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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 DECEMBER 31, 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 Identification
incorporation or organization) 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 [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 February 7, 2003, there
were 25,369,713 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 - December 31, 2002 and June 30, 3
2002
Condensed Consolidated Statements of Operations - Three months 4
ended December 31, 2002 and 2001; Six months ended December 31,
2002 and 2001
Condensed Consolidated Statements of Cash Flows - Six months ended 5
December 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results 9
of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 17
Item 4 Controls and Procedures 24
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27
2
PART I. FINANCIAL INFORMATION PAREXEL INTERNATIONAL CORPORATION
ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, JUNE 30,
2002 2002
------------ ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 46,219 $ 22,479
Marketable securities 33,856 43,630
Billed and unbilled accounts receivable, net 233,016 224,713
Prepaid expenses 8,112 8,688
Current deferred tax assets 21,348 21,642
Other current assets 4,582 6,388
---------- ----------
Total current assets 347,133 327,540
Property and equipment, net 52,051 47,624
Goodwill and other intangible assets, net 19,438 14,763
Non-current deferred tax assets 11,201 11,201
Other assets 6,685 6,033
---------- ----------
Total assets $ 436,508 $ 407,161
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 137 $ 422
Accounts payable 10,561 11,858
Deferred revenue 141,392 114,723
Accrued expenses 18,453 15,814
Accrued employee benefits and withholdings 27,422 31,713
Current deferred tax liabilities 2,538 2,538
Income taxes payable 917 7,361
Other current liabilities 5,243 5,091
---------- ----------
Total current liabilities 206,663 189,520
Long-term debt 660 432
Non-current deferred tax liabilities 9,206 9,268
Other liabilities 5,902 5,087
---------- ----------
Total liabilities 222,431 204,307
---------- ----------
Minority interest in subsidiary 3,409 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 December 31, 2002 and June 30, 2002; shares
issued: 26,220,506 at December 31, 2002 and
26,033,806 at June 30, 2002; shares outstanding:
25,359,506 at December 31, 2002 and 25,172,806 at
June 30, 2002 262 261
Additional paid-in capital 169,409 167,829
Treasury stock, at cost; 861,000 shares at December 31, 2002
and June 30, 2002 (8,165) (8,165)
Retained earnings 55,834 52,455
Accumulated other comprehensive loss (6,672) (12,303)
---------- ----------
Total stockholders' equity 210,668 200,077
---------- ----------
Total liabilities and stockholders' equity $ 436,508 $ 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 FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Service revenue $ 122,348 $ 106,874 $ 241,701 $ 208,714
Reimbursement revenue 27,061 22,803 53,894 48,958
---------- ---------- ---------- ----------
Total revenue 149,409 129,677 295,595 257,672
Costs and expenses:
Direct costs 81,542 73,725 162,486 145,620
Reimbursable out-of-pocket expenses 27,061 22,803 53,894 48,958
Selling, general and administrative expenses 28,145 24,520 54,745 47,430
Depreciation and amortization 5,042 4,428 9,848 8,946
Restructuring charge 5,886 - 5,886 -
---------- ---------- ---------- ----------
Total costs 147,676 125,476 286,859 250,954
---------- ---------- ---------- ----------
Income from operations 1,733 4,201 8,736 6,718
Other income (expense) (1,279) 1,491 (2,382) 3,041
---------- ---------- ---------- ----------
Income before provision for income taxes and 454 5,692 6,354 9,759
minority interest
Provision for income taxes 182 2,183 2,660 3,732
Minority interest 130 441 289 503
---------- ---------- ---------- ----------
Net income $ 142 $ 3,068 $ 3,405 $ 5,524
========== ========== ========== ==========
Earnings per share:
Basic $ 0.01 $ 0.12 $ 0.14 $ 0.22
Diluted $ 0.01 $ 0.12 $ 0.13 $ 0.22
Shares used in computing earnings per share:
Basic 25,242 24,861 25,137 24,761
Diluted 25,485 25,478 25,343 25,400
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,405 $ 5,524
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 9,847 8,946
Changes in operating assets/liabilities 9,610 1,132
---------- ----------
Net cash provided by operating activities 22,862 15,602
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (114,735) (129,268)
Proceeds from sale of marketable securities 124,446 105,920
Acquisition of business (2,153) (1,505)
Proceeds from sale of fixed assets 415 1,481
Purchase of property and equipment (13,211) (9,958)
---------- ----------
Net cash used in investing activities (5,238) (33,330)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,581 1,533
Borrowings and (repayments) under credit arrangements (56) 285
---------- ----------
Net cash provided by financing activities 1,525 1,818
---------- ----------
