accordance with the electronic records regulations that
apply to the pharmaceutical and CRO industries. The Company must maintain source
documents for each study for specified periods, and such documents may be
reviewed according to GCP standards by the study sponsor and the FDA during
audits. Non-compliance with GCP can result in the disqualification of data
collected during a clinical trial.
The clinical investigation of new drugs, biologics and devices is highly
regulated by government agencies. The standard for the conduct of clinical
research and development studies comprises GCP, which stipulates procedures
designed to ensure the quality and integrity of data obtained from clinical
testing and to protect the rights and safety of clinical subjects. The FDA and
many other regulatory authorities require that study results submitted to such
authorities be based on studies conducted in accordance with GCP. Specifically,
in the European Union ("EU") clinical trials are subject to national regulation.
At present, the rules are not harmonized (see discussion of the International
Conference on Harmonization below), but most member states require some form of
notification or approval by government authorities, review and approval by
independent ethics committees and other measures to protect the interests of
human subjects. As in the US, clinical trials in the EU are expected to be
carried out in compliance with detailed requirements for GCP. The foreign
regulatory approval process includes all of the risks and potential delays
associated with the FDA approval process.
10
Because the FDA's regulatory requirements have served as the model for much of
the regulation of new drug development worldwide, regulatory requirements
similar to those of the FDA exist in the other countries in which the Company
operates. The Company's regulatory capabilities include knowledge of the
specific regulatory requirements in numerous countries. The Company has managed
simultaneous regulatory submissions in more than one country for a number of
drug sponsors for at least the past six years. Beginning in 1991, the FDA and
corresponding regulatory agencies of Canada, Japan and Western Europe commenced
discussions to develop harmonized standards for preclinical and clinical studies
and the format and content of applications for new drug approvals (through a
process known as the International Conference on Harmonization, or ICH). Data
from multinational studies adhering to GCP are now generally acceptable to the
FDA, Canadian, Western European and Japanese regulators. The ICH process has
sanctioned a single common format for drug and biologic marketing applications,
known as the Common Technical Document ("CTD") in the U.S., Europe, Japan and
Canada. On July 1, 2003 the CTD format will become mandatory in Europe, Japan
and Canada, and highly recommended by FDA in the U.S. The Company has been
developing the expertise to compile CTDs for its clients in both paper and
electronic form.
REGULATION OF DRUGS AND BIOLOGICS
Before a new drug or biologic may be approved and marketed, the drug or biologic
must undergo extensive testing and regulatory review in order to determine that
the drug or biologic is safe and effective. It is not possible to estimate the
time in which preclinical, Phase I, II and III studies are completed with
respect to a given product, if at all, although the time period may last many
years. The stages of this development process are as follows:
Preclinical Research (approximately 1 to 3.5 years). In vitro ("test tube") and
animal studies in accordance with GLP to establish the relative toxicity of the
drug or biologic over a wide range of doses and to detect any potential to cause
a variety of adverse conditions and diseases, including birth defects or cancer.
If results warrant continuing development of the drug or biologic, the results
of the studies are submitted to the FDA by the manufacturer as part of an
Investigational New Drug Application ("IND"), which must be reviewed and cleared
by the FDA before proposed clinical testing can begin. An IND must include,
among other things, preclinical data, chemistry, manufacturing and control
information, and an investigative plan, and must be activated by the FDA before
such trials may begin. There can be no assurance that submission of an IND will
result in the ability to commence clinical trials.
Clinical Trials (approximately 3.5 to 6 years)
. Phase I-Basic safety and pharmacology testing in approximately 20
to 80 human subjects, usually healthy volunteers, includes
studies to determine metabolic and pharmacologic action of the
product in humans, how the drug or biologic works, how it is
affected by other drugs, how it is tolerated and absorbed, where
it goes in the body, how long it remains active, and how it is
broken down and eliminated from the body.
. Phase II-Basic efficacy (effectiveness) and dose-range testing,
sometimes in 100 to 200 patients afflicted with a specific
disease or condition for which the product is intended for use,
to further test safety, begin evaluating effectiveness, optimize
dosage amounts, determine dose schedules, and typically, to
determine routes of administration. If Phase II studies yield
satisfactory results and no hold is placed on further studies by
the FDA, Phase III studies can be commenced.
. Phase III-Larger scale, multi-center comparative clinical trials
conducted with patients afflicted by a target disease in order to
provide enough data for a valid statistical test of safety and
effectiveness required by the FDA and others and to provide a
basis for product labeling. When results from Phase II or Phase
III show special promise in the treatment of a serious condition
for which existing therapeutic options are nonexistent, limited
or of minimal value, the FDA may allow the sponsor to make the
new drug available to a larger number of patients through the
regulated mechanism of a Treatment Investigational New Drug
("TIND"), which may span late Phase II, Phase III, and FDA
review. Although TINDs may enroll and collect a substantial
amount of data from tens of thousands of patients, they are not
granted in all cases.
The FDA receives reports on the progress of each phase of clinical testing and
may require the modification, suspension, or termination of clinical trials if,
among other things, an unreasonable risk is presented to patients or if the
design of the trial is insufficient to meet its stated objective.
11
NDA or Biologic License Application ("BLA") Preparation and Submission. Upon
completion of Phase III trials, the sponsor assembles the statistically analyzed
data from all phases of development, along with the chemistry and manufacturing
and pre-clinical data and the proposed labeling, among other things, into a
single large document, the NDA or BLA (or the CTD in the future), which today
comprises, on average, roughly 100,000 pages.
FDA Review of NDA or BLA. Careful scrutiny of data from all phases of
development (including a TIND) to confirm that the manufacturer has complied
with regulations and that the drug or biologic is safe and effective for the
specific use (or "indication") under study. The FDA may refuse to accept the NDA
or BLA for filing and substantive review if certain administrative and content
criteria are not satisfied and even after accepting the submission for review,
the FDA may also require additional testing or information before approval of an
NDA or BLA. The FDA must deny approval of an NDA or BLA if applicable regulatory
requirements are not ultimately satisfied.
Post-Marketing Surveillance and Phase IV Studies. Federal regulation requires
the sponsor to collect and periodically report to the FDA additional safety and
efficacy data on the drug or biologic for as long as the manufacturer markets
the product (post-marketing surveillance). If the product is marketed outside
the U.S., these reports must include data from all countries in which the
product is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the product, to test new dosage formulations, or
to confirm selected non-clinical benefits, e.g., increased cost-effectiveness or
improved quality of life. Product approval may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
REGULATION OF MEDICAL DEVICES
Unless a medical device is exempted from premarket submission and clearance, FDA
approval or clearance of the device is required before the product may be
marketed in the United States. In order to obtain clearance for marketing, a
manufacturer must demonstrate substantial equivalence to a similar legally
marketed product by submitting a premarket notification, 510(k), to the agency.
The FDA may require preclinical and clinical data to support a substantial
equivalence determination, and there can be no assurance the FDA will find a
device substantially equivalent. Clinical trials can take extended periods of
time to complete. In addition, if the FDA requires an approved Investigational
Device Exemption ("IDE") before clinical device trials may commence, there can
be no guarantee that the agency will approve the IDE. An IDE approval process
could also result in significant delay.
After submission of a premarket notification containing, among other things, any
data collected, the FDA may find the device substantially equivalent and the
device may be marketed. If the FDA finds that a device is not substantially
equivalent, the manufacturer may request that the FDA make a risk-based
classification to place the device in Class I or Class II. However, if a timely
request for risk-based classification is not made, or if the FDA determines that
a Class III designation is appropriate, an approved pre-market approval
application ("PMA") will be required before the device may be marketed.
The PMA approval process is lengthy, expensive, and typically requires, among
other things, extensive data from preclinical testing and a well-controlled
clinical trial or trials that demonstrate a reasonable assurance of safety and
effectiveness. There can be no assurance that review will result in timely or
any PMA approval. There may also be significant conditions on approval,
including limitations on labeling and advertising claims and the imposition of
post-market testing, tracking, or surveillance requirements.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
Recent legislative changes protecting confidential medical information could
impact the manner in which the Company conducts certain components of its
business. On August 14, 2002, the Department of Health and Human Services issued
final modifications to privacy regulations (the "Privacy Rule") under the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). These
regulations impose new restrictions governing the disclosure of confidential
medical information in United States. The Privacy Rule requires all companies
subject to it to comply with its provisions on or before April 14, 2003.
The failure on the part of the Company, its clients and/or the physician
investigators from whom the Company receives confidential medical information to
comply with the Privacy Rule could result in the termination of ongoing research
or the disqualification of data for submission to regulatory authorities.
Additionally, the issuance of a notice of finding by a governmental authority
against either the Company or its clients, based upon a material violation by
the Company of any applicable regulation, could materially and adversely affect
its business.
12
POTENTIAL LIABILITY AND INSURANCE
PAREXEL's clinical research services focuses on the testing of experimental
drugs and devices on human volunteers pursuant to a study protocol. Clinical
research involves a risk of liability for personal injury or death to patients
due, among other reasons, to possible unforeseen adverse side effects or
improper administration of the new drug. PAREXEL does not provide healthcare
services directly to patients. Rather, physician investigators are responsible
for administering drugs and evaluating patients. Many of these patients are
already seriously ill and are at risk of further illness or death.
The Company believes that the risk of liability to patients in clinical trials
is mitigated by various regulatory requirements, including the role of
institutional review boards ("IRBs") and the need to obtain each patient's
informed consent. The FDA requires each human clinical trial to be reviewed and
approved by the IRB at each study site. An IRB is an independent committee that
includes both medical and non-medical personnel and is obligated to protect the
interests of patients enrolled in the trial. The IRB monitors the protocol and
measures designed to protect patients, such as the requirement to obtain
informed consent.
To reduce its potential liability, PAREXEL is generally successful in
incorporating indemnity provisions into its contracts with clients and with
investigators hired by the Company on behalf of its clients. These indemnities
generally do not, however, protect PAREXEL against certain of its own actions,
such as those involving negligence. Moreover, these indemnities are contractual
arrangements that are subject to negotiation with individual clients, and the
terms and scope of such indemnities can vary from client to client and from
study to study. Finally, the financial performance of these indemnities is not
secured, so that the Company bears the risk that an indemnifying party may not
have the financial ability to fulfill its indemnification obligations. PAREXEL
could be materially and adversely affected if it were required to pay damages or
incur defense costs in connection with an uninsured claim that is outside the
scope of an indemnity or where the indemnity, although applicable, is not
performed in accordance with its terms.
The Company currently maintains an errors and omissions professional liability
insurance policy, subject to deductibles and coverage limits. There can be no
assurance that this insurance coverage will be adequate, or that insurance
coverage will continue to be available on terms acceptable to the Company.
RISK FACTORS
The statements included in this annual report, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations", may
contain "forward-looking statements", within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the adequacy of the Company's existing capital
resources and future cash flows from operations, and 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", "appears", "will" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results,
including the Company's actual operating performance, actual expense savings and
other operating improvements resulting from restructurings, and actual future
results, to differ significantly from the results indicated by the
forward-looking statements. These important factors are discussed below in
greater detail and elsewhere in this annual report.
The forward-looking statements included in this annual report represent the
Company's estimates as of the date of this annual report. The Company
specifically disclaims any obligation to update these forward-looking statements
in the future. These forward-looking statements should not be relied upon as
representing the Company's estimates or views as of any date subsequent to the
date of this annual report.
13
THE LOSS, MODIFICATION, OR DELAY OF LARGE CONTRACTS MAY NEGATIVELY IMPACT THE
COMPANY'S FINANCIAL PERFORMANCE
Generally, the Company's clients can terminate their contracts with the Company
upon thirty to sixty days' notice or can delay execution of services. Clients
terminate or delay their contracts for a variety of reasons, including, but not
limited to:
. merger or potential merger related activities;
. failure of products being tested to satisfy safety requirements;
. failure of products being tested is proven ineffective;
. products having unexpected or undesired clinical results;
. client decisions to forego a particular study, perhaps for economic
reasons;
. insufficient patient enrollment in a study;
. insufficient investigator recruitment;
. production problems which cause shortages of the product;
. product withdrawal following market launch; and
. manufacturing facility shut down.
In addition, the Company believes that FDA regulated companies may proceed with
fewer clinical trials or conduct them without the assistance of
biopharmaceutical services companies if they are trying to reduce costs as a
result of budgetary limits or changing priorities. These factors may cause such
companies to cancel contracts with biopharmaceutical services companies. The
loss or delay of a large contract or the loss or delay of multiple contracts
could have a material adverse effect on the Company's financial performance. The
Company has in the past experienced contract cancellations, which have had a
material adverse effect on the Company's financial results.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE
The Company's quarterly and annual operating results have varied and will
continue to vary in the future as a result of a variety of factors, many of
which are beyond the Company's control. Factors that cause these variations
include:
. the level of new business authorizations in a particular quarter or
year;
. the timing of the initiation, progress, or cancellation of significant
projects;
. exchange rate fluctuations between quarters or years;
. restructuring charges;
. the mix of services offered in a particular quarter or year;
. the timing of the opening of new offices;
. costs and related financial impact of acquisitions;
. the timing of other internal expansion costs;
. the timing and amount of costs associated with integrating
acquisitions; and
. the timing and amount of startup costs incurred in connection with the
introduction of new products, services or subsidiaries.
A high percentage of the Company's operating costs is fixed. Therefore, the
timing of the completion, delay or loss of contracts, or the progress of client
projects, can cause the Company's operating results to vary substantially
between reporting periods. The Company believes that period-to-period
comparisons of results of operations are not a good indication of future
performance.
THE COMPANY FACES INTENSE COMPETITION
The Company primarily competes against in-house departments of pharmaceutical
companies, other full service CROs, small specialty CROs, and to a lesser
extent, universities, teaching hospitals, and other site organizations. In
addition, PAREXEL's PCG and MMS businesses also compete with a large and
fragmented group of specialty service providers, including
advertising/promotional companies, major consulting firms with pharmaceutical
industry groups and smaller companies with pharmaceutical industry focus.
Perceptive competes primarily with CROs, information technology companies and
other software companies.
14
Some of these competitors, including the in-house departments of pharmaceutical
companies, have greater capital, technical and other resources than the Company.
In addition, because of their concentrated size and focus, some of the smaller
specialized companies against which the Company competes may compete effectively
against it. If the Company does not compete successfully with such businesses
and organizations, the Company may lose clients, which would cause its business
to suffer.
THE FIXED PRICE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
The majority of the Company's contracts are at fixed prices. As a result, the
Company bears the risk of cost overruns. If the Company fails to adequately
price its contracts or if it experiences significant cost overruns, the
Company's operating results could be materially adversely affected. In the past,
the Company has had to commit unanticipated resources to complete projects,
resulting in lower gross margins on those projects. The Company might experience
similar situations in the future, which would have material adverse impact on
its operating results.
STREAMLINED GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND
BIOTECHNOLOGY PRODUCT DEVELOPMENT PROCESS COULD REDUCE THE NEED FOR THE
COMPANY'S SERVICES
Governmental regulation of the drug, medical device and biotechnology product
development process is complicated, extensive and demanding. A large part of the
Company's business involves assisting pharmaceutical and biotechnology companies
through the regulatory approval process. Changes in regulations, such as to
streamline procedures or to relax approval standards, could eliminate or reduce
the need for the Company's services, and, as a result, the Company's business,
results of operations and financial condition could be materially adversely
affected.
In the United States, the FDA and the Congress have attempted to streamline the
regulatory process by providing for industry user fees that fund additional
reviewer hires and better management of the regulatory review process. In
Europe, governmental authorities have approved common standards for clinical
testing of new drugs throughout the European Union by adopting GCP standards and
by making the process more uniform and streamlined. In the past several years,
Japan also has adopted GCP through legislation and has legitimized the use of
CROs. The United States, Europe and Japan have also collaborated in the
11-year-long International Conference on Harmonization (ICH), the purpose of
which is to eliminate duplicative or conflicting regulations in the three
regions. The ICH partners have agreed upon a common format for marketing
applications that eliminates the need to tailor the format to each region. Such
efforts and similar efforts in the future that streamline the regulatory process
may reduce the demand for the Company's services.
ANY FAILURE BY THE COMPANY TO COMPLY WITH EXISTING REGULATIONS WOULD HARM THE
COMPANY'S REPUTATION AND OPERATING RESULTS
If the Company fails to comply with applicable governmental regulations, it
could result in the termination of the Company's ongoing research or sales or
marketing projects, or the disqualification of data for submission to regulatory
authorities. This would harm the Company's reputation, its prospects for future
work and its operating results. In addition, failure to comply with a
governmental regulation could result in the Company having to repeat research or
redo trials. The Company may be contractually required to take such action at no
further cost to the customer, but at substantial cost to the Company.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS
Numerous governments have undertaken efforts to control growing health care
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the past, the U.S. Congress has entertained
several comprehensive health care reform proposals. The proposals were generally
intended to expand health care coverage for the uninsured and reduce the growth
of total health care expenditures. While the U.S. Congress did not adopt any
comprehensive reform proposals, members of Congress may raise similar proposals
in the future. If any of these proposals are approved by the U.S. Congress,
pharmaceutical, medical device and biotechnology companies may react by spending
less on research and development. If this were to occur, the Company would have
fewer business opportunities. The Company is unable to predict the likelihood
that health care reform proposals will be enacted into law or the effect such
laws would have on the Company's business.
Many governments outside the U.S. have also reviewed or undertaken health care
reform. The Company cannot predict the impact that any pending or future foreign
health care reform proposals may have on its business in other countries.
15
In addition to health care reform proposals, the expansion of managed care
organizations in the healthcare market may result in reduced spending on
research and development. Managed care organizations' efforts to cut costs by
limiting expenditures on pharmaceuticals and medical devices could result in
pharmaceutical, biotechnology and medical device companies spending less on
research and development. If this were to occur, the Company could have fewer
business opportunities and its revenue and financial condition could be
adversely affected.
NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT
INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY, INCREASED COSTS, OR
LIMITATIONS ON SERVICE OFFERINGS
The confidentiality and release of patient-specific information are subject to
government regulation. Under HIPAA, the U.S. Department of Health and Human
Services has issued regulations mandating heightened privacy and confidentiality
protections. Additional legislation governing the possession, use and
dissemination of medical record information and other personal health
information has been proposed or adopted at both the state and federal levels.
Proposed and final federal regulations governing patient-specific information
may require the Company to implement new security measures that may result in
substantial expenditures or limit its ability to offer some of its products and
services. Additionally, states may adopt health information legislation or
regulations that contain privacy and security provisions that are more
burdensome than the federal regulations. There is also a risk of civil or
criminal liability if the Company is found to be responsible for any violations
of applicable laws, regulations or duties relating to the use, privacy or
security of health information.
THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO KEEP PACE WITH RAPID
TECHNOLOGICAL CHANGES THAT COULD MAKE ITS PRODUCTS AND SERVICES LESS COMPETITIVE
OR OBSOLETE
The biotechnology, pharmaceutical and medical device industries generally and
clinical research specifically are subject to increasingly rapid technological
changes. The Company's competitors or others might develop technologies,
products or services that are more effective or commercially attractive than the
Company's current or future technologies, products or services, or render its
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and the Company cannot
make enhancements to its technologies, products and services necessary for the
Company to remain competitive, the Company's competitive position, and in turn
its business, revenue and financial condition, would be materially and adversely
affected.
THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL OF ITS
BUSINESS
In fiscal year 2002, the Company's five largest clients accounted for 34% of its
consolidated service revenue, and one client accounted for 11% of consolidated
service revenue. In fiscal year 2001, the Company's five largest clients
accounted for 37% of its consolidated service revenue, and one client accounted
for 10% of consolidated service revenue. The Company expects that a small number
of customers will continue to represent a significant part of the Company's
revenue. The Company's contracts with these customers generally can be
terminated on short notice. The Company could suffer a material adverse effect
if it lost or experienced a material reduction in the business of a significant
client. The Company has in the past experienced contract cancellations with a
significant client, which had a materially adverse effect on the Company's
financial results.
THE COMPANY'S BUSINESS DEPENDS ON BEING ABLE TO SUBMIT ELECTRONIC RECORDS TO THE
FDA ACCORDING TO FDA REGULATIONS
If the Company were unable to submit electronic records to the FDA, its ability
to provide services to customers who meet FDA requirements could be adversely
affected. The FDA published 21 CFR Part 11 "Electronic Records; Electronic
Signatures; Final Rule" ("Part 11") in 1997. Part 11 became effective in August
1997 and defines the regulatory requirements that must be met for FDA acceptance
of electronic records and/or electronic signatures in place of the paper
equivalents. Part 11 requires that those utilizing such electronic records
and/or signatures employ procedures and controls designed to ensure the
authenticity, integrity and, as appropriate, confidentiality of electronic
records. In certain circumstances, Part 11 requires those utilizing electronic
records to ensure that a person appending an electronic signature cannot readily
repudiate the signed record. Pharmaceutical and biotechnology companies are
increasing their utilization of electronic records and electronic signatures and
are requiring their service providers and partners to do likewise. Becoming
compliant with Part 11 involves considerable complexity and cost. The Company's
ability to provide services to customers in full compliance with applicable
regulations includes a requirement that, over time, all of the Company's
affected systems become compliant with the requirements of Part 11.
16
THE COMPANY'S PERCEPTIVE BUSINESS DEPENDS ON THE CONTINUOUS, EFFECTIVE, RELIABLE
AND SECURE OPERATION OF ITS COMPUTER HARDWARE, SOFTWARE, AND INTERNET
APPLICATIONS AND RELATED TOOLS AND FUNCTIONS.
Perceptive's business requires collecting, managing, manipulating and analyzing
large amounts of data, and communicating data via the Internet. Perceptive
depends on the continuous, effective, reliable and secure operation of its
computer hardware, software, networks, telecommunication networks, internet
servers and related infrastructure. To the extent that Perceptive's hardware or
software malfunctions or access to Perceptive's data by internal research
personnel or customers through the Internet is interrupted, its business could
suffer.
Perceptive's computer and communications hardware is protected through physical
and software safeguards. However, it is still vulnerable to fire, storm, flood,
power loss, earthquakes, telecommunications failures, physical or software
break-ins, and similar events. In addition, Perceptive's software products are
complex and sophisticated, and as such, could contain data, design or software
errors that could be difficult to detect and correct. Software defects could be
found in current or future products. If Perceptive fails to maintain and further
develop the necessary computer capacity and data to support its customers'
needs, it could result in loss of or delay in revenue and market acceptance. In
addition, any sustained disruption in Internet access provided by third parties
could adversely impact Perceptive's business.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND MARKET NEW SERVICES
An important element of the Company's strategy is the successful development and
marketing of new services that complement or expand the Company's existing
businesses. If the Company is unable to (1) develop new services and (2) create
demand for those newly developed services, it will not be able to implement this
element of its strategy, and its future business, results of operations and
financial condition could be adversely affected. The Company cannot make any
assurance that it will be able to develop or market new services successfully.
IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL
TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MIGHT SUFFER
One of the factors on which the Company's CRS business competes is the ability
to recruit patients for the clinical studies the Company is managing. These
clinical trials rely upon the ready accessibility and willing participation of
volunteer subjects. These subjects generally include volunteers from the
communities in which the studies are conducted, which to date have provided a
substantial pool of potential subjects for research studies. The trials being
managed by CRS and ultimately the Company's CRS business could be adversely
affected if the Company was unable to attract suitable and willing volunteers on
a consistent basis.
THE COMPANY RELIES ON HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL WHO
MAY NOT REMAIN WITH THE COMPANY
The Company relies on a number of key executives, including Josef H. von
Rickenbach, its Chairman and Chief Executive Officer. The Company does not have
employment agreements with all of its senior officers and if any of these key
executives leave the Company, it could have a material adverse effect on the
Company. In addition, in order to compete effectively, the Company must attract
and maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees is intense. The Company may not be
successful in attracting or retaining key personnel.
17
THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS
AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS
The Company's CRS business primarily involves the testing of experimental drugs
or other regulated FDA products on consenting human volunteers pursuant to a
study protocol. Such services involve a risk of liability for personal injury or
death to patients who participate in the study or who use a product approved by
regulatory authorities after the clinical research has concluded, due to, among
other reasons, possible unforeseen adverse side effects or improper
administration of the new product by physicians. In certain cases, these
patients are already seriously ill and are at risk of further illness or death.
Although many of the Company's CRS contracts with clients include indemnity
provisions and the Company has loss insurance, the Company's financial condition
could be materially and adversely affected if the Company had to pay damages or
incur defense costs in connection with a claim that is outside the scope of an
indemnity or insurance coverage. The Company's financial condition could also be
materially and adversely affected in cases where the indemnity, although
applicable, is not performed in accordance with its terms. Additionally, the
Company's financial condition could be adversely and materially affected if its
liability exceeds the amount of its insurance. The Company may not be able to
continue to secure insurance on acceptable terms.
THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD DECLINE
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future in response to quarter-to-quarter
variations in:
. operating results;
. earnings estimates by analysts;
. market conditions in the industry;
. prospects of health care reform;
. changes in government regulations; and
. general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations. Investors in the
Company's common stock must be willing to bear the risk of such fluctuations in
earnings and stock price.
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS REVENUE AND RESULTS OF OPERATIONS
Because the Company provides most of its services worldwide, its business is
subject to risks associated with doing business internationally. The Company's
service revenue from its non-U.S. operations represented approximately 42.8% of
its total service revenue for the year ended June 30, 2002. The Company
anticipates that service revenue from international operations may grow in the
future. Accordingly, the Company's future results could be harmed by a variety
of factors, including:
. changes in a specific country's or region's political or economic
conditions, including Western Europe, in particular;
. potential negative consequences from changes in tax laws affecting the
Company's ability to repatriate profits;
. difficulty in staffing and managing widespread operations; and
. unfavorable labor regulations applicable to the Company's European
operations.
18
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 42.8% of the Company's service revenue for the year ended June 30,
2002 were from non-U.S. operations. The Company's financial statements are
denominated in U.S. dollars; thus, factors associated with international
operations, including changes in foreign currency exchange rates, could
significantly affect the Company's results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:
. Foreign Currency Translation Risk. The revenue and expenses of the
Company's foreign operations are generally denominated in local
currencies and then are translated into U.S. dollars for financial
reporting purposes.
. Foreign Currency Transaction Risk. The Company's service contracts may
be denominated in a currency other than the functional currency in
which the Company performs the service related to such contracts.
The Company tries to limit these risks through exchange rate fluctuation
provisions stated in its service contracts, or may hedge transaction risk with
foreign currency exchange contracts. Despite such efforts, the Company may still
experience fluctuations in financial results from its operations outside the
United States, and the Company cannot assure that it will be able to favorably
reduce the currency transaction risk associated with its service contracts.
THE COMPANY'S DEVELOPMENT OF ITS PERCEPTIVE INFORMATICS BUSINESS MAY NEGATIVELY
IMPACT RESULTS IN THE SHORT TERM
The Company is currently making investments in its technology subsidiary,
Perceptive Informatics, Inc. and may need to make additional investments in the
future in order to achieve its objectives. The profitability of Perceptive will
depend, in part, on customer acceptance and use of its products and services and
its ability to compete against rival products and services. There can be no
assurance that Perceptive will be profitable in the future or that any revenue
resulting from it will be sufficient to offset the Company's investments in this
division.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND
SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN THE COMPANY'S RESOURCES IF
NOT PROPERLY MANAGED
The Company's business has expanded substantially in the past. Future rapid
expansion could strain the Company's operational, human and financial resources.
In order to manage expansion, the Company must:
. continue to improve its operating, administrative and information
systems;
. accurately predict its future personnel and resource needs to meet
client contract commitments;
. track the progress of ongoing client projects; and
. attract and retain qualified management, sales, professional,
scientific and technical operating personnel.
The Company may face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
. assimilate differences in foreign business practices, exchange rates
and regulatory requirements;
. operate amid political and economic instability;
. hire and retain qualified personnel; and
. overcome language, tariff and other barriers.
19
THE COMPANY MAY MAKE ACQUISITIONS IN THE FUTURE WHICH MAY LEAD TO DISRUPTIONS TO
THE COMPANY'S ONGOING BUSINESS
The Company may make strategic acquisitions in the future. The Company has made
a number of acquisitions and will continue to review new acquisition
opportunities. If the Company is unable to successfully integrate an acquired
company, the acquisition could lead to disruptions to the Company's business.
The success of an acquisition will depend upon, among other things, the
Company's ability to:
. assimilate the operations and services or products of the acquired
company;
. integrate acquired personnel;
. retain and motivate key employees;
. retain customers; and
. minimize the diversion of management's attention from other business
concerns.
Acquisitions of foreign companies may also involve additional risks, including
assimilating differences in foreign business practices and overcoming language
and cultural barriers.
In the event that the operations of an acquired business do not meet the
Company's performance expectations, the Company may have to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business, which could have a materially adverse effect on the Company's
financial results.
ITEM 2. PROPERTIES
As of June 30, 2002, the Company occupied approximately 1,321,320 square feet of
building space in 56 locations in 37 countries around the world. Except for its
facility in Alexandria, VA that covers approximately 7,500 square feet and is
owned by the Company, the Company leases its building space under various leases
that expire between 2003 and 2011.
The Company's headquarters occupy 212,000 square feet of leased space in
Waltham, Massachusetts under a lease that expires in 2009. The Company's
non-U.S. facilities account for approximately 607,062 square feet. In
particular, the Company occupies approximately 304,000 square feet in various
locations in the United Kingdom, 187,000 square feet in various locations in
Germany and 99,000 square feet in various locations in France.
The following table indicates the approximate square footage of property
attributable to each of the Company's operating segments:
Total Sq. Ft.
----------------
CRS .......... 940,176
PCG .......... 156,000
MMS .......... 175,144
Perceptive ... 50,000
See Note 14 to the Consolidated Financial Statements for further information
regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS
On or about June 8, 2000, a complaint was filed in the United States District
Court for the Southern District of New York against the Company and four of its
directors by two arbitrageurs, Elliott Associates, L.P. and Westgate
International L.P. The complaint alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5, Section 20(a) of the Exchange
Act and asserted state law claims for fraud and negligent misrepresentation. On
November 28, 2000, the United States District Court for the Southern District of
New York granted the Company's Motion to Dismiss all counts of the complaint.
The time period to appeal this decision has expired. On or about April 23, 2001,
a complaint was filed by the arbitrageurs, Elliott Associates, L.P. and Elliott
International, L.P. f/k/a Westgate International, L.P., in the Supreme Court of
the State of New York in connection with the same matter alleging claims of
common law fraud under the laws of New York against the Company and seeking
monetary damages. On May 24, 2002, the Supreme Court of the State of New York
granted the Company's Motion to Dismiss all counts of the complaint. The time
period to appeal this decision has expired. No appeal of this decision was
filed.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2002.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "PRXL". The table below shows the high and low sales prices of the common
stock for each quarter of the fiscal years ended June 30, 2001 and 2002.
2001 2002
---- ----
High Low High Low
---- --- ---- ---
First Quarter $11.75 $ 8.50 $19.74 $10.46
Second Quarter $10.88 $ 8.06 $16.20 $10.14
Third Quarter $17.25 $ 9.94 $17.40 $13.00
Fourth Quarter $20.00 $11.69 $16.08 $11.95
As of August 22, 2002, there were approximately 92 stockholders of record. The
number does not include shareholders for which shares were held in a "nominee"
or "street" name.
The Company has never declared or paid any cash dividends on its Common Stock
and does not anticipate paying any cash dividend in the foreseeable future. The
Company intends to retain future earnings for the development and expansion of
its business.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data and number of employees)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
OPERATIONS
----------
Service revenue $444,318 $387,560 $378,150 $348,486 $285,442
Income (loss) from operations 20,493 (6,860) (1) 2,983(2) 20,564(3) 13,301(4)
Net income (loss) 13,235 (825) 4,388 15,622 9,319
Basic earnings (loss) per share $0.53 $(0.03) $0.18 $0.63 $0.39
Diluted earnings (loss) per share $0.52 $(0.03) $0.17 $0.62 $0.38
FINANCIAL POSITION
------------------
Cash, cash equivalents and marketable securities $66,109 $60,949 $90,530 $89,957 $76,634
Working capital 138,020 117,210 123,680 132,757 118,937
Total assets 407,161 361,534 351,940 333,565 261,758
Long-term debt 432 12 104 79 36
Stockholders' equity $200,077 $177,822 $186,133 $192,032 $168,380
OTHER DATA
----------
Purchase of property and equipment $23,808 $18,145 $19,089 $18,910 $27,736
Depreciation and amortization $17,893 $21,453 $21,934 $17,932 $15,114(5)
Number of employees 4,930 4,640 4,200 4,198 3,705
Weighted average shares used in computing:
Basic earnings (loss) per share 24,928 24,637 24,981 24,848 23,939
Diluted earnings (loss) per share 25,582 24,637 25,140 25,128 24,825
22
(1) Loss from operations for the year ended June 30, 2001, include a
restructuring benefit of $0.7 million. This consisted of a $1.5 million
reduction in previously accrued restructuring charges due to changes in
estimates related to the third quarter 2000 restructuring, offset by $0.8
million for exiting a business location in the U.S. Also in the year ended June
30, 2001, the Company recorded restructuring charges of $7.2 million. These
charges included $3.1 million of employee severance and related costs for
eliminating approximately 125 managerial and staff positions worldwide (44% in
the U.S. and 56% in Europe), $3.9 million related to consolidation and
abandonment of certain facilities (40% in the U.S. and 60% in Europe), and
approximately $0.2 million primarily related to miscellaneous costs associated
with the Company's fourth quarter restructuring plan. Additionally, the Company
recorded $1.0 in accelerated depreciation expense due to changes in the
estimated useful lives of leasehold improvements in abandoned leased facilities,
$0.9 million of one-time asset write-offs, as well as $0.6 million in expenses
associated with discontinued services.
(2) Income from operations for the year ended June 30, 2000 includes $13.1
million related to restructuring and other charges recorded in the third
quarter, 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.
(3) 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 consolidation of certain
facilities in North America and Europe.
(4) Income from operations for the year ended June 30, 1998 includes $13.6
million of nonrecurring charges, including $10.3 million pertaining to
acquisitions.
(5) Depreciation and amortization for the year ended June 30, 1998 includes a
non-cash 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a leading biopharmaceutical services company, providing a broad
range of knowledge-based contract research, medical marketing, consulting and
technology products and services to the worldwide pharmaceutical, biotechnology,
and medical device industries. The Company's primary objective is to provide
solutions for managing the biopharmaceutical product lifecycle with the goal of
reducing the time, risk and cost associated with the development and
commercialization of new therapies. Over the past nineteen years, PAREXEL has
developed significant expertise in processes and technologies supporting this
strategy. The Company's product and service offerings include: clinical trials
management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, regulatory and medical consulting, performance
improvement, industry training and publishing, web-based portal solutions,
interactive voice response systems, electronic data capture solutions, medical
diagnostics services, and other drug development consulting services. The
Company believes that its integrated services, depth of therapeutic area
expertise, and sophisticated information technology, along with its experience
in global drug development and product launch services, represent key
competitive strengths.
The Company is managed through four business segments, namely, CRS, PCG, MMS and
Perceptive. CRS constitutes the Company's core business and includes clinical
trials management and biostatistics and data management, as well as related
medical advisory and investigator site services. PCG provides technical
expertise in such disciplines as clinical pharmacology, regulatory affairs,
industry training, publishing, and management consulting. PCG consultants
identify options and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive provides technology solutions to improve
clients' product development and commercialization processes. Perceptive offers
a portfolio of products and services that include web-based portals, IVRS,
electronic data capture solutions, and medical diagnostics.
23
Most of the Company's contracts are fixed price, with some variable components,
and range in duration from a few months to several years. Cash flow from these
contracts typically consists of a down payment required to be paid at the time
of contract execution with the balance due in installments over the contract's
duration, usually on a milestone achievement basis. Revenue from these contracts
is generally recognized as work is performed. As a result, cash receipts do not
necessarily correspond to costs incurred and revenue recognized on contracts.
Generally, the Company's clients can terminate their contracts with the Company
upon thirty to sixty days' notice or can delay execution of services. Clients
may terminate or delay contracts for a variety of reasons, including, among
others: merger or potential merger related activities involving the client, the
failure of products being tested to satisfy safety requirements or efficacy
criteria, unexpected or undesired clinical results of the product, client cost
reductions as a result of budgetary limits or changing priorities, the client's
decision to forego a particular study, insufficient patient enrollment or
investigator recruitment, or production problems resulting in shortages of the
product.
As discussed in Note 2 to the Consolidated Financial Statements, effective
January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") 01-14
Income Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred. These out-of-pocket expenses are reflected in the Company's
Consolidated Statements of Operations under "Reimbursement Revenue" and
"Reimbursable Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on behalf of
its clients with independent physician investigators in connection with clinical
trials. These investigator fees are not reflected in PAREXEL's Service Revenue,
Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses, and/or Direct Costs,
since such fees are reimbursed by customers on a "pass through basis", without
risk or reward to the Company. The amounts of these investigator fees were $74.6
million, $56.2 million and $55.0 million for the years ended June 30, 2002, 2001
and 2000, respectively.
Direct Costs primarily consist of compensation and related fringe benefits for
project-related employees, other project-related costs not reimbursed by
clients, and certain facilities and information systems costs. Selling, General
and Administrative expenses consist principally of compensation and related
fringe benefits for selling and administrative employees, professional services,
advertising costs, and allocated costs related to facilities and information
systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
CRITICAL ACCOUNTING POLICIES
The following critical accounting policies are used in the preparation of the
Company's financial statements.
Revenue
Service revenue on fixed price contracts is recognized as service is provided
based on the ratio that costs incurred to-date bear to estimated total costs at
completion, as estimated by the project managers on a monthly basis. This method
requires the Company to estimate total expected revenue and total expected
costs. Revenue related to contract modifications is recognized when the Company
has reached agreement with the client, the amounts are reasonably determinable,
and the services have been performed. Generally, the assigned financial manager
or financial analyst reviews contract estimates on a monthly basis. Adjustments
to contract cost estimates are made in the periods in which the facts that
require the revisions become known. Historically, there have not been any
significant variations between contract estimates and the actual costs incurred,
which were not recovered from clients. In the event that future estimates are
materially incorrect, they could materially impact the Company's financial
position or its results of operations.
Billed Accounts Receivable, Unbilled Accounts Receivable and Deferred Revenue
Billed accounts receivable represents amounts for which invoices have been sent
to clients. Unbilled accounts receivable represent amounts recognized as revenue
for which invoices have not yet been sent to clients. Deferred revenue
represents amounts billed or payments received for which revenue has not yet
been earned. The Company maintains an allowance for doubtful accounts based on
historical collectability and specific identification of potential problems. In
the event the Company is unable to collect all or part of its outstanding
receivables, there may be a material impact to the Company's financial position
or its results of operations.
24
Income Taxes
The Company's global provision for corporate income taxes is calculated using
the tax accounting rules established by Statement of Financial Accounting
Standards ("SFAS") No. 109. Income tax expense is based on the distribution of
profit before tax amongst the taxing jurisdictions where the Company operates,
adjusted as required by the tax laws of each taxing jurisdiction. The provision
is a combination of current-year tax liability and future tax liability /
benefit that results from differences between book and taxable income that will
reverse in future periods. Deferred tax assets and liabilities for these future
tax effects are established on the Company's balance sheet. A valuation
allowance is established if it is more likely than not that future tax benefits
will not be realized. Monthly interim tax provision calculations are prepared
during the year. Differences between these interim estimates and the final
results for the year could materially impact the Company's effective tax rate
and its consolidated financial results of operations.
Employee Stock Compensation
The Company elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Options Issued to Employees", or APB 25, and related
interpretations in accounting for the Company's employee stock options because
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation", or SFAS 123, requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized. If the Company accounted for stock options under SFAS 123, it would
have recorded additional compensation expense for the stock option grants to
employees. If the Company is unable to continue to account for stock options
under ABP 25, its financial results would be materially adversely affected to
the extent of the additional compensation expense it would have to recognize,
which could change significantly from period to period based on several factors
including the number of stock options granted and fluctuations of its stock
price and/or interest rates.
Foreign Currencies
The Company derives a large portion of its service revenue from operations in
foreign countries. The Company's financial statements are denominated in U.S.
dollars; thus, factors associated with international operations, including
changes in foreign currency exchange rates, could significantly affect the
Company's results of operations. Gains and losses on transactions denominated in
currencies other than an entity's functional currency are reported in other
income (expense). Adjustments from the translation of the subsidiary entities'
foreign functional currencies to the reported U.S. dollars are reported in
accumulated other comprehensive income/loss within stockholder's equity.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the
fair value of the related net assets at the date of acquisition. Prior to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill was
amortized using the straight-line method over the expected useful life.
Subsequent to the adoption of SFAS No. 142, goodwill is subject to annual
impairment testing. The Company has assessed the impairment of goodwill under
SFAS No. 142 in fiscal year 2002. Based on this assessment, there was no
impairment identified at June 30, 2002. Any future impairment of goodwill could
have a material impact to the Company's financial position or its results of
operations.
25
RESULTS OF OPERATIONS
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
two years ended June 30, 2002 and 2001.
For the year ended June 30, 2002
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
Service revenue $101,840 $106,874 $112,027 $123,577
Income from operations 2,517 4,201 4,556 9,219
Net income 2,456 3,068 3,711 4,000
Diluted earnings per share $0.10 $0.12 $0.14 $0.16
For the year ended June 30, 2001
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
Service revenue $88,215 $94,324 $98,322 $106,699
Income (loss) from operations (1) (1,113) 194 684 (6,625)
Net income (loss) (101) 957 1,899 (3,580)
Diluted earnings (loss) per share $0.00 $0.04 $0.08 $(0.15)
(1) Income (loss) from operations for the first quarter ended September 30,
2000, include a restructuring benefit of $0.7 million. This consisted of a
$1.5 million reduction in previously accrued restructuring charges due to
changes in estimates related to the third quarter 2000 restructuring,
offset by $0.8 million from exiting a business location in the U.S. Also in
the first quarter, the Company recorded a $0.4 million one-time write-down
of aged receivables in Eastern Europe and $0.6 million in accelerated
depreciation expense due to changes in the estimated useful lives of
leasehold improvements in abandoned leased facilities. During the fourth
quarter ended June 30, 2001, the Company recorded restructuring charges of
$7.2 million. These charges included $3.1 million of employee severance and
related costs for eliminating approximately 125 managerial and staff
positions worldwide (44% in the U.S. and 56% in Europe), $3.9 million
related to consolidation and abandonment of certain facilities (40% in the
U.S. and 60% in Europe), and approximately $0.2 million primarily related
to miscellaneous costs associated with the Company's fourth quarter
restructuring plan. Additionally in the fourth quarter, the Company
recorded $0.5 million of one-time expense associated with asset write-offs
in Europe, $0.6 million in expenses associated with discontinued services,
and $0.4 million in accelerated depreciation expense due to changes in the
estimated useful lives of leasehold improvements in abandoned leased
facilities.
ACQUISITIONS AND IMPACT OF RESTRUCTURING AND OTHER CHARGES
Effective July 1, 2001, the Company acquired EDYABE, a contract research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.6 million. In connection with this transaction, the Company
recorded approximately $1.4 million of excess cost over the fair value of the
interest in the net assets acquired as goodwill. Goodwill is subject to
impairment testing under SFAS No. 142.
On September 29, 2000, the Company acquired a clinical pharmacology unit located
in Northwick Park Hospital in Harrow, U.K. The fair value of the assets acquired
and the amount the Company paid for this transaction was nominal. As such, there
was no goodwill recorded for this transaction.
Effective September 1, 2000, the Company acquired a majority interest in
FARMOVS, a clinical pharmacology research business and bioanalytical laboratory
located in Bloemfontein, South Africa for approximately $3.0 million. In
connection with this transaction, the Company recorded approximately $2.0
million related to the excess cost over the fair value of the interest in the
net assets acquired as goodwill. Goodwill is subject to impairment testing under
SFAS No. 142.
26
During the quarter ended June 30, 2001, the Company recorded restructuring and
other charges totaling $7.2 million due to a decision to consolidate some of the
Company's operating facilities. The $7.2 million consisted of $3.1 million of
employee severance and related costs for eliminating approximately 125
managerial and staff positions worldwide (44% in the U.S. and 56% in Europe),
$3.9 million related to consolidation and abandonment of certain facilities (40%
in the U.S. and 60% in Europe), and approximately $0.2 million primarily related
to miscellaneous costs associated with the Company's fourth quarter
restructuring plan. Additionally, the Company recorded restructuring benefits of
$0.7 million during the first quarter of fiscal 2001. This consisted of a $1.5
million reduction in previously accrued restructuring charges due to changes in
estimates related to the third quarter 2000 restructuring, offset by $0.8
million for exiting a consulting business location in the U.S.
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 projects. As
a result, the Company estimated that total revenue for fiscal year 2000 and 2001
would be unfavorably impacted 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 a benefit derived from a
change in the Company's original estimate of when certain facilities would be
sublet. The remaining charges, totaling $1.6 million, primarily related to the
write-off of certain intangible assets and other investments, which were not
expected to produce future value.
ANALYSIS BY SEGMENT
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service 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, interest income (expense), other income
(expense), and income tax expense in segment profitability. Service revenue,
direct costs and gross profit on service revenue for fiscal years 2002, 2001,
and 2000 were as follows:
2002 vs. 2001 2001 vs. 2000
----------------------- ----------------------
IN THOUSANDS Increase Increase
2002 2001 (Decrease) % 2000 (Decrease) %
------------ ------------ ------------ --------- ------------ ------------ --------
Service revenue:
CRS $261,727 $240,501 $21,226 8.8% $262,698 $(22,197) -8.4%
PCG 97,775 80,796 16,979 21.0% 66,525 14,271 21.5%
MMS 64,829 54,277 10,552 19.4% 48,927 5,350 10.9%
Perceptive 19,987 11,986 8,001 66.8% - 11,986 -
------------ ------------ ------------ ------------ ------------
$444,318 $387,560 $56,758 14.6% $378,150 $9,410 2.5%
============ ============ ============ ============ ============
Direct costs:
CRS $175,120 $165,337 $9,783 5.9% $173,544 $(8,207) -4.7%
PCG 71,466 63,611 7,855 12.3% 51,963 11,648 22.4%
MMS 43,464 37,347 6,117 16.4% 35,378 1,969 5.6%
Perceptive 15,873 11,465 4,408 38.4% - 11,465 -
------------ ------------ ------------ ------------ ------------
$305,923 $277,760 $28,163 -10.1% $260,885 $16,875 6.5%
============ ============ ============ ============ ============
Gross profit on
service revenue:
CRS $86,607 $75,164 $11,443 15.2% $89,154 $(13,990) -15.7%
PCG 26,309 17,185 9,124 53.1% 14,562 2,623 18.0%
MMS 21,365 16,930 4,435 26.2% 13,549 3,381 25.0%
Perceptive 4,114 521 3,593 689.6% - 521 -
------------ ------------ ------------ ------------ ------------
$138,395 $109,800 $28,595 26.0% $117,265 $(7,465) -6.4%
============ ============ ============ ============ ============
27
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2001
(See Item 8 Consolidated Statements of Operations for reference)
Service revenue increased by $56.8 million, or 14.6%, to $444.3 million for the
fiscal year ended June 30, 2002 from $387.6 million for the same period in 2001.
On a geographic basis, service revenue for fiscal year 2002 was distributed as
follows: Americas $255.4 million (57.5%), Europe $171.7 million (38.6%), and
Asia/pacific $17.2 million (3.9%). In fiscal year 2001, service revenue was
distributed as follows: Americas $228.3 million (58.9%), Europe $146.0 million
(37.7%), and Asia/Pacific $13.3 million (3.4%). On a segment basis, CRS service
revenue increased by $21.2 million, or 8.8%, to $261.7 million in fiscal year
2002 from $240.5 million in fiscal year 2001. The year-over-year increase in CRS
service revenue was driven mainly by a 21.7% increase in new business awards,
principally in the biotech business with peri-approval projects. These increases
in new business were offset in part by an unusually high rate of cancellations
in fiscal year 2002 which, in the vast majority of cases, were due to client
safety and efficacy issues and budgetary reasons. PCG service revenue increased
by $17.0 million, or 21.0%, to $97.8 million in fiscal year 2002 from $80.8
million in fiscal year 2001 largely due to new business awards and incremental
revenue resulting from fiscal year 2001 clinical pharmacology acquisitions, as
well as solid increases in regulatory consulting in connection with recent
increases in FDA enforcement activity. MMS service revenue increased by $10.6
million, or 19.4%, to $64.8 million in fiscal year 2002 as compared with $54.3
million in fiscal year 2001 primarily due to an increase in the number of
projects serviced by the business which was in part attributable to an expansion
of the MMS client base in the North America market. Perceptive service revenue
increased by $8.0 million, or 66.8%, to $20.0 million in fiscal year 2002 from
$12.0 million in fiscal year 2001 principally due to a significant increase in
new business awards from existing clients, and continued business expansion to
new customers. These increases were attributable principally to the growth in
the web, voice, and data product offerings.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of and reimbursable by clients. It does not yield any gross profit to
the Company, nor does it have an impact on net income.
Direct costs increased by $28.2 million, or 10.1%, to $305.9 million in fiscal
year 2002 from $277.8 million in fiscal year 2001. On a segment basis, CRS
direct costs increased $9.8 million, or 5.9%, to $175.1 million in fiscal year
2002 from $165.3 million in fiscal year 2001 primarily due to higher labor costs
associated with increased business volume. As a percentage of service revenue,
CRS direct costs improved by 1.8 percentage points in fiscal year 2002, as
compared with fiscal year 2001 primarily due to improved operational labor
efficiencies and effective implementation of cost control measures as part of
focused profitability improvement initiatives (e.g. enhanced billing practices
and improved project management). PCG direct costs increased by $7.9 million, or
12.3%, to $71.5 million in fiscal year 2002 from $63.6 million in fiscal year
2001 primarily due to inclusion of the fiscal year 2001 acquisitions in the
results for the full year and higher employee-related expenses associated with
increased business volume across all business lines. As a percentage of service
revenue, PCG direct costs improved by 5.6 percentage points as a result of
greater fixed cost efficiency associated with revenue growth, as well as the
impact of some higher margin regulatory projects in fiscal year 2002. MMS direct
costs increased by $6.1 million, or 16.4%, to $43.5 million in fiscal year 2002,
as compared with $37.3 million in fiscal year 2001 primarily due to higher
employee-related expenses required to support increased business volume. As a
percentage of service revenue, MMS direct costs improved by 1.8 percentage
points primarily due to increased efficiency and further improvements in direct
cost management. Perceptive's direct costs increased by $4.4 million, or 38.4%,
to $15.9 million in fiscal year 2002 from $11.5 million in fiscal 2001 primarily
due to increased labor expense needed to support revenue growth within the
business segment. As a percentage of service revenue, Perceptive's direct costs
improved 16.3 percentage points, as compared with fiscal year 2001, primarily
due to greater cost efficiency.
Selling, general and administrative ("SG&A") expense increased by $11.3 million,
or 12.7%, to $100.0 million in fiscal year 2002 from $88.7 million in fiscal
year 2001 primarily due to increased labor costs associated with business growth
(80% of total increase), marketing and promotion expense (13% of total
increase), and other miscellaneous costs. As a percentage of service revenue,
SG&A decreased by 0.4 percentage points.
The Company had approximately 4,930 employees at the end of fiscal year 2002 and
4,640 employees at the end of fiscal year 2001. The increase was primarily due
to the acquisition of EDYABE, as well as hiring of additional employees needed
to support revenue growth in all business segments.
Depreciation and amortization ("D&A") expense decreased $3.6 million, or 16.6%,
to $17.9 million in fiscal year 2002 from $21.5 million in fiscal year 2001
primarily due to foreign currency fluctuations compared with fiscal year 2001,
adjustments which were made to the estimated useful lives of assets abandoned
during the first quarter of fiscal year 2001 as part of the Company's
restructuring plan, the current year impact of past restructuring activities,
and the adoption of SFAS No. 142, under which the Company eliminated
approximately $0.8 million in amortization expense in fiscal year 2002. As a
percentage of service revenue, D&A expense decreased to 4.0% in fiscal year
2002, from 5.5% in fiscal year 2001.
28
Income from operations increased $27.4 million to $20.5 million in fiscal year
2002 from a loss of $6.9 million one year ago, primarily for the reasons noted
in the preceding paragraphs, and the absence of restructuring charges in fiscal
year 2002 when compared with fiscal year 2001. Income from operations as a
percentage of service revenue increased to 4.6% in fiscal year 2002, as compared
with a negative 1.8% in the last fiscal year.
Total other income decreased $5.3 million, or 68.4%, to $2.4 million in fiscal
year 2002 from $7.7 million in fiscal year 2001. The decrease was primarily due
to lower worldwide interest rates and a reduction in foreign exchange gains
related to the weakened U.S. dollar versus the Euro and the British Pound
primarily during the fourth quarter of fiscal year 2002. The decrease was
partially offset by a $0.9 million gain from the sale of a building.
The Company had an effective income tax rate of 39.3% in fiscal year 2002
compared with 142.5% in fiscal year 2001. The reduction was primarily due to
favorable changes in the mix of taxable income in the different jurisdictions
where the Company operates and restructuring and other charges taken in fiscal
year 2001, which were not benefited in fiscal year 2001. Without the impact of
restructuring and other charges, the effective tax rate for fiscal year 2001
would have been 41.8%. As of June 30, 2002, there was approximately $7.8 million
of net operating loss carryforward tax benefit still remaining to be used in
future years. As of June 30, 2002, there was a valuation reserve established of
approximately $10.0 million related to the benefit of these losses and other tax
assets.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2000
(See Item 8 Consolidated Statements of Operations for reference)
Service revenue increased $9.4 million, or 2.5%, to $387.6 million in fiscal
year 2001 from $378.2 million for 2000. This growth was primarily attributable
to an increase in the volume of projects serviced by the Company due in part to
acquisitions completed during fiscal year 2001. In fiscal year 2001, service
revenue from North American and Asian operations increased 1.3% and 76.0%,
respectively, over the prior year while service revenue from European operations
was flat. On a segment basis, CRS service revenue decreased $22.2 million, or
8.4%, from the prior year primarily due to the decision to break out Perceptive
as a separate segment during fiscal year 2001 and the impact of project
cancellations and delays. PCG service revenue increased $14.3 million, or 21.5%,
from the prior year due to $7.9 million derived from acquisitions completed in
fiscal year 2001 and increased projects serviced by the business. MMS service
revenue increased $5.4 million, or 10.9%, mainly due to increased projects
serviced by the business. Perceptive service revenue was $12.0 million in fiscal
year 2001. Perceptive service revenue was included within CRS in fiscal year
2000, and therefore, no comparative data is available.
Direct costs increased $16.9 million, or 6.5%, to $277.8 million for fiscal year
2001 from $260.9 million in fiscal year 2000 mainly as a result of business
growth, the decision to invest in Perceptive, and employee retention programs.
On a segment basis, CRS direct costs decreased $8.2 million, or 4.7%, to $165.3
million for fiscal year 2001 from $173.5 million for fiscal year 2000 primarily
due to lower labor and related costs associated with lower revenue and
Perceptive's direct costs being reported as part of CRS in the comparable prior
year period. PCG direct costs increased $11.6 million, or 22.4%, to $63.6
million for fiscal year 2001 from $52.0 million for fiscal year 2000 and MMS
direct costs increased $2.0 million, or 5.6%, to $37.3 million for fiscal year
2001 from $35.4 million for fiscal year 2000. The higher direct costs for PCG
and MMS were principally due to an increased level of hiring and personnel costs
associated with acquisitions and increased projects serviced by those businesses
in fiscal year 2001. Perceptive direct costs were $11.5 million in fiscal year
2001 and were included within CRS in fiscal year 2000, and therefore, no
comparative data is available. As a percentage of service revenue, direct costs
increased to 68.7% and 78.7% in fiscal year 2001 from 66.1% and 78.1% in fiscal
year 2000 for CRS and PCG, respectively, due in part to the cost of expanded
employee retention programs. MMS direct costs as a percentage of service revenue
decreased to 68.8% in fiscal year 2001 from 72.3% in fiscal year 2000, primarily
due to improved cost management. Perceptive direct costs as a percentage of
service revenue were 95.7% in fiscal year 2001.
SG&A expenses increased $9.1 million, or 11.5%, to $88.7 million for fiscal year
2001 from $79.6 million in 2000. The increase in SG&A was principally due to
higher personnel costs associated with new hires and employee retention programs
in all business segments, increased facilities-related expenses and increased
professional fees associated, in part, with the Company's restatement of its
fiscal year 2000 financial statements. As a percentage of service revenue, SG&A
expenses were 22.9% in fiscal year 2001 and 21.1% in fiscal year 2000.
The Company had approximately 4,640 employees at the end of fiscal year 2001
compared with 4,200 at the end of fiscal year 2000. The PCG and MMS businesses
accounted for 84% of the total increase. This increase was primarily due to
acquisitions in the PCG operation and new hires to accommodate new projects in
PCG, MMS and Perceptive, partially offset by reductions in staff due to
restructuring in the CRS business segment.
29
D&A expense remained essentially flat at approximately $21.5 million in fiscal
year 2001 when compared with fiscal year 2000. As a percentage of service
revenue, D&A decreased to 5.5% in fiscal year 2001 from 5.7% in fiscal year
2000.
The Company's loss from operations was $6.9 million in fiscal year 2001 versus
income of $3.0 million in fiscal year 2000. Excluding restructuring and other
charges, income from operations decreased $15.0 million, or 87.9%, to $2.1
million in fiscal year 2001 from $17.1 million in fiscal year 2000. Excluding
these charges, income from operations as a percentage of service revenue
decreased to 0.5% in fiscal year 2001 from 4.5% in fiscal year 2000. The
decrease was primarily due to higher direct costs and SG&A expenses as noted
above.
Total other income increased $2.2 million, or 40.0% to $7.7 million in fiscal
year 2001 from $5.5 million in fiscal year 2000 primarily due to higher foreign
exchange gains, offset by lower interest income.
The Company had an effective tax rate of 142.5% in fiscal year 2001 and 48.2% in
fiscal year 2000. This increase was primarily attributable to changes in the mix
of taxable income within the different geographic jurisdictions in which the
Company operates, the utilization of previously unbenefitted net operating
losses in certain foreign jurisdictions (primarily Germany), and the impact of
restructuring and other charges the Company took in fiscal year 2001. Without
the impact of restructuring and other charges, the effective tax rate would have
been 41.8% in fiscal year 2001 and 39.0% in fiscal year 2000. As of June 30,
2001, $1.1 million of net operating loss carryforward tax rate benefits
remained.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth,
including acquisition costs, with cash flow from operations and proceeds from
the sale of equity securities. Investing activities primarily reflect
acquisition costs and capital expenditures for information systems enhancements
and leasehold improvements.
Most of the Company's contracts are fixed price, with some variable components,
and range in duration from a few months to several years. Cash flow from these
contracts typically consists of a down payment required to be paid at the time
of contract execution with the balance due in installments over the contract's
duration, usually on a milestone achievement basis. Revenue from these contracts
is generally recognized as work is performed. As a result, cash receipts do not
necessarily correspond to costs incurred and revenue recognized on contracts.
The Company's operating cash flow is heavily influenced by changes in the levels
of billed and unbilled receivables and deferred revenue. These account balances
as well as days sales outstanding in accounts receivable, net of deferred
revenue, can vary based on contractual milestones and the timing and size of
cash receipts. Days sales outstanding ("DSO") in accounts receivable, net of
deferred revenue, was 56 days at June 30, 2002 compared with 67 days at June 30,
2001. The decrease in DSO in fiscal year 2002 as compared with fiscal 2001 was
primarily due to improved billing practices and increased collection activities.
Accounts receivable, net of the allowance for doubtful accounts was $224.7
million ($131.5 million in billed accounts receivable and $93.2 million in
unbilled accounts receivable) at June 30, 2002 and $206.9 million ($121.5
million in billed accounts receivable and $85.4 million in unbilled accounts
receivable) at June 30, 2001. Deferred revenue was $114.7 million at June 30,
2002 and $93.6 million at June 30, 2001. Days sales outstanding is calculated by
adding the end-of-period balances for billed and unbilled account receivables,
net of deferred revenue and the allowance for doubtful accounts, then dividing
the resulting amount by gross revenue (service revenue, reimbursement revenue,
and investigator fees) for the most recent quarter, and multiplying the
resulting fraction by the number of days in the quarter.
The Company has lines-of-credit with foreign banks in the aggregate of
approximately $10.0 million. These lines-of-credit are not collateralized and
are payable on demand. At June 30, 2002, the Company had approximately $10.0
million available under these credit arrangements.
Net cash provided by operating activities totaled $22.3 million in fiscal year
2002 as compared with $5.6 million used in operating activities in fiscal year
2001. The net cash provided by operating activities in fiscal year 2002
consisted of $13.2 million of net income, $17.9 million related to depreciation
and amortization expense, an $11.3 million increase in other liabilities, a $3.8
million decrease in accounts receivable (net of the allowance for doubtful
accounts and deferred revenue), and $0.7 million of minority interest in the net
income of a consolidated subsidiary, partially offset by a $14.7 million
decrease in accounts payable, a $6.2 million increase in deferred income taxes,
a $2.7 million increase in prepaids and other assets, and a $1.0 million gain on
the disposal of assets. The net use of cash in fiscal year 2001 consisted of a
$38.7 million increase in accounts receivable (net of the allowance for doubtful
accounts and deferred revenue), a net loss of $0.9 million, partially offset by
$21.5 million related to depreciation and amortization, a $4.1 million decrease
in deferred income taxes, a $6.3 million increase in accounts payable, and a
$2.6 million increase in other liabilities.
30
Net cash used by investing activities for fiscal year 2002 totaled $63.9 million
and consisted of $40.3 of net cash used to purchase marketable securities, $23.8
million used primarily for software and hardware purchases across all business
segments, and $1.8 million used for a business acquisition, partly offset by
$1.9 million in proceeds from the sale of certain assets. Net cash provided by
investing activities for fiscal year 2001 totaled $13.4 million and consisted of
net proceeds of $33.6 million from the sale of marketable securities and $0.9
million of proceeds from the sale of assets, partially offset by $18.1 million
used primarily for software and hardware purchases across all business segments
and $3.0 million used for the acquisition of FARMOVS.
Net cash provided by financing activities totaled $3.3 million for fiscal year
2002 and consisted primarily of proceeds from the issuance of common stock in
association with the Company's employee stock purchase and stock option plans.
Net cash provided by financing activities totaled $0.4 million for fiscal year
2001 and consisted of $2.3 million from the issuance of common stock under the
Company's stock options and employee stock purchase plans, offset by $1.9
million used to repurchase the Company's common stock.
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company's principal source of cash is from contracts with clients. If the
Company is unable to generate new contracts with existing and new clients and/or
the level of contract cancellations increases, revenue and cash flow will be
adversely affected (see Risk Factor for further detail). Absent a material
adverse change in the level of the Company's new business bookings or contract
cancellations, PAREXEL believes that its existing capital resources together
with cash flow from operations and borrowing capacity under existing lines of
credit will be sufficient to meet its foreseeable cash needs.
In the future, the Company expects to consider acquiring businesses to enhance
its service offerings, expand its therapeutic expertise, and/or increase its
global presence. Any such acquisitions may require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuance of equity or debt securities. There can be no
assurance that such financing will be available on terms acceptable to the
Company.
The Company's contractual obligations and commitments for fiscal years
subsequent to June 30, 2002 are as follows:
($ IN THOUSANDS) 2003 2004 2005 2006 Thereafter Total
-------- ------- ------- ------- ---------- --------
Operating leases $27,269 $24,961 $23,775 $21,023 $98,054 $195,082
Obligations under
capital lease 89 97 105 114 92 497
-------- ------- ------- ------- ---------- --------
$27,358 $25,058 $23,880 $21,137 $98,146 $195,579
======== ======= ======= ======= ========== ========
The Company expects capital expenditures to total approximately $25.0 million in
fiscal year 2003.
As of June 30, 2002, PAREXEL did not have any off-balance sheet arrangements.
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency rates, interest rates, and other relevant
market rate or price changes. In the ordinary course of business, the Company is
exposed to market risk resulting from changes in foreign currency exchange
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.
Foreign Currency Exchange Rates
The Company derived approximately 43% of its service revenue for fiscal year
2002, 41% of its service revenue for fiscal year 2001 and 40% of its service
revenue for fiscal year 2000, 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 exchange rates 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.
31
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in a currency
other than the foreign subsidiary's functional (local) currency. 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. During fiscal years 2002 and 2001, the Company
recorded foreign exchange gains of $0.2 million and $5.0 million, respectively.
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 enters into
foreign exchange forward contracts to offset the impact of currency
fluctuations. These foreign exchange forward contracts generally have maturity
dates ranging from one to six months. The Company does not expect gains or
losses on these contracts to have a material impact on its financial results
(see Note 2 to the Consolidated Financial Statements).
Conversion to the Euro Currency
On January 1, 1999, a new currency, the Euro, became the legal currency for 11
of the 15 member countries of the European Economic Community. Between January
1, 1999 and January 1, 2002, governments, companies and individuals were
permitted to conduct business in the member countries in both the Euro and
existing national currencies. On January 1, 2002, the Euro became the sole
currency in the member countries. PAREXEL conducts business in seven of the
member countries and converted two of those countries to the Euro currency in
fiscal year 2001 and the remaining five in fiscal year 2002. Conversion to the
Euro currency did not create a material effect on either the Company's financial
position or its results of operations in either fiscal year 2001 or fiscal year
2002.
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 June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002 and will be effective in the Company's fiscal
year ending June 30, 2003. The adoption of SFAS 146 is not expected to have any
material adverse impact on the Company's financial position or results of its
operations.
In November 2001, the EITF of the FASB issued EITF 01-14, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". EITF 01-14 requires reimbursable out-of-pocket expenses incurred to
be characterized as revenue in the income statement. The guidance became
effective for periods beginning after December 15, 2001 and required comparative
financial statements for prior periods to be reclassified. EITF 01-14 was
adopted by PAREXEL in the third quarter of fiscal year 2002 and did not have any
impact on either the Company's financial position or its results of operations
because the amount included in revenue was offset by a like amount in expenses.
The Company excludes investigator fees from its out-of-pocket expenses because
these fees are reimbursed by customers on a "pass through basis", without risk
or reward to the Company. The amount of the investigator fees incurred on behalf
of clients for the fiscal year ended June 30, 2002, 2001 and 2000, were $74.6
million, $56.2 million and $55.0 million, respectively.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") which supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 requires, among other things, that long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
144 is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Accordingly, SFAS 144 will be effective for
the Company beginning July 1, 2002. The Company is currently evaluating the
potential impact, if any, the adoption of SFAS 144 will have on its financial
position and results of operations.
32
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires, among other things, the cessation of goodwill
amortization. In addition, the standard includes provisions for the
reclassification to goodwill of certain existing intangible assets, reassessment
of the useful lives of existing intangible assets, reclassification of certain
intangible assets out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. SFAS No. 142 was adopted by the
Company in the first quarter of fiscal year 2002 and resulted in the elimination
of goodwill amortization of approximately $0.8 million for fiscal 2002. Had SFAS
No. 142 been implemented in fiscal year 2001, approximately $0.8 million of
amortization expense would have been eliminated for fiscal year 2001.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the
Company in the first quarter of fiscal year 2002 and did not have any impact on
either the Company's financial position or its results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" under Item 7 above.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
----------------------------
($ in thousands, except per share data)
2002 2001 2000
-------------- --------------- --------------
Service revenue $444,318 $387,560 $378,150
Reimbursement revenue 120,606 93,728 73,348
-------------- --------------- --------------
TOTAL REVENUE 564,924 481,288 451,498
Costs and expenses:
Direct costs 305,923 277,760 260,885
Reimbursable out-of-pocket expenses 120,606 93,728 73,348
Selling, general and administrative 100,009 88,745 79,611
Depreciation and amortization 17,893 21,453 21,583
Restructuring and other charges - 6,462 13,088
-------------- --------------- --------------
TOTAL COSTS 544,431 488,148 448,515
-------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS 20,493 (6,860) 2,983
Interest income 2,693 2,677 4,370
Interest expense (1,452) (96) (419)
Other income, net 1,200 5,151 1,531
-------------- --------------- --------------
TOTAL OTHER INCOME 2,441 7,732 5,482
Income before provision for income taxes 22,934 872 8,465
Provision for income taxes 9,013 1,243 4,077
Minority interest 686 454 -
-------------- --------------- --------------
NET INCOME (LOSS) $13,235 $(825) $4,388
============= =============== ==============
Earnings (loss) per share:
Basic $0.53 $(0.03) $0.18
Diluted $0.52 $(0.03) $0.17
Weighted average shares
Basic 24,928 24,637 24,981
Diluted 25,582 24,637 25,140
The accompanying notes are an integral part of the consolidated financial
statements.
34
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
June 30,
2002 2001
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $22,479 $57,590
Marketable securities 43,630 3,359
Billed and unbilled accounts receivable, net (Note 5) 224,713 206,904
Prepaid expenses 8,688 10,025
Current deferred tax assets 21,642 13,987
Other current assets 6,388 3,022
---------------- --------------
Total current assets 327,540 294,887
Property and equipment, net (Note 6) 47,624 39,888
Goodwill and other intangible assets, net 14,763 12,695
Non-current deferred tax assets 11,201 8,427
Other assets 6,033 5,637
---------------- --------------
Total assets $407,161 $361,534
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $422 $254
Accounts payable 11,858 26,296
Deferred revenue 114,723 93,577
Accrued expenses 15,814 17,135
Accrued employee benefits and withholdings 31,713 24,864
Current deferred tax liabilities 2,538 1,794
Income taxes payable 7,361 3,682
Other current liabilities 5,091 3,797
---------------- --------------
Total current liabilities 189,520 171,399
Long-term debt 432 12
Non-current deferred tax liabilities 9,268 5,789
Other liabilities 5,087 3,944
---------------- --------------
Total liabilities 204,307 181,144
---------------- --------------
Commitments and contingencies (Note 14)
Minority interest in subsidiary 2,777 2,568
Stockholders' equity:
Preferred stock--$.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, 2002 and 2001; shares
issued: 26,033,808 at June 30, 2002 and
25,636,220, at June 30, 2001; shares outstanding:
25,172,808 at June 30, 2002 and 24,775,220 at
June 30, 2001 261 257
Additional paid-in capital 167,829 164,141
Treasury stock, at cost; 861,000 shares at June 30, 2002 and 2001 (8,165) (8,165)
Retained earnings 52,455 39,220
Accumulated other comprehensive loss (12,303) (17,631)
---------------- --------------
Total stockholders' equity 200,077 177,822
---------------- --------------
Total liabilities and stockholders' equity $407,161 $361,534
================ ==============
The accompanying notes are an integral part of the consolidated financial
statements.
35
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands, except share and per share data)
Common Stock
-------------------------------
Accum.
Other
Retained Compre- Total Compre-
Additional Treasury Earnings hensive Stock- hensive
Number Par Paid-in Stock, (Accum. Income holders' Income/
Of Shares Value Capital At Cost Deficit) (Loss) Equity (Loss)
---------------------------------------------------------------------------------------
Balance at June 30, 1999 25,103,049 $251 $159,593 $(18) $35,785 $(3,579) $192,032
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 loss on marketable securities 2 2 2
Foreign currency translation adjustment (6,350) (6,350) (6,350)
Net income 4,388 4,388 4,388
---------------------------------------------------------------------------------------
Balance at June 30, 2000 24,719,158 $254 $162,057 $(6,424) $40,173 $(9,927) $186,133 $(1,960)
=============
Shares issued under stock option/
purchase plans 266,062 3 1,874 1,877
Income tax benefit from exercise
of stock options 227 227
Shares repurchased (210,000) (1,758) (1,758)
Foreign currency translation adjustment (7,704) (7,704) (7,704)
Retirement of Treasury Stock (17) 17
Elimination of net income of
subsidiary for change in fiscal year (128) (128)
Net loss (825) (825) (825)
---------------------------------------------------------------------------------------
Balance at June 30, 2001 24,775,220 $257 $164,141 $(8,165) $39,220 $(17,631) $177,822 $(8,529)
=============
Shares issued under stock option/
purchase plans 397,588 4 3,263 3,267
Income tax benefit from exercise
of stock options 425 425
Foreign currency translation adjustment 5,328 5,328 5,328
Net income 13,235 13,235 13,235
---------------------------------------------------------------------------------------
Balance at June 30, 2002 25,172,808 $261 $167,829 $(8,165) $52,455 $(12,303) $200,077 $18,563
=======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
36
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the years ended June 30,
2002 2001 2000
------------------ ----------------- -----------------
CASH FLOW FROM OPERATING ACTIVITIES: $13,235 $(825) $4,388
Net income (loss)
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Minority interest in net income of consolidated subsidiary 686 454 -
Depreciation and amortization 17,893 21,453 21,934
(Gain) loss on disposal of assets (963) (108) 1,638
Deferred income taxes (6,206) 4,063 (7,179)
Allowance for doubtful accounts 47 875 (1,427)
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (16,911) (46,901) (9,726)
Prepaid expenses and other current assets (1,962) 1,163 (1,439)
Other assets (737) (2,130) 432
Accounts payable (14,727) 6,316 4,114
Deferred revenue 20,614 7,354 13,339
Other current liabilities 10,205 (16) 3,709
Other liabilities 1,140 2,665 30
------------------ ----------------- -----------------
Net cash provided (used) by operating activities 22,314 (5,637) 29,813
------------------ ----------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of marketable securities (364,594) (93,120) (83,090)
Proceeds from sale of marketable securities 324,323 126,735 73,670
Purchases of property and equipment (23,808) (18,145) (19,089)
Acquisition of a business, net of cash acquired (1,793) (2,994) (3,000)
Proceeds from sale of assets 1,945 915 587
Other investing activities - - (1,244)
------------------ ----------------- -----------------
Net cash provided (used) by investing activities (63,927) 13,391 (32,166)
------------------ ----------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,267 1,878 2,357
Payments to repurchase common stock - (1,758) (6,225)
Borrowings (repayments) under lines of credit 73 (129) (762)
Repayments under capital lease obligations (28) - -
Proceeds from issuance of subsidiary's common stock - 386 -
------------------ ----------------- -----------------
Net cash provided (used) by financing activities 3,312 377 (4,630)
------------------ ----------------- -----------------
Elimination of net loss of a subsidiary for change in fiscal year - (128) -
Effect of exchange rate changes on cash and cash equivalents 3,190 (3,921) (1,514)
------------------ ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (35,111) 4,082 (8,497)
Cash and cash equivalents at beginning of year 57,590 53,508 62,005
------------------ ----------------- -----------------
Cash and cash equivalents at end of year $22,479 $57,590 $53,508
================== ================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
37
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
($ in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,448 $50 $22
Income taxes $9,975 $3,202 $14,159
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $2,928 $5,550 $4,187
Liabilities and minority interest assumed (1,135) (2,556) (1,187)
------------------ ----------------- -----------------
Cash paid for acquisitions $1,793 $2,994 $3,000
================== ================= =================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Asset purchased under capital lease $525 - -
Income tax benefit from exercise of stock options $425 $227 $110
The accompanying notes are an integral part of the consolidated financial
statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
The Company is a leading biopharmaceutical services company, providing a broad
range of knowledge-based contract research, medical marketing, consulting and
technology products and services to the worldwide pharmaceutical, biotechnology,
and medical device industries. The Company's primary objective is to provide
solutions for managing the biopharmaceutical product lifecycle with the goal of
reducing the time, risk and cost associated with the development and
commercialization of new therapies. Over the past nineteen years, PAREXEL has
developed significant expertise in processes and technologies supporting this
strategy. The Company's product and service offerings include: clinical trials
management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, regulatory and medical consulting, performance
improvement, industry training and publishing, web-based portal solutions, IVRS,
electronic data capture solutions, medical diagnostics services, and other drug
development consulting services. The Company believes that its integrated
services, depth of therapeutic area expertise, and sophisticated information
technology, along with its experience in global drug development and product
launch services, represent key competitive strengths.
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, its wholly owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The Company changed the fiscal year end for one of its subsidiaries, MMS, from
May 31 to June 30 in fiscal year 2001. The effect of this change resulted in the
reduction of retained earnings in the amount of $0.1 million during fiscal year
2001.
Reclassifications
Certain fiscal year 2001 amounts have been reclassified to conform with the
fiscal year 2002 presentation.
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, revenue and expenses, and
disclosures of contingent assets and liabilities. Actual results may differ from
those estimates.
Revenue
Fixed price contract revenue is recognized as services are performed based on
the ratio that costs incurred to date bear to estimated total costs at
completion. 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. Deferred
revenue represent amounts billed in excess of revenue recognized.
Effective January 1, 2002, the Company adopted EITF 01-14 Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.
These out-of-pocket expenses are reflected in the Company's Consolidated
Statements of Operations under "Reimbursement Revenue" and "Reimbursable
Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on behalf of
its clients with independent physician investigators in connection with clinical
trials. These investigator fees are not reflected in PAREXEL's Service Revenue,
Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses, and/or Direct Costs,
since such fees are reimbursed by customers on a "pass through basis", without
risk or reward to the Company. The amounts of these investigator fees were $74.6
million, $56.2 million and $55.0 million for the years ended June 30, 2002, 2001
and 2000, respectively.
39
As required under EITF 01-14, the Company has restated the prior periods for the
reclassifications presented as follows:
($ IN THOUSANDS) 2001 2000
---------------- --------------
Total Revenue, as previously reported $387,560 $378,150
Reclassification of reimbursed expenses 93,728 73,348
---------------- --------------
Total Revenue, as restated $481,288 $451,498
================ ==============
Total Costs, as previously reported $394,870 $375,167
Reclassification of reimbursed expenses 93,278 73,348
---------------- --------------
Total Costs, as restated $488,148 $448,515
================ ==============
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. Marketable securities are classified as "available for sale" and are
carried at fair market value, which approximates amortized cost.
Concentration of Credit Risk
Financial instruments, which may potentially expose the Company to
concentrations of credit risk, include trade accounts receivable. However, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management expectations. In fiscal year 2002, one
client, Astra Zeneca PLC, accounted for 11% of consolidated service revenue. In
fiscal year 2001 and 2000, one client, Novartis AG, accounted for 10% and 21% of
consolidated service revenue, respectively.
Property and Equipment
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 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 acquisitions
accounted for under the purchase method. Prior to the adoption of SFAS No. 142,
intangible assets were amortized using the straight-line method over their
expected useful life ranging from five to twenty-five years. SFAS No. 142 was
adopted by the Company in the first quarter of fiscal year 2002 and resulted in
the elimination of goodwill amortization.
Intangible assets of $14.8 million and $12.7 million, included in Goodwill and
Other Intangible assets, are net of accumulated amortization of $2.2 million and
$2.1 million as of June 30, 2002 and 2001, respectively. Amortization expense
was $0.06 million, $0.8 million and $1.5 million for the fiscal years ended June
30, 2002, 2001, and 2000, respectively.
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, for the estimated future tax benefits of
deductible temporary differences and tax operating loss and credit carryforwards
and are net of valuation allowances established in jurisdictions where the
realization of those benefits is questionable. Deferred income tax expense
represents the change in the net deferred tax asset and liability balances.
40
Foreign Currency
Assets and liabilities of the Company's international operations are translated
into U.S. dollars at exchange rates in effect on the balance sheet date and
equity accounts are translated at historical exchange rates. Income and expense
items are translated at average exchange rates in effect during the year.
Translation adjustments are accumulated in other comprehensive loss as a
separate component of stockholders' equity in the consolidated balance sheet.
Transaction gains and losses are included in other income, net in the
consolidated statements of operations.
Earnings Per Share
Earnings per share has been calculated in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing net
income for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares plus the
dilutive effect of outstanding stock options and shares issuable under the
employee stock purchase plan.
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", as described by FASB Interpretation No. 44.
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 purposes only.
Financial Instruments
From time to time, the Company enters into forward exchange contracts to hedge
foreign currency exposures. These forward exchange contracts were entered into
as economic hedges, which have not been designated as hedges for accounting
purposes as defined under FAS 133.
Realized gains or losses on forward exchange contracts, acquired for the purpose
of reducing exposure to currency fluctuations associated with expected cash
flows denominated in currencies other than functional currencies, are reflected
in Other Income (Expense). Forward exchange contracts are marked to market with
the unrealized gain or loss reflected in Other Income (Expense).
Recently Issued Accounting Standards
In June 2002, the FASB issued SFAS 146. SFAS 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS 146 requires that a liability for a costs associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 and will be
effective in the Company's fiscal year ending June 30, 2003. The adoption of
SFAS 146 is not expected to have any material adverse impact on the Company's
financial position or results of its operations.
In November 2001, the EITF of the FASB issued EITF 01-14, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". EITF 01-14 requires reimbursable out-of-pocket expenses incurred to
be characterized as revenue in the income statement. The guidance became
effective for periods beginning after December 15, 2001 and required comparative
financial statements for prior periods to be reclassified. EITF 01-14 was
adopted by PAREXEL in the third quarter of fiscal year 2002 and did not have any
impact on either the Company's financial position or its results of operations
because the amount included in revenue was offset by a like amount in expenses.
The Company excludes investigator fees from its out-of-pocket expenses because
these fees are reimbursed by customers on a "pass through basis", without risk
or reward to the Company. The amount of the investigator fees incurred on behalf
of clients for the fiscal year ended June 30, 2002, 2001 and 2000, were $74.6
million, $56.2 million and $55.0 million, respectively.
41
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 144 requires, among other things, that long-lived assets be measured at the
lower of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Accordingly, SFAS 144 will be effective for the Company beginning
July 1, 2002. The Company is currently evaluating the potential impact, if any,
the adoption of SFAS 144 will have on its financial position and results of
operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires, among other things, the cessation of goodwill
amortization. In addition, the standard includes provisions for the
reclassification to goodwill of certain existing intangible assets, reassessment
of the useful lives of existing intangible assets, reclassification of certain
intangible assets out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. SFAS No. 142 was adopted by the
Company in the first quarter of fiscal year 2002 and resulted in the elimination
of goodwill amortization of approximately $0.8 million for fiscal year 2002. Had
SFAS No. 142 been implemented in fiscal year 2001, approximately $0.8 million of
amortization expense would have been eliminated for fiscal year 2001.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the
Company in the first quarter of fiscal year 2002 and did not have any impact on
either the Company's financial position or its results of operations.
NOTE 3. ACQUISITIONS
Fiscal Year 2002
Effective July 1, 2001, the Company acquired EDYABE, a contract research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.6 million. In connection with this transaction, the Company
recorded approximately $1.4 million of excess cost over the fair value of the
interest in the net assets acquired as goodwill. Goodwill is subject to
impairment testing under SFAS No. 142.
Fiscal Year 2001
On September 29, 2000, the Company acquired a clinical pharmacology unit located
in Northwick Park Hospital in Harrow, U.K. The fair value of the assets acquired
and the amount the Company paid for this transaction were nominal. As such,
there was no goodwill recorded for this transaction.
Effective September 1, 2000, the Company acquired a majority interest in
FARMOVS, a clinical pharmacology research business and bioanalytical laboratory
located in Bloemfontein, South Africa for approximately $3.0 million. In
connection with this transaction, the Company recorded approximately $2.0
million related to the excess cost over the fair value of the interest in the
net assets acquired as goodwill. Goodwill is subject to impairment testing under
SFAS No. 142.
Fiscal Year 2000
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 an
additional amount of approximately $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 was obligated to make additional payments in
contingent purchase price if CEMAF achieved certain established annual earnings
targets in each fiscal year through June 30, 2002. No payments were required in
fiscal year 2002, 2001 and 2000. In connection with recording the assets and
liabilities acquired, the Company recorded approximately $2.4 million related to
the excess cost over the fair value of the net assets acquired as goodwill.
Goodwill is subject to impairment testing under SFAS No. 142.
42
NOTE 4. MARKETABLE SECURITIES
Available-for-sale securities included in marketable securities at June 30, 2002
and 2001, consisted of the following:
($ IN THOUSANDS) 2002 2001
------------ ------------
Municipal debt securities $43,630 $3,359
============ ============
At June 30, 2002, all available-for-sale securities were scheduled to mature on
varying dates within one year.
The Company's investments are reflected at fair market value, which approximates
amortized cost. During fiscal year 2002, gross realized gains totaled $0.2
million and gross realized losses totaled $0.2 million. During fiscal year 2001,
gross realized gains totaled $0.3 million and gross realized losses totaled $0.3
million. In fiscal year 2000, gross realized gains totaled $2.2 million and
gross realized losses totaled $2.0 million.
NOTE 5. BILLED AND UNBILLED ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2002 and 2001, consisted of the following:
($ IN THOUSANDS) 2002 2001
------------- -------------
Billed $134,720 $124,285
Unbilled 94,615 87,194
Allowance for doubtful accounts (4,622) (4,575)
------------- -------------
$224,713 $206,904
============= =============
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 and 2001, consisted of the following:
($ IN THOUSANDS) 2002 2001
------------- -------------
Owned assets:
Computer and office equipment $65,402 $55,409
Computer software 32,735 22,236
Furniture and fixtures 22,859 19,882
Leasehold improvements 11,346 9,856
Buildings 4,354 5,675
Other 974 997
------------- -------------
137,670 114,055
Less: accumulated depreciation (90,536) (74,167)
------------- -------------
47,134 39,888
------------- -------------
Assets held under capital lease:
Computer software 525 -
Less: accumulated amortization (35) -
------------- -------------
490 -
------------- -------------
$47,624 $39,888
============= =============
Depreciation and amortization expense relating to property and equipment was
$17.9 million, $20.6 million, and $20.1 million, for the years ended June 30,
2002, 2001, and 2000, respectively. The depreciation expense for the year ended
June 30, 2001 includes $0.9 million of accelerated depreciation due to changes
in the estimated useful lives of leasehold improvements on abandoned leased
facilities.
43
NOTE 7. RESTRUCTURING AND OTHER CHARGES
The Company did not record any restructuring provisions in fiscal year 2002.
During the quarter ended June 30, 2001, the Company recorded restructuring and
other charges totaling $7.2 million. These charges included $3.1 million of
employee severance and related costs for eliminating approximately 125
managerial and staff positions worldwide (44% in the U.S. and 56% in Europe),
$3.9 million related to consolidation and abandonment of certain facilities (40%
in the U.S. and 60% in Europe), and approximately $0.2 million primarily related
to miscellaneous costs associated with the Company's fourth quarter
restructuring plan. Additionally, the Company recorded restructuring benefits of
$0.7 million during the first quarter of fiscal 2001. This consisted of a $1.5
million reduction in previously accrued restructuring charges due to changes in
estimates related to the third quarter 2000 restructuring, offset by $0.8
million for exiting a consulting business location in the U.S.
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 projects. As
a result, the Company estimated that total revenue for fiscal year 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 a benefit derived from a
change in the Company's original estimate of when certain facilities would be
sublet. The remaining charges, totaling $1.6 million, primarily related to the
write-off of certain intangible assets and other investments, which were not
expected to produce future value.
During the three months ended June 30, 1999, the Company recorded a $2.8 million
charge in connection with the centralization of certain facilities. The charge
consisted of future non-cancellable lease payments partially offset by estimated
sublease income.
Fiscal years 2002, 2001, and 2000 activities against the restructuring accrual
were as follows and are recorded under accrued expenses in the Company's
Consolidated Balance Sheet:
($ IN THOUSANDS) Balance at Gross Payments/ Balance at
June 30, 2001 Provisions Adjustments June 30, 2002
------------------- ------------------- ------------------- ------------------
Employee severance costs $2,785 - $(1,609) $1,176
Facilities related charge 5,709 - (3,584) 2,125
Other charges 242 - (242) -
------------------- ------------------- ------------------- ------------------
$8,736 - $(5,435) $3,301
=================== =================== =================== ==================
Balance at Gross Payments/ Balance at
June 30, 2000 Provisions Adjustments June 30, 2001
------------------- ------------------- ------------------- ------------------
Employee severance costs $4,183 $3,070 $(4,468) $2,785
Facilities related charge 4,976 3,891 (3,158) 5,709
Other charges (15) 269 (12) 242
------------------- ------------------- ------------------- ------------------
$9,144 $7,230 $(7,638) $8,736
=================== =================== =================== ==================
44
Balance at Gross Payments/ Balance at
June 30, 1999 Provisions Adjustments June 30, 2000
------------------ ------------------ ------------------ -----------------
Employee severance costs - $7,157 $(2,974) $4,183
Facilities related charge 2,557 4,317 (1,898) 4,976
Other charges - 1,614 (1,629) (15)
------------------ ------------------ ------------------ -----------------
$2,557 $13,088 $(6,501) $9,144
================== ================== ================== =================
NOTE 8. CREDIT ARRANGEMENTS
The Company has a foreign line of credit with a major bank in the amount of
approximately $7.0 million. The line is not collateralized, is payable on
demand, and bears interest at a rate in the 4% to 5% range. At June 30, 2002,
the amount outstanding under this credit arrangement was zero.
The Company has other foreign lines of credit with banks totaling approximately
$3.0 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 7%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At June 30, 2002, the Company
had approximately $3.0 million available credit under this arrangement.
NOTE 9. STOCKHOLDERS' EQUITY
As of June 30, 2002 and 2001, there were 5,000,000 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.
Repurchases are made in the open market subject to market conditions. The
Company did not repurchase any of its common stock during fiscal year ended June
30, 2002. During the fiscal year ended June 30, 2001, the Company acquired
210,000 shares at a total cost of $1.8 million.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 1.2 million, 3.6 million, and 1.6 million outstanding stock
options were excluded from the calculation of diluted earnings per share for
fiscal years 2002, 2001, and 2000, respectively because they were anti-dilutive.
The following table is a summary of shares used in calculating basic and diluted
earnings per share:
Years ended June 30,
(IN THOUSANDS) 2002 2001 2000
------------ ----------- ------------
Net income (loss) $13,235 $(825) $4,388
Weighted average number of shares outstanding, used
in computing basic earnings per share 24,928 24,637 24,981
Dilutive common stock options 654 - 159
------------ ----------- ------------
Weighted average shares used in computing
diluted earnings per share 25,582 24,637 25,140
============ =========== ============
Basic earnings (loss) per share $0.53 $(0.03) $0.18
Diluted earnings (loss) per share $0.52 $(0.03) $0.17
45
NOTE 11. 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.
2001 Stock Incentive Plan
In September 2001, the Company adopted the 2001 Stock Incentive Plan, ("2001
Plan") which provides for the grant of incentive and non-qualified stock options
for the purchase of up to an aggregate of 1,000,000 shares of common stock to
employees, officers, directors, consultants, and advisors (and any individuals
who have accepted an offer for employment) of the Company. Options under the
2001 Plan expire in ten years from the date of grant and the vesting period may
vary at the board of directors' discretion.
1998 Stock Plan
In February 1998, the Company adopted the 1998 Non-qualified, Non-officer Stock
Option Plan (the "1998 Plan") which provides for the grant of non-qualified
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.
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 3,028,674 shares of common
stock to directors, officers, employees, and consultants to the Company. Options
under the 1995 Plan expire eight years from the date of grant and vest over
ninety days to five years.
Employee Stock Purchase Plans
In September 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(the "Purchase Plan"). Under the Purchase Plan, employees had 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 was lower,
up to specified limits. An aggregate of 600,000 shares could have been issued
under the Purchase Plan. The Purchase Plan terminated in fiscal year 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 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 may be issued under the 2000 Purchase Plan.
Stock Options of Subsidiary
In August 2000, Perceptive Informatics, Inc. ("Perceptive"), a majority owned
subsidiary of the Company, adopted the 2000 Stock Incentive Plan ("the Plan") to
grant rights to purchase up to an aggregate of 3,530,000 shares of Perceptive
common stock. Under the Plan, Perceptive may grant to its employees, officers,
directors, consultants and advisors, options, restricted stock awards, or other
stock-based awards. As of June 30, 2002 and 2001, Perceptive was not publicly
traded and the shares outstanding under this plan were 3,182,927 and 2,689,971,
respectively.
46
Summary Data for PAREXEL Stock Option Plans
Aggregate stock option activities for all plans, excluding Perceptive's Plan,
for the three years ended June 30, 2002 were as follows:
Weighted
Average
Exercise
Options Price
---------------- -----------------
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
Granted 1,400,500 11.17
Exercised (83,297) 6.82
Canceled (381,175) 19.27
----------------
Outstanding at June 30, 2001 3,594,523 15.76
Granted 876,000 13.19
Exercised (130,324) 8.41
Canceled (325,629) $17.79
----------------
Outstanding at June 30, 2002 4,014,570 $15.20
================
Exercisable at June 30, 2002 1,830,609
Available for future grant at June 30, 2002 1,182,121
Summary information related to options outstanding and exercisable as of June
30, 2002 is as follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices June 30, 2002 Life (Years) Price June 30, 2002 Price
- ------------------ -------------------- ---------------------- ------------------ --------------- ---------------
$ 0.00 - $ 3.78 30,548 1.9 $ 0.01 30,548 $ 0.01
$ 3.78 - $ 7.56 83,000 1.7 $ 7.34 83,000 $ 7.34
$ 7.56 - $11.34 1,168,719 5.6 $ 9.57 442,130 $ 9.53
$11.34 - $15.12 1,526,736 7.0 $12.75 186,482 $12.44
$15.12 - $18.91 263,100 3.7 $17.98 215,018 $18.32
$18.91 - $22.69 282,027 4.4 $21.25 249,058 $21.27
$22.69 - $26.47 130,290 3.7 $24.12 130,290 $24.12
$26.47 - $30.25 246,925 3.6 $27.08 235,465 $27.05
$30.25 - $34.03 231,925 2.8 $31.77 209,178 $31.79
$34.03 - $37.81 51,300 3.8 $36.18 49,440 $36.20
-------------------- ---------------
4,014,570 1,830,609
==================== ===============
47
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, 2002: Risk free interest rates of
4.08% fiscal year 2002, 5.52% in fiscal year 2001 and 6.10% in fiscal year 2000;
dividend yield of 0.0% for each year; volatility factor of the expected market
price of the Company's common stock of 64% for fiscal year 2002, 67% for fiscal
year 2001 and 72% for fiscal year 2000; and an average holding period of six
years. During fiscal year 2002, 2001 and 2000, the weighted-average grant-date
fair value of the stock options granted was $8.30, $6.43 and $6.30 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) 2002 2001 2000
---------- ---------- ----------
Pro forma net income (loss) $7,377 $(4,893) $(1,057)
Pro forma net income (loss) per diluted
weighted average share $0.29 $(0.20) $(0.04)
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 $2.6 million, $2.4 million and $2.4 million, for the years ended June
30, 2002, 2001, and 2000, respectively.
NOTE 12. FINANCIAL INSTRUMENTS
As of June 30, 2002 and 2001, the Company entered into forward exchange
contracts to exchange Euro and British Pounds for U.S. dollars. The notional
contract amount of outstanding forward exchange contracts were approximately
$24.0 million and $8.0 million at June 30, 2002 and 2001, respectively.
While it is not the Company's intention to terminate the above derivative
financial instruments, fair values were estimated based on market rates, which
represented the amounts that the Company would receive or pay if the instruments
were terminated at the balance sheet date. The fair values of forward exchange
contracts were approximately $0.4 million at June 30, 2002 and $0.1 million at
June 30, 2001.
At June 30, 2002, maturities of the Company's forward exchange contracts were
one to two months.
NOTE 13. INCOME TAXES
Domestic and foreign income (loss) before income taxes for the three years ended
June 30, were as follows:
($ IN THOUSANDS) 2002 2001 2000
------------ ------------ ------------
Domestic $23,413 $8,119 $16,205
Foreign (479) (7,247) (7,740)
------------ ------------ ------------
$22,934 $872 $8,465
============ ============ ============
48
The provisions for income taxes for the three years ended June 30, were as
follows:
($ IN THOUSANDS) 2002 2001 2000
------------ ------------ ------------
Current:
Federal $8,512 $4,362 $5,389
State 3,060 1,324 2,015
Foreign 2,849 733 1,338
------------ ------------ ------------
14,421 6,419 8,742
------------ ------------ ------------
Deferred:
Federal (4,351) (2,088) (1,087)
State (89) (55) (362)
Foreign (968) (3,033) (3,216)
------------ ------------ ------------
(5,408) (5,176) (4,665)
------------ ------------ ------------
$9,013 $1,243 $4,077
============ ============ ============
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate as set forth below:
($ IN THOUSANDS) 2002 % 2001 % 2000 %
----------- ------- ----------- ------- ----------- -------
Income tax expense computed at the federal
statutory rate $8,027 35.0% $305 35.0% $2,963 35.0%
State income taxes, net of federal benefit 1,989 8.7% 871 100.0% 953 11.3%
Foreign rate differential (344) -1.5% 1,406 161.2% 498 5.9%
Foreign permanent tax adjustments (109) -0.5% 257 29.5% 202 2.4%
U.S. permanent tax adjustments (2,928) -12.8% (130) -14.9% (124) -1.5%
Change in valuation allowances 2,625 11.4% (2,170) -248.9% 207 2.4%
U.S. separate return limitation year loss - - - - (154) -1.8%
Other (247) -1.1% 704 80.6% (468) -5.5%
----------- ------- ----------- ------- ----------- -------
$9,013 39.3% $1,243 142.5% $4,077 48.2%
=========== ======= =========== ======= =========== =======
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries as those earnings have been
permanently reinvested. Such taxes, if any, are not expected to be significant.
49
Significant components of the Company's net deferred tax asset as of June 30,
2002 and 2001 were as follows:
($ IN THOUSANDS) 2002 2001
----------- -----------
Deferred tax assets:
Foreign loss carryforwards $7,838 $7,529
Accrued expenses 21,521 14,162
Allowance for doubtful accounts 736 1,028
Deferred contract profit 12,667 6,836
Other 39 192
----------- -----------
Gross deferred tax assets 42,801 29,747
Deferred tax asset valuation allowance (9,958) (7,333)
----------- -----------
Total deferred tax assets 32,843 22,414
----------- -----------
Deferred tax liabilities:
Property and equipment (8,704) (3,423)
Other (3,102) (4,160)
----------- -----------
Total deferred tax liabilities (11,806) (7,583)
----------- -----------
$21,037 $14,831
=========== ===========
The net deferred tax assets and liabilities included in the consolidated balance
sheets as of June 30, 2002 and 2001 were as follows:
($ IN THOUSANDS) 2002 2001
----------- -----------
Current deferred tax assets $21,642 $13,987
Non-current deferred tax assets 11,201 8,427
Current deferred tax liabilities (2,538) (1,794)
Non-current deferred tax liabilities (9,268) (5,789)
----------- -----------
$21,037 $14,831
=========== ===========
The Company has foreign tax loss carryforwards, tax effected, of approximately
$7.8 million that are 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 future foreign income tax benefits related to income tax
loss carryforwards and temporary tax adjustments based on an assessment that it
is more likely than not that these benefits will not be realized. In fiscal year
2002, the valuation allowance increased by $2.6 million. As of June 30, 2002,
$9.9 million of future tax rate benefit remains. The ultimate realization of
this benefit is dependent upon the generation of sufficient taxable income in
respective jurisdictions.
NOTE 14. LEASE COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases that include renewal
and escalation clauses. Total rent expense was $25.4 million, $23.7 million, and
$20.3 million for fiscal years 2002, 2001 and 2000, respectively. The Company
also leases certain equipment under capital lease. Future minimum lease payments
due under non-cancellable leases are as follows:
($ IN THOUSANDS) 2003 2004 2005 2006 Thereafter Total
----------- ----------- ----------- ----------- ------------ -----------
Operating leases $27,269 $24,961 $23,775 $21,023 $98,054 $195,082
50
NOTE 16. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2002 and 2001, a member of the Company's Board
of Directors was also a director of one of the Company's customers. Revenue
recognized from this customer in fiscal year 2002 and 2001 was $16.0 million and
$25.7, respectively. The accounts receivable balance at June 30, 2002 and 2001
from this customer was $8.6 million and $5.9 million, respectively. Related
party amounts included in accounts receivable were on standard terms and manner
of settlement. During the years ended June 30, 2002 and 2001, certain members of
the Company's Board of Directors were affiliated with certain companies in which
PAREXEL made investments. The total sum of all these investments by PAREXEL was
$0.9 million.
NOTE 17. GEOGRAPHIC AND SEGMENT INFORMATION
Financial information by geographic area for the three years ended June 30, 2002
is as follows:
($ IN THOUSANDS) 2002 2001 2000
---------- ---------- ----------
Service revenue:
Americas $255,450 $228,351 $225,478
United Kingdom 80,295 62,055 65,444
Rest of continental Europe 91,390 83,896 79,695
Asia/Pacific 17,183 13,258 7,533
---------- ---------- ----------
$444,318 $387,560 $378,150
========== ========== ==========
Income (loss) from operations:
Americas $16,071 $3,107 $5,979
United Kingdom 3,511 (10,126) (4,162)
Rest of continental Europe 660 (760) 2,012
Asia/Pacific 251 919 (846)
---------- ---------- ----------
$20,493 $(6,860) $2,983
========== ========== ==========
Identifiable assets:
Americas $246,231 $215,691 $199,762
United Kingdom 86,022 58,948 65,028
Rest of continental Europe 64,888 76,209 81,348
Asia/Pacific 10,020 10,686 5,802
---------- ---------- ----------
$407,161 $361,534 $351,940
========== ========== ==========
The Company is managed through four business segments: CRS, PCG, MMS and
Perceptive. CRS constitutes the Company's core business and includes clinical
trials management and biostatistics and data management, as well as related
medical advisory and investigator site services. PCG provides technical
expertise in such disciplines as clinical pharmacology, regulatory affairs,
industry training, publishing, and management consulting. PCG consultants
identify options and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive provides technology solutions to improve
clients' product development and commercialization processes. Perceptive offers
a portfolio of products and services that include web-based portals, IVRS,
electronic data capture solutions, and medical diagnostics.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographical basis. Accordingly, the
Company does not include selling, general, and administrative expenses,
depreciation and amortization expense, interest income (expense), other income
(expense), and income tax expense in segment profitability. The accounting
policies of the segments are the same as those described in Note 2.
51
($ IN THOUSANDS) CRS PCG MMS PERCEPTIVE* TOTAL
--------- -------- ------- ------------ ----------
Service revenue:
2002 $261,727 $97,775 $64,829 $19,987 $444,318
2001 $240,501 $80,796 $54,277 $11,986 $387,560
2000 $262,698 $66,525 $48,927 - $378,150
Gross profit on service revenue:
2002 $86,607 $26,309 $21,365 $4,114 $138,395
2001 $75,164 $17,185 $16,930 $ 521 $109,800
2000 $89,154 $14,562 $13,549 - $117,265
* The Company began reporting Perceptive as a fourth business segment in the
first quarter of fiscal year 2001. Perceptive was reported as part of CRS in
fiscal year 2000 and information is not available to break out Perceptive from
CRS in fiscal year 2000.
52
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of PAREXEL International Corporation:
We have audited the accompanying consolidated balance sheet of PAREXEL
International Corporation and its subsidiaries as of June 30, 2002 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. 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. The financial statements of
PAREXEL International Corporation as of June 30, 2001 and 2000 were audited by
other auditors whose report dated August 14, 2001 expressed an unqualified
opinion on those statements, prior to the reclassifications made to those
financial statements related to the adoption of EITF 01-14, as described in Note
2.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PAREXEL
International Corporation and its subsidiaries at June 30, 2002, and the
consolidated results of its operations, stockholders' equity and cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States. We also audited the reclassifications described in Note 2
that were applied to restate the 2001 and 2000 financials statements. In our
opinion such reclassifications are appropriate and have been properly applied.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 financial statements of the Company other than with respect to
such reclassifications, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 financial statements taken as a whole.
Ernst & Young LLP
Boston, Massachusetts
August 15, 2002
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PAREXEL International Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of PAREXEL
International Corporation and its subsidiaries at June 30, 2001, and the results
of their operations and their cash flows for each of the two years in the period
ended June 30, 2001, prior to the revisions related to the adoption of EITF
01-14, further described in Note 2, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(A)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. 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 of
America, 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 our opinion.
PricewaterhouseCoopers LLP
Boston, MA
August 14, 2001
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item may be found under the captions "Elections
of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the Company's 2002 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found under the captions
"Directors' Compensation," "Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," "Employment Agreements," "Stock
Performance Graph" and "Compensation Committee and Stock Option Committee Report
on Executive Compensation" in the Proxy Statement for the Company's 2002 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to this item may be found under the caption "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Proxy Statement for the Company's 2002 Annual Meeting
of Stockholders. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found under the captions "Certain
Relationships and Related Transactions" in the Proxy Statement for the Company's
2002 Annual Meeting of Stockholders. Such information is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS. The following financial statements and
supplementary data are included in Item 8 of this report.
FINANCIAL STATEMENTS FORM 10-K PAGE
-------------------- --------------
Report of Independent Auditors for the year ended
June 30, 2002 53
Report of Independent Accountants for the years ended
June 30, 2001 and 2000 54
Consolidated Statements of Operations for each of the
three years ended June 30, 2002, 2001, and 2000 34
Consolidated Balance Sheets at June 30, 2002 and 2001 35
Consolidated Statements of Stockholders' Equity for
each of the three years ended June 30, 2002, 2001, and 2000 36
Consolidated Statements of Cash Flows for each of the
three years ended June 30, 2002, 2001, and 2000 37-38
Notes to Consolidated Financial Statements 39-52
(2) FINANCIAL STATEMENT SCHEDULES:
For the three years ended June 30, 2002:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or Notes thereto.
(3) EXHIBITS. The list of Exhibits filed as a part of this Annual Report on
Form 10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(B) Reports on Form 8-K: The Company filed Current Report on Form 8-K on June
25, 2002 reporting a change in the Company's certified public accountant.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PAREXEL INTERNATIONAL CORPORATION
By: /s/ Josef H. Von Rickenbach Dated: September 26, 2002
- -----------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title(s) Date
/s/ Josef H. Von Rickenbach
- -------------------------------
Josef H. von Rickenbach Chairman of the Board and Chief September 26, 2002
Executive Officer (principal executive
officer)
/s/ James F. Winschel, Jr.
- -------------------------------
James F. Winschel, Jr. Senior Vice President and Chief September 26, 2002
Financial Officer (principal financial and
accounting officer)
/s/ A. Dana Callow, Jr.
- -------------------------------
A. Dana Callow, Jr. Director September 26, 2002
/s/ A. Joseph Eagle
- -------------------------------
A. Joseph Eagle Director September 26, 2002
/s/ Patrick J. Fortune
- -------------------------------
Patrick J. Fortune Director September 26, 2002
/s/ Richard L. Love
- -------------------------------
Richard L. Love Director September 26, 2002
/s/ Serge Okun
- -------------------------------
Serge Okun Director September 26, 2002
/s/ William U. Parfet
- -------------------------------
William U. Parfet Director September 26, 2002
57
CERTIFICATIONS
I, Josef H. von Rickenbach, certify that:
1. I have reviewed this annual report on Form 10-K of PAREXEL
International Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 26, 2002
/s/ Josef H. von Rickenbach
--------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
I, James F. Winschel, Jr , certify that:
1. I have reviewed this annual report on Form 10-K of PAREXEL
International Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 26, 2002
/s/ James F. Winschel, Jr.
--------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
(principal financial officer)
58
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Articles of Organization of the Company,
as amended (filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996
and incorporated herein by this reference).
3.2 Amended and Restated By-laws of the Company (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended June 30, 2001 and incorporated herein by this
reference).
4.1 Specimen certificate representing the Common Stock of the
Company (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 33-97406) and incorporated
herein by this reference).
10.1* Form of Stock Option Agreement of the Company (filed as
Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (File No. 333-1188) and incorporated herein by
reference).
10.2* 1986 Incentive Stock Option Plan of the Company (filed as
Exhibit 10.10 to the Company's Registration Statement on Form
S-1 (File No. 33-97406) and incorporated herein by this
reference).
10.3* 1987 Stock Plan of the Company (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
33-97406) and incorporated herein by this reference).
10.4* 1989 Stock Plan of the Company (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No.
33-97406) and incorporated herein by this reference).
10.5* Second Amended and Restated 1995 Stock Plan of the Company
(filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended June 30, 1998 and incorporated herein
by this reference).
10.6* 1995 Non-Employee Director Stock Option Plan of the Company
(filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File No. 33-97406) and incorporated
herein by this reference).
10.7* Corporate Plan for Retirement of the Company (filed as
Exhibit 10.16 to the Company's Registration Statement on Form
S-1 (File No. 33-97406) and incorporated herein by this
reference).
10.8 First Amendment dated as of January 3, 1992 to the Lease
dated June 14, 1991 between 200 West Street Limited
Partnership and the Company (filed as Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (File No.
33-97406) and incorporated herein by this reference).
10.9 Second Amendment dated as of June 28, 1993 to the Lease dated
June 14, 1991 between 200 West Street Limited Partnership and
the Company (filed as Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (File No. 33-97406) and
incorporated herein by this reference).
59
10.10* 1998 Non-Qualified, Non-Officer Stock Option Plan, as amended
(filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 and incorporated
herein by this reference).
10.11* Amended and Restated Employment Agreement dated December 6,
1999 between Josef H. von Rickenbach and the Company (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 and incorporated
herein by this reference).
10.12 Third Amendment to Lease dated November 17, 1998 between
Boston Properties Limited Partnership and the Company (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998 and incorporated
herein by this reference).
10.13 Lease dated November 17, 1998 between Boston Properties
Limited Partnership and the Company (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998 and incorporated herein by this
reference).
10.14 Lease dated June 14, 1991 between 200 West Street Limited
Partnership and the Company (filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.15.1* Employment Agreement dated August 30, 1996 between Ulf
Schneider and PAREXEL GmbH (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.15.2* Amendment to Employment Agreement, dated November 22, 1999,
between Ulf Schneider and PAREXEL GmbH (filed as Exhibit
10.19.2 to the Company's Annual Report on Form 10-K for the
year ended ended June 30, 2001 and incorporated herein by
this reference).
10.15.3* Amendment to Employment Agreement, dated June 21, 2000
between Ulf Schneider and PAREXEL GmbH (filed as Exhibit
10.19.3 to the Company's Annual Report on Form 10-K for the
year ended ended June 30, 2001 and incorporated herein by
this reference).
10.16 Fourth Amendment dated August 28, 2000 to the lease dated
November 17, 1998 between Boston Properties Limited
Partnership and the Company (filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.17* Change of Control/Severance Agreement, dated as of April 9,
2001, by and between the Company and Carl A. Spalding (filed
as Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 2001 and incorporated herein by
this reference).
10.18* Change of Control/Severance Agreement, date as of April 3,
2001, by and between the Company and James F. Winschel, Jr.
(filed as Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the year ended June 30, 2001 and incorporated
herein by this reference)
60
10.19* Change of Control/Severance Agreement, dated as of April 3,
2001, by and between the Company and Mark T. Beaudouin.
10.20* 1998 Non-Qualified, Non-Officer Stock Option Plan (filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (File No. 333-47033) and incorporated herein by this
reference).
10.21* PAREXEL International Nonqualified Deferred Compensation Plan
21.1 List of subsidiaries of the Company .
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
* denotes management contract or any compensatory plan, contract or arrangement.
61
Schedule II
PAREXEL INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($ in thousands)
Balance at Charged to Balance at
beginning costs and Deductions end of
of year expenses and write-offs year
---------------- -------------- --------------- ----------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended June 30, 2000 $5,127 $ 607 $(2,034) $3,700
Year ended June 30, 2001 3,700 1,117 (242) 4,575
Year ended June 30, 2002 4,575 961 (914) 4,622
62