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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 5, 2002, there
were 25,175,358 shares of PAREXEL International Corporation common stock
outstanding, excluding 861,000 shares in treasury.
1
PAREXEL INTERNATIONAL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - September 3
30, 2002 and June 30, 2002
Condensed Consolidated Statements of Operations - 4
Three months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows - 5
Three months ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial 6
Statements
Item 2 Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosure About 14
Market Risk
Item 4 Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, JUNE 30,
2002 2002
------------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 33,748 $ 22,479
Marketable securities 35,363 43,630
Billed and unbilled accounts receivable, net 223,787 224,713
Prepaid expenses 8,269 8,688
Current deferred tax assets 21,275 21,642
Other current assets 5,366 6,388
--------- ---------
Total current assets 327,808 327,540
Property and equipment, net 49,402 47,624
Goodwill and other intangible assets, net 15,073 14,763
Non-current deferred tax assets 11,201 11,201
Other assets 6,047 6,033
--------- ---------
Total assets $ 409,531 $ 407,161
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term
debt $ 134 $ 422
Accounts payable 10,538 11,858
Deferred revenue 118,513 114,723
Accrued expenses 14,082 15,814
Accrued employee benefits and withholdings 34,713 31,713
Current deferred tax liabilities 2,538 2,538
Income taxes payable 3,543 7,361
Other current liabilities 3,643 5,091
--------- ---------
Total current liabilities 187,704 189,520
Long-term debt 675 432
Non-current deferred tax liabilities 9,206 9,268
Other liabilities 4,894 5,087
--------- ---------
Total liabilities 202,479 204,307
--------- ---------
Minority interest in subsidiary 2,894 2,777
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 September 30, 2002 and
June 30, 2002; shares issued: 26,036,356 at
September 30, 2002 and 26,033,806 at
June 30, 2002; shares outstanding:
25,175,356 at September 30, 2002 and
25,172,806 at June 30, 2002 261 261
Additional paid-in capital 167,848 167,829
Treasury stock, at cost; 861,000 shares at
September 30, 2002 and June 30, 2002 (8,165) (8,165)
Retained earnings 55,718 52,455
Accumulated other comprehensive loss (11,504) (12,303)
--------- ---------
Total stockholders' equity 204,158 200,077
--------- ---------
Total liabilities and stockholders' equity $ 409,531 $ 407,161
========= =========
See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
--------- ---------
Service revenue $ 119,353 $ 101,840
Reimbursement revenue 26,833 26,155
--------- ---------
Total revenue 146,186 127,995
Costs and expenses:
Direct costs 80,944 71,895
Reimbursable out-of-pocket expenses 26,833 26,155
Selling, general and administrative expenses 26,600 22,910
Depreciation and amortization 4,806 4,518
--------- ---------
Total costs 139,183 125,478
--------- ---------
Income from operations 7,003 2,517
Other income (expense) (1,103) 1,550
--------- ---------
Income before provision for income taxes and
minority interest 5,900 4,067
Provision for income taxes 2,478 1,549
Minority interest 159 62
--------- ---------
Net income $ 3,263 $ 2,456
========= =========
Earnings per share:
Basic and diluted $ 0.13 $ 0.10
Shares used in computing earnings per share:
Basic 25,173 24,797
Diluted 25,315 25,451
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,263 $ 2,456
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 4,806 4,518
Changes in operating assets/liabilities 1,290 (3,328)
------- --------
Net cash provided by operating activities 9,359 3,646
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (60,714) (93,988)
Proceeds from sale of marketable securities 68,952 85,780
Acquisition of business (497) (1,505)
Proceeds from sale of fixed assets 31 1,451
Purchase of property and equipment (6,552) (4,459)
------- --------
Net cash provided by (used) in investing activities 1,220 (12,721)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 19 420
Borrowings and (repayments) under credit arrangements (44) 364
------- --------
Net cash provided by (used) in financing activities (25) 784
------- --------
Effect of exchange rate changes on cash and cash equivalents 715 1,635
------- --------
Net increase (decrease) in cash for the period 11,269 (6,656)
Cash and cash equivalents at beginning of period 22,479 57,590
------- --------
Cash and cash equivalents at end of period $33,748 $ 50,934
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Taxes $ 6,055 $ 3,542
Interest $ 645 $ 4
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 497 $ 2,640
Liabilities and minority interest assumed -- (1,135)
------- --------
Cash paid for acquisition $ 497 $ 1,505
======= ========
See notes to condensed consolidated financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions of Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(primarily consisting of normal recurring adjustments) considered necessary for
a fair presentation have been included. Operating results for the three months
ended September 30, 2002, are not necessarily indicative of the results that may
be expected for other quarters or the entire fiscal year. Certain prior year
balances have been reclassified in order to conform to current year
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 2002.
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 Condensed 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 clients on a "pass through basis", without
risk or reward to the Company. The amounts of these investigator fees were $18.1
million and $14.5 million for the three months ended September 30, 2002 and
2001, respectively.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 2.7 million and 1.3 million outstanding stock options were
excluded from the calculation of diluted earnings per share for the three months
ended September 30, 2002 and 2001, respectively because they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
------- -------
Net income attributable to common shares $ 3,263 $ 2,456
======= =======
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 25,173 24,797
======= =======
Basic earnings per common share $ 0.13 $ 0.10
======= =======
DILUTED EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 25,173 24,797
Shares attributable to common stock options 142 654
------- -------
25,315 25,451
======= =======
Diluted earnings per common share $ 0.13 $ 0.10
======= =======
6
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income (loss) has been calculated by the Company in accordance
with Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income, which is comprised primarily of net income and foreign
currency translation adjustments, totaled $4.1 million and $6.2 million for the
three months ended September 30, 2002 and 2001, respectively.
NOTE 4 - SEGMENT INFORMATION
The Company is managed through four business segments: Clinical Research
Services ("CRS"), the PAREXEL Consulting Group ("PCG"), Medical Marketing
Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS
constitutes the Company's core business and includes clinical trials management,
biostatistics and data management, as well as related medical advisory and
investigator site services. PCG provides technical expertise in such disciplines
as clinical pharmacology, regulatory affairs, industry training, publishing, and
management consulting. PCG consultants identify options and propose solutions to
address clients' product development, registration, and commercialization
issues. MMS provides a full spectrum of market development, product development,
and targeted communications services in support of product launch. Perceptive
provides technology solutions to improve clients' product development and
commercialization processes. Perceptive offers a portfolio of products and
services that include web-based portals, IVRS, electronic data capture
solutions, and medical diagnostics.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include selling, general, and administrative expenses;
depreciation and amortization expense; other income (expense); or income taxes
in segment profitability.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
($ IN THOUSANDS) 2002 2001
-------- --------
Service revenue:
Clinical Research Services $ 71,897 $ 60,778
PAREXEL Consulting Group 24,790 21,703
Medical Marketing Services 17,082 15,111
Perceptive Informatics, Inc. 5,584 4,248
-------- --------
$119,353 $101,840
======== ========
Gross profit on service revenue:
Clinical Research Services $ 23,959 $ 19,226
PAREXEL Consulting Group 6,957 5,190
Medical Marketing Services 5,804 4,817
Perceptive Informatics, Inc. 1,689 712
-------- --------
$ 38,409 $ 29,945
======== ========
NOTE 5 - RESTRUCTURING CHARGES
During the three months ended September 30, 2002, the Company did not record any
new restructuring provisions.
Current quarter activity charged against the restructuring accrual (which is
included in "Other current liabilities" in the Condensed Consolidated Balance
Sheet) was as follows:
BALANCE AS OF
BALANCE AS OF 1ST QUARTER SEPTEMBER 30,
($ IN THOUSANDS) JUNE 30, 2002 PAYMENTS 2002
------------- ----------- -------------
Employee severance costs $ 1,176 $ (310) $ 866
Facilities related charges 2,125 (749) 1,376
------- ------- -------
$ 3,301 $(1,059) $ 2,242
======= ======= =======
7
NOTE 6 - STOCK REPURCHASE PROGRAM
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20 million of the Company's common stock.
Repurchases made in the open market are subject to market conditions. As of
September 30, 2002, the Company has repurchased $8.2 million of the Company's
common stock under the program, but there were no repurchases during the three
months ended September 30, 2002.
NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the 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 third quarter ending March 31, 2003. The adoption of
SFAS 146 is not expected to have a material impact on the Company's financial
position or results of its operations.
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. SFAS 144 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 8 - SUBSEQUENT EVENT
On November 1, 2002, the Company acquired the assets of PRACON & HEALTHIQ, a
provider of specialized sales and marketing services based in Reston, Virginia
and Orange, California for approximately $2.0 million. Purchase price allocation
is subject to finalization.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information discussed below is derived from the Condensed
Consolidated Financial Statements included herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation of such information. The Company's
results of operations for a particular quarter may not be indicative of results
expected during subsequent fiscal quarters or for the entire year.
The statements included in this quarterly report on Form 10-Q, 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 in greater detail under "RISK FACTORS" below and elsewhere in this
quarterly report.
The forward-looking statements included in this quarterly report represent the
Company's estimates as of the date of this quarterly 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 quarterly report.
8
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, interactive
voice response systems ("IVRS"), electronic data capture solutions, and medical
diagnostics.
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.
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 Condensed 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 clients on a "pass through basis", without
risk or reward to the Company. The amounts of these investigator fees were $18.1
million and $14.5 million for the three months ended September 30, 2002 and
2001, respectively.
Direct Costs primarily consist of compensation and related fringe benefits for
project-related employees, other project-related costs not reimbursed by
clients, and allocated costs related to facilities and information systems.
Selling, General and Administrative expenses consist principally of compensation
and related fringe benefits for selling and administrative employees,
professional services, advertising costs, and certain costs related to
facilities and information systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
9
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 or units delivered to-date bear to the
estimated total costs or units delivered at completion, as estimated by 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 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.
INCOME TAXES
The Company's global provision for corporate income taxes is calculated using
the tax accounting rules established by 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. Changes in the distribution of profits and losses between taxing
jurisdictions may have a significant impact on the Company's effective tax rate.
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, no compensation expense is recognized because the
exercise price equals the market price of the underlying stock on the date of
the grant. If PAREXEL accounted for stock options under SFAS 123, the Company
would have recorded additional compensation expense for stock option grants to
employees. If the Company were unable 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. The additional
compensation expense could vary significantly from period to period based on
several factors including the number of stock options granted and stock price
and/or interest rate fluctuations.
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. As a result, factors associated with international operations,
including changes in foreign currency exchange rates, could significantly affect
the Company's results of
10
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 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 its 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.
RESULTS OF OPERATIONS
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 geographic basis. Accordingly, the
Company does not include the impact of selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income taxes in segment profitability. Service revenue, direct costs and gross
profit on service revenue for the three months ended September 30, 2002 and 2001
were as follows:
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
------------------------
($ IN THOUSANDS) 2002 2001 INCREASE %
-------- -------- -------- --------
Service revenue:
CRS $ 71,897 $ 60,778 $ 11,119 18.3%
PCG 24,790 21,703 3,087 14.2%
MMS 17,082 15,111 1,971 13.0%
Perceptive 5,584 4,248 1,336 31.5%
-------- -------- --------
$119,353 $101,840 $ 17,513 17.2%
======== ======== ========
Direct costs:
CRS $ 47,938 $ 41,552 $ 6,386 15.4%
PCG 17,833 16,513 1,320 8.0%
MMS 11,278 10,294 984 9.6%
Perceptive 3,895 3,536 359 10.2%
-------- -------- --------
$ 80,944 $ 71,895 $ 9,049 12.6%
======== ======== ========
Gross profit on
service revenue:
CRS $ 23,959 $ 19,226 $ 4,733 24.6%
PCG 6,957 5,190 1,767 34.0%
MMS 5,804 4,817 987 20.5%
Perceptive 1,689 712 977 137.2%
-------- -------- --------
$ 38,409 $ 29,945 $ 8,464 28.3%
======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001:
Service revenue increased by $17.5 million, or 17.2%, to $119.4 million for the
three months ended September 30, 2002 from $101.8 million for the same period
one year ago. Excluding foreign exchange fluctuations, current quarter service
revenue would have been $115.0 million, a year-over-year increase of 13.0%. On a
geographic basis, service revenue for the three months ended September 30, 2002
was distributed as follows: The Americas
11
$64.7 million (54.2%), Europe $49.9 million (41.8%), and Asia/Pacific $4.8
million (4.0%). For the three months ended September 30, 2001, service revenue
was distributed as follows: The Americas $57.7 million (56.7%), Europe $40.0
million (39.3%), and Asia/Pacific $4.1 million (4.0%). On a segment basis, CRS
service revenue increased by $11.1 million, or 18.3%, to $71.9 million in the
three months ended September 30, 2002 from $60.8 million in the same period in
fiscal year 2002. Excluding the impact of foreign currency fluctuations, CRS
service revenue increased by 13.9% primarily due to higher business volume in
the biotech client sector and in the late stage phases of the clinical trials
business. PCG service revenue increased by $3.1 million, or 14.2%, to $24.8
million for the three months ended September 30, 2002 from $21.7 million in the
three months ended September 30, 2001. Excluding foreign currency fluctuations,
PCG service revenue increased by 10.0% primarily due to increased demand in the
group's regulatory consulting and clinical pharmacology businesses. MMS service
revenue increased by $2.0 million, or 13.0%, to $17.1 million in the three
months ended September 30, 2002 from $15.1 million in the same period in fiscal
year 2002. Excluding foreign currency fluctuations, MMS service revenue
increased by 8.3% primarily due to an increase in the number of projects
serviced by the business. Perceptive service revenue increased by $1.3 million,
or 31.5%, to $5.6 million in the three months ended September 30, 2002 as
compared with $4.2 million in the same period one year ago primarily due to the
growth in the web, voice and data products, and medical diagnostics 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 $9.0 million, or 12.6%, to $80.9 million for the three
months ended September 30, 2002 from $71.9 million in the same period last
fiscal year. On a segment basis, CRS direct costs increased $6.4 million, or
15.4%, to $47.9 million for the three months ended September 30, 2002 from $41.6
million in the same three-month period in fiscal year 2002. The increase was
driven primarily by foreign exchange fluctuations and higher labor costs
associated with business growth. As a percentage of service revenue, CRS direct
costs improved by 1.7 percentage points primarily due to improved operational
labor efficiencies, especially in Europe. PCG direct costs increased $1.3
million, or 8.0%, to $17.8 million in the three months ended September 30, 2002
from $16.5 million in the same period one year ago. The increase was caused
principally by foreign exchange fluctuations and higher employee-related
expenses associated with increased business volume. As a percentage of service
revenue, PCG direct costs improved by 4.1 percentage points primarily due to
improved direct cost efficiency and a more profitable business mix. MMS direct
costs increased $1.0 million, or 9.6%, to $11.3 million in the three months
ended September 30, 2002 from $10.3 million for the three months ended September
30, 2001. The higher cost levels can be attributed to foreign exchange
fluctuations and increased labor costs associated with higher business volume.
As a percentage of service revenue, MMS direct costs improved by 2.1 percentage
points as a result of improved labor cost leveraging and better control of
employee-related expenses. Perceptive direct costs increased $0.4 million, or
10.2%, to $3.9 million in the three months ended September 30, 2002 from $3.5
million in the same period in the last fiscal year primarily due to increased
labor costs associated with revenue growth. As a percentage of service revenue,
Perceptive's direct costs improved by 13.5 percentage points primarily due to a
more favorable business mix, as well as ongoing productivity improvements.
Selling, general and administrative ("SG&A") expenses increased by $3.7 million,
or 16.1%, to $26.6 million for the three months ended September 30, 2002 from
$22.9 million in the same period in the last fiscal year. Of the total increase,
approximately 4.2% was caused by foreign currency fluctuations with the
remaining increase primarily due to increased labor costs and facility-related
costs associated with business growth. As a percentage of service revenue, SG&A
remained relatively flat at 22.3% in the three-month period ended September 30,
2002 and 22.5% in the same period one year ago.
Depreciation and amortization ("D&A") expense increased by $0.3 million, or
6.4%, to $4.8 million for the three months ended September 30, 2002 from $4.5
million for the same period last fiscal year primarily as a result of foreign
currency fluctuations. As a percentage of service revenue, D&A decreased to 4.0%
for the three months ended September 30, 2002 from 4.4% in the same period last
fiscal year driven by the substantial increase in revenue.
Income from operations increased $4.5 million, or 178.2%, to $7.0 million for
the three months ended September 30, 2002 from $2.5 million in the same period
one year ago primarily due to the reasons noted in the preceding paragraphs.
Income from operations increased as a percentage of service revenue to 5.9% for
the three months ended September 30, 2002 from 2.5% for the same period in the
last fiscal year.
Total other income/(loss) decreased $2.7 million to a loss of $1.1 million in
the three months ended September 30, 2002 from $1.6 million of income in the
three months ended September 30, 2001. The decrease was primarily due
12
to an increase in foreign exchange losses in the first quarter of fiscal year
2003, partly offset by not having a current year counterpart to last year's $0.9
million gain on a sale of a facility.
The Company had an effective income tax rate of 42.0% for the three months ended
September 30, 2002 and 38.1% for the three months ended September 30, 2001. The
increase was primarily due to unfavorable changes in the mix of taxable income
and losses in the different jurisdictions where the Company operates. Any future
unfavorable changes in the mix of taxable income in the different jurisdictions
could materially impact the Company's effective tax rate and its consolidated
financial results of operations.
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 59 days at September 30, 2002 compared with 67 days at
September 30, 2001. The decrease in DSO in the three months ended September 30,
2002 as compared with the three months ended September 30, 2001 was primarily
due to improved billing practices and increased collection activities. Accounts
receivable, net of the allowance for doubtful accounts was $223.8 million
($132.4 million in billed accounts receivable and $91.4 million in unbilled
accounts receivable) at September 30, 2002 and $202.8 million ($107.3 million in
billed accounts receivable and $95.5 million in unbilled accounts receivable) at
September 30, 2001. Deferred revenue was $118.5 million at September 30, 2002
and $98.9 million at September 30, 2001. The $19.6 million increase in deferred
revenue was directly attributable to advance payments in conjunction with new
business wins. 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
the sum of total revenue plus investigator fees billed 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 September 30, 2002, the Company had approximately
$10.0 million available under these credit arrangements.
Net cash provided by operating activities for the three months ended September
30, 2002 totaled $9.4 million and was generated from $3.3 million of net income,
$4.8 million related to depreciation and amortization expense, a $4.8 million
decrease in accounts receivable (net of the allowance for doubtful accounts and
deferred revenue), a $1.4 million decrease in prepaids and other current assets,
and a $0.4 million decrease in deferred taxes and other assets, partially offset
by $4.0 million decrease in other current liabilities and a $1.3 million
decrease in accounts payable. For the three months ended September 30, 2001, net
cash provided by operating activities was $3.6 million and was generated from
$2.5 million of net income, $4.5 million for depreciation and amortization, and
a $9.4 million decrease in accounts receivable (net of the allowance for
doubtful accounts and deferred revenue), partially offset by an $11.1 million
decrease in accounts payable, a $0.9 million gain on the sale of a building, and
an $0.8 million decrease in other net liabilities.
Net cash provided by investing activities for the three months ended September
30, 2002 totaled $1.2 million and consisted of $8.2 million of net proceeds from
the sale of marketable securities, offset by $6.5 million used in equipment
purchases and $0.5 million used for a business acquisition. Net cash used in
investing activities for the three months ended September 30, 2001 totaled $12.7
million and consisted of $8.2 million related to net purchases of marketable
securities, $4.5 million used for equipment purchases, and $1.5 million for the
acquisition of EDYABE, offset by $1.5 million in proceeds from the sale of a
building.
13
Net cash used in financing activities for the three months ended September 30,
2002 was de minimis. Net cash provided by financing activities totaled $0.8
million for the three months ended September 30, 2001 and consisted of $0.4
million in proceeds from the issuance of common stock associated with the
Company's stock option plans and $0.4 million in net borrowings under credit
arrangements.
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company'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 would be
adversely affected (see "Risk Factors" 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 2002, the FASB issued SFAS 146, "Costs Associated with Exit or Disposal
Activities". 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 third quarter ending March 31, 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 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. SFAS 144 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 46% and 44% of its service revenue for the
three-month periods ended September 30, 2002 and 2001, respectively, from
operations outside of the United States. The Company does not have significant
operations in countries in which the economy is considered to be highly
inflationary. The Company's financial statements are denominated in U.S.
dollars, and accordingly, changes in the exchange rate between foreign
currencies and the U.S. dollar will affect the translation of such subsidiaries'
financial results into U.S. dollars for purposes of reporting the Company's
consolidated financial results.
The Company may be 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
14
fluctuations in the relative values of the contract currency and the currency in
which the expenses are incurred. For the three months ended September 30, 2002
and 2001, the Company recorded foreign exchange loss of $1.1 million and $0.3
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 and currency option transactions
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.
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business,
including forward-looking statements made in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other forward-looking statements that the Company may make from
time to time. If any of the following risks occur, our business, financial
condition, or results of operations could be materially adversely affected.
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 the Food and Drug Administration ("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;
15
- 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 contract research organization ("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.
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 good clinical
practice ("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.
16
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.
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 the Health Insurance Portability and Accountability
Act of 1996 ("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
17
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 the three months ended September 30, 2002, the Company's five largest clients
accounted for 35% of its consolidated service revenue, and one client accounted
for 11% of consolidated service revenue. In the three months ended September 30,
2001, the Company's five largest clients accounted for 36% of its consolidated
service revenue, and one client accounted for 11% 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.
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.
18
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.
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.
19
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 46% of
its total service revenue for the three months ended September 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.
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 46% of the Company's service revenue for the three months ended
September 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.
20
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.
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 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, the Company's principal executive officers and principal financial
officer have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index on the page immediately preceding the exhibits for a
list of exhibits filed as part of this quarterly report, which Exhibit Index is
incorporated by this reference.
(b) The Company did not file any Current Report on Form 8-K with the Securities
and Exchange Commission during the Quarter ended September 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 14th day of November 2002.
PAREXEL International Corporation
Date: November 14, 2002 By: /s/ Josef H. von Rickenbach
------------------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
Date: November 14, 2002 By: /s/ James F. Winschel, Jr.
------------------------------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief Financial Officer
22
CERTIFICATION
I, Josef H. von Rickenbach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAREXEL
INTERNATIONAL CORPORATION;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Josef H. von Rickenbach
--------------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
(principal executive officer)
23
CERTIFICATION
I, James F. Winschel, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of PAREXEL
INTERNATIONAL CORPORATION;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ James F. Winschel, Jr.
-------------------------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief Financial Officer
(principal financial officer)
24
EXHIBIT INDEX
Exhibit Number Description
99.1 Chairman of the Board and Chief Executive Officer -
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Senior Vice President and Chief Financial Officer -
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
25