Effect of exchange rate changes on cash and cash equivalents 4,591 439
---------- ----------
Net increase (decrease) in cash for the period 23,740 (15,471)
Cash and cash equivalents at beginning of period 22,479 57,590
---------- ----------
Cash and cash equivalents at end of period $ 46,219 $ 42,119
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Taxes $ 9,587 $ 8,730
Interest $ 1,407 $ 268
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 2,620 $ 2,640
Liabilities assumed (467) (1,135)
---------- ----------
Cash paid for acquisition $ 2,153 $ 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 six months
ended December 31, 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 $20.7
million and $24.3 million for the three months ended December 31, 2002 and 2001,
respectively, and $38.8 million for both the six-month periods ended December
31, 2002 and 2001.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 2.3 million and 1.4 million outstanding stock options were
excluded from the calculation of diluted earnings per share for the three months
ended December 31, 2002 and 2001, respectively, and approximately 2.6 million
and 1.4 million outstanding stock options were excluded from the calculation of
diluted earnings per share for the six months ended December 31, 2002 and 2001,
respectively, because they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
------------ ------------- ------------ -------------
Net income attributable to common shares $ 142 $ 3,068 $ 3,405 $ 5,524
========= ======== ======== ========
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 25,242 24,861 25,137 24,761
========= ======== ======== ========
Basic earnings per common share $ 0.01 $ 0.12 $ 0.14 $ 0.22
========= ======== ======== ========
6
DILUTED EARNINGS PER COMMON SHARE
COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock
outstanding 25,242 24,861 25,137 24,761
Shares attributable to common stock
options 243 617 206 639
--------- -------- -------- --------
25,485 25,478 25,343 25,400
========= ======== ======== ========
Diluted earnings per common share $ 0.01 $ 0.12 $ 0.13 $ 0.22
========= ======== ======== ========
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 $4.9 million and $0.7 million for the
three months ended December 31, 2002 and 2001, respectively, and $9.0 million
and $6.9 million for the six months ended December 31, 2002 and 2001,
respectively.
NOTE 4 - SEGMENT INFORMATION
The Company is managed through four business segments: Clinical Research
Services ("CRS"), the PAREXEL Consulting Group ("PCG"), Medical Marketing
Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS
constitutes the Company's core business and includes clinical trials management,
biostatistics and data management, as well as related medical advisory and
investigator site services. PCG provides technical expertise in such disciplines
as clinical pharmacology, regulatory affairs, industry training, publishing, and
management consulting. PCG consultants identify alternatives and propose
solutions to address clients' product development, registration, and
commercialization issues. MMS provides a full spectrum of market development,
product development, and targeted communications services in support of product
launch. Perceptive provides technology solutions to improve clients' product
development and commercialization processes. Perceptive offers a portfolio of
products and services that include web-based portals, interactive voice response
systems ("IVRS"), electronic data capture solutions, and medical diagnostics.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include selling, general, and administrative expenses;
depreciation and amortization expense; other income (expense); or income taxes
in segment profitability.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- -----------------------------
($ IN THOUSANDS) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Service revenue:
Clinical Research Services $ 75,149 $ 63,361 $ 147,046 $ 124,139
PAREXEL Consulting Group 25,084 23,726 49,874 45,429
Medical Marketing Services 17,316 14,868 34,398 29,979
Perceptive Informatics, Inc. 4,799 4,919 10,383 9,167
---------- ---------- ---------- ----------
$ 122,348 $ 106,874 $ 241,701 $ 208,714
========== ========== ========== ==========
Gross profit on service revenue:
Clinical Research Services $ 26,693 $ 21,044 $ 50,652 $ 40,270
PAREXEL Consulting Group 6,872 6,414 13,829 11,604
Medical Marketing Services 5,640 4,962 11,444 9,779
Perceptive Informatics, Inc. 1,601 729 3,290 1,441
---------- ---------- ---------- ----------
$ 40,806 $ 33,149 $ 79,215 $ 63,094
========== ========== ========== ==========
7
NOTE 5 - RESTRUCTURING CHARGES
During the three months ended December 31, 2002, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the June 2001 restructuring charge. The changes
in prior assumptions were caused by challenging real estate market conditions
which have made it difficult to sub-lease the abandoned facilities, especially
at previously estimated rental rates.
Current quarter activity charged against the restructuring accrual (which is
included in "Accrued Expenses" in the Condensed Consolidated Balance Sheet) was
as follows:
BALANCE AS OF BALANCE AS OF
SEPTEMBER 30, 2ND QUARTER DECEMBER 31,
($ IN THOUSANDS) 2002 PROVISION PAYMENTS 2002
------------- --------- ----------- -------------
Employee severance costs $ 866 - $ (255) $ 611
Facilities-related charges 1,376 5,886 (776) 6,486
-------- -------- -------- --------
$ 2,242 $ 5,886 $ (1,031) $ 7,097
======== ======== ======== ========
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that guidance by requiring a variable interest entity, as
defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. FIN
46 also requires disclosure about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company is currently evaluating the requirements and impact of FIN 46 on its
consolidated results of operations and financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition Disclosure, An Amendment of FASB Statement No. 123"
("SFAS 148"). This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement No. 123 to require more prominent and more frequent disclosure in
financial statements regarding the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company will continue to apply Accounting Principles Board Opinion No.
25 as the method used to account for stock-based employee compensation
arrangements, where applicable, but will adopt the disclosure requirements of
SFAS 148 beginning with the financial statements for its third quarter ending
March 31, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under the guarantee. The disclosure
provisions of FIN 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. The provisions for initial recognition
and measurement are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective of a guarantor's
year-end. The adoption of FIN 45 did not impact the Company's consolidated
results of operations or financial position.
8
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.
NOTE 7 - SUBSEQUENT EVENT
On January 31, 2003, the Company acquired FWPS Group Limited ("FW Pharma"), a
software company that delivers enterprise-wide clinical trial management systems
to the biopharmaceutical industry. Based in Birmingham, United Kingdom, the
company was acquired for initial consideration totaling approximately $11.7
million comprised of a cash payment of approximately $8.7 million and shares of
the Company's common stock with an aggregate value of approximately $3.0
million. The number of shares issued to satisfy the stock component of the
initial consideration is subject to adjustment at the time the Company registers
such shares for resale under the Security Act of 1933, as amended, if the market
value of such shares at that time is greater or less than $2,950,000 based on a
predetermined formula. In accordance with the terms of the agreement, the
Company is obligated to make additional payments in contingent purchase price of
up to approximately $4.3 million if FW Pharma achieves certain established
targets over a twenty-four month period post closing.
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 materially 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.
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 twenty 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.
9
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 alternatives 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.
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 $20.7
million and $24.3 million for the three months ended December 31, 2002 and 2001,
respectively, and $38.8 million for both the six-month periods ended December
31, 2002 and 2001.
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."
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 consolidated results of operations or financial
position.
10
BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Billed accounts receivable represent 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 consolidated
results of operations or financial position.
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 various taxing
jurisdictions in which 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 results of operations or
financial position.
EMPLOYEE STOCK COMPENSATION
The Company elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Options Issued to Employees" ("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" ("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 PAREXEL were unable to account for stock options under ABP 25, the
Company's financial results would be materially adversely affected to the extent
that additional compensation expense had to be recognized. 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 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 consolidated results of operations or
financial position.
11
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 and six months ended December 31,
2002 and 2001 were as follows:
FOR THE THREE MONTHS ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
($ IN THOUSANDS) INCREASE INCREASE
2002 2001 (DECREASE) % 2002 2001 (DECREASE) %
----------- ---------- ----------- ------- --------- ---------- ----------- -------
Service revenue:
CRS $75,149 $63,361 $11,788 18.6% $147,046 $124,139 $22,907 18.5%
PCG 25,084 23,726 1,358 5.7% 49,874 45,429 4,445 9.8%
MMS 17,316 14,868 2,448 16.5% 34,398 29,979 4,419 14.7%
Perceptive 4,799 4,919 (120) -2.4% 10,383 9,167 1,219 13.3%
-------- -------- ------- -------- -------- ------- -----
$122,348 $106,874 $15,474 14.5% $241,701 $208,714 $32,987 15.8%
======== ======== ======= ======== ======== =======
Direct costs:
CRS $48,456 $42,317 $6,139 14.5% $96,394 $83,869 $12,525 14.9%
PCG 18,212 17,312 900 5.2% 36,045 33,825 2,220 6.6%
MMS 11,676 9,906 1,770 17.9% 22,954 20,200 2,754 13.6%
Perceptive 3,198 4,190 (992) -23.7% 7,093 7,726 (633) -8.2%
-------- -------- ------- -------- -------- -------
$81,542 $73,725 $7,817 10.6% $162,486 $145,620 $16,866 11.6%
======== ======== ======= ======== ======== =======
Gross profit on
service revenue:
CRS $26,693 $21,044 $5,649 26.8% $50,652 $40,270 $10,382 25.8%
PCG 6,872 6,414 458 7.1% 13,829 11,604 2,225 19.2%
MMS 5,640 4,962 678 13.7% 11,444 9,779 1,665 17.0%
Perceptive 1,601 729 872 119.6% 3,290 1,441 1,849 128.3%
-------- -------- ------- -------- -------- -------
$40,806 $33,149 $7,657 23.1% $79,215 $63,094 $16,121 25.6%
======== ======== ======= ======== ======== =======
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001:
Service revenue increased by $15.5 million, or 14.5%, to $122.3 million for the
three months ended December 30, 2002 from $106.9 million for the same period one
year ago. Excluding foreign exchange fluctuations, current quarter service
revenue would have been $117.5 million, a year-over-year increase of 9.9%. On a
geographic basis, service revenue for the three months ended December 31, 2002
was distributed as follows: The Americas - $64.9 million (53.1%), Europe - $52.7
million (43.1%), and Asia/Pacific - $4.7 million (3.8%). For the three months
ended December 31, 2001, service revenue was distributed as follows: The
Americas - $61.7 million (57.7%), Europe - $40.7 million (38.1%), and
Asia/Pacific - $4.5 million (4.2%). On a segment basis, CRS service revenue
increased $11.8 million, or 18.6%, to $75.1 million for the three months ended
December 31, 2002 from $63.3 million in the same period in fiscal year 2002.
Excluding the impact of foreign currency fluctuations, CRS service revenue
increased by 14.0% primarily due to higher business volume in the biotech client
sector and in phases IIIb and IV of the clinical trial business, as well as a
lower rate of cancellations during the past six to seven months. PCG service
revenue increased by $1.4 million, or 5.7%, to $25.1 million in the three months
ended December 31, 2002 from $23.7 million in the three months ended December
31, 2001. Excluding the impact of foreign currency fluctuations, PCG service
revenue increased by 1.4%, primarily due to an increase in the regulatory
consulting and clinical pharmacology businesses. MMS service revenue increased
by $2.4 million, or 16.5%, to $17.3 million in the three-month period ended
December 31, 2002 from $14.9 million in the same period one year ago. Excluding
the impact of foreign currency fluctuations, MMS service revenue increased by
11.5% due to organic growth from an increase in the number of projects serviced
by the group, and incremental revenue from the acquisition of the Pracon and
HealthIQ division from Excerpta Medica, Inc. ("Pracon and HealthIQ"), which was
completed during the second
12
quarter of fiscal year 2003. Perceptive service revenue decreased by $0.1
million, or 2.4%, to $4.8 million in the three months ended December 31, 2002 as
compared with $4.9 million in the same period one year ago primarily due to a
high level of cancellations experienced in the April to September 2002
timeframe.
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 $7.8 million, or 10.6%, to $81.5 million for the three
months ended December 31, 2002 from $73.7 million in the same period last fiscal
year. On a segment basis, CRS direct costs increased $6.1 million, or 14.5%, to
$48.4 million for the three months ended December 31, 2002 from $42.3 million in
the same three-month period in fiscal year 2002. The increase was due primarily
to foreign exchange fluctuations and higher labor costs associated with business
growth. As a percentage of service revenue, CRS direct costs for the three
months ended December 31, 2002 improved by 2.3 percentage points from the same
three-month period one year ago primarily due to improved operational labor
efficiencies and leveraging of strong revenue growth. PCG direct costs increased
$0.9 million, or 5.2%, to $18.2 million in the three months ended December 31,
2002 from $17.3 million in the same period one year ago. The increase was caused
principally by foreign exchange fluctuations and inflation driven increases in
spending. As a percentage of service revenue, PCG direct costs showed a marginal
improvement of 0.4 points for the three months ended December 31, 2002 as
compared with the three-month period ended December 31, 2001. MMS direct costs
increased $1.8 million, or 17.9%, to $11.7 million in the three months ended
December 31, 2002 from $9.9 million for the three months ended December 31,
2001. The higher cost levels can be attributed to foreign exchange fluctuations,
increased labor costs associated with the Pracon and HealthIQ acquisition, and
higher labor costs associated with business growth. As a percentage of service
revenue, MMS direct costs for the three months ended December 31, 2002 increased
by 0.8 points over the same period one year ago primarily as a result of
leveraging revenue growth. Perceptive direct costs decreased $1.0 million, or
23.7%, to $3.2 million in the three months ended December 31, 2002 from $4.2
million in the same period in the last fiscal year primarily due to lower labor
costs associated with a lower level of business volume. As a percentage of
service revenue, Perceptive's direct costs for the three months ended December
31, 2002 improved by 18.5 percentage points from the same three-month period one
year ago primarily due to a more favorable business mix.
Selling, general and administrative ("SG&A") expenses increased by $3.6 million,
or 14.8%, to $28.1 million for the three months ended December 31, 2002 from
$24.5 million in the same period in the last fiscal year. Of the total increase,
approximately 4.6% was caused by foreign currency fluctuations with the
remaining increase primarily due to increased labor and facility-related costs
associated with business growth. As a percentage of service revenue, SG&A
remained relatively flat at 23.0% in the three-month periods ending December 31,
2002 and 2001.
Depreciation and amortization ("D&A") expense increased by $0.6 million, or
13.9%, to $5.0 million for the three months ended December 31, 2002 from $4.4
million for the same period in the last fiscal year due to foreign currency
fluctuations and an increase in capital expenditures over the past twelve
months. As a percentage of service revenue, D&A remained at 4.1% for the three
months ended December 31, 2002 and 2001.
During the three months ended December 31, 2002, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the June 2001 restructuring charge. The changes
in prior assumptions were caused by challenging real estate market conditions
which have made it difficult to sub-lease the abandoned facilities, especially
at previously estimated rental rates. There were no special charges recorded
during the three months ended December 31, 2001.
Income from operations decreased by $2.5 million, or 58.7%, to $1.7 million for
the three months ended December 31, 2002 from $4.2 million in the same period
one year ago primarily due to the facilities-related restructuring charge
discussed above. Income from operations decreased as a percentage of service
revenue to 1.4% for the three months ended December 31, 2002 from 3.9% for the
same period in the last fiscal year. Excluding the one-time restructuring
charge, income from operations for the three months ended December 31, 2002
would have increased by $3.4 million, or 81.4%, to $7.6 million from $4.2
million in the same period last fiscal year.
Total other income/(loss) decreased $2.8 million to a loss of $1.3 million in
the three months ended December 31, 2002 from income of $1.5 million in the
three months ended December 31, 2001. The decrease was primarily due to an
increase in foreign exchange losses and lower interest income in the second
quarter of fiscal year 2003.
The Company had an effective income tax rate of 40.1% for the three months ended
December 31, 2002 and 38.4% for the three months ended December 31, 2001. The
increase was primarily due to unfavorable changes in the mix of taxable income
and losses in the different jurisdictions in which the Company operates. Any
future unfavorable
13
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.
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2001:
Service revenue increased by $33.0 million, or 15.8%, to $241.7 million for the
six months ended December 30, 2002 from $208.7 million for the same period one
year ago. Excluding foreign exchange fluctuations, service revenue would have
been $232.5 million, a year-over-year increase of 11.4%. On a geographic basis,
service revenue for the six months ended December 31, 2002 was distributed as
follows: The Americas - $129.6 million (53.6%), Europe - $102.6 million (42.5%),
and Asia/Pacific - $9.5 million (3.9%). For the six months ended December 31,
2001, service revenue was distributed as follows: The Americas - $119.4 million
(57.2%), Europe - $80.7 million (38.7%), and Asia/Pacific - $8.6 million (4.1%).
On a segment basis, CRS service revenue increased $22.9 million, or 18.5%, to
$147.0 million for the six months ended December 31, 2002 from $124.1 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 phases IIIb and IV of the
clinical trial business, as well as a lower rate of cancellations during the
past six to seven months. PCG service revenue increased by $4.4 million, or
9.8%, to $49.9 million in the six months ended December 31, 2002 from $45.4
million in the six months ended December 31, 2001. Excluding the impact of
foreign currency fluctuations, PCG service revenue increased by 5.5% primarily
due to increases in the group's regulatory consulting and clinical pharmacology
businesses. MMS service revenue increased by $4.4 million, or 14.7%, to $34.4
million in the six-month period ended December 31, 2002 from $30.0 million in
the same period one year ago. Excluding the impact of foreign currency
fluctuations, MMS service revenue increased by 9.9% due primarily to an increase
in the number of projects serviced by the group as well as incremental revenue
resulting from the Pracon and HealthIQ acquisition completed during the second
quarter of fiscal year 2003. Perceptive service revenue increased by $1.2
million, or 13.3%, to $10.4 million in the six months ended December 31, 2002 as
compared with $9.2 million in the same period one year ago. The relatively low
rate of growth is directly attributable to a high level of cancellations during
the April to September 2002 timeframe.
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 $16.9 million, or 11.6%, to $162.5 million for the six
months ended December 31, 2002 from $145.6 million in the same period last
fiscal year. On a segment basis, CRS direct costs increased $12.5 million, or
14.9%, to $96.4 million for the six months ended December 31, 2002 from $83.9
million in the same six-month period in fiscal year 2002. The increase was due
primarily to foreign exchange fluctuations and higher labor costs associated
with business growth. As a percentage of service revenue, CRS direct costs for
the six months ended December 31, 2002 improved by 2.0 percentage points over
the same period in the last fiscal year primarily due to a more favorable
business mix, improved operational labor efficiencies, and leveraging of strong
business growth. PCG direct costs increased $2.2 million, or 6.6%, to $36.0
million in the six months ended December 31, 2002 from $33.8 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 for the
six months ended December 31, 2002 improved by 2.2 percentage points over the
same period one year ago primarily due to improved labor cost efficiency. MMS
direct costs increased $2.8 million, or 13.6%, to $23.0 million in the six
months ended December 31, 2002 from $20.2 million for the six months ended
December 31, 2001. The higher cost levels can be attributed to foreign exchange
fluctuations, increased labor costs associated with an increased number of
projects serviced by the group, and incremental labor costs associated with the
Pracon and HealthIQ acquisition. As a percentage of service revenue, MMS direct
costs improved by 0.7 points in the six months ended December 31, 2002 over the
same period one year ago principally as a result of leveraging revenue growth.
Perceptive direct costs decreased $0.6 million, or 8.2%, to $7.1 million in the
six months ended December 31, 2002 from $7.7 million in the same period in the
last fiscal year primarily due to lower revenue levels. As a percentage of
service revenue, Perceptive's direct costs for the six months ended December 31,
2002 improved by 16.0 percentage points over the same period one year ago
primarily due to a more favorable business mix and better labor cost leveraging.
Selling, general and administrative ("SG&A") expenses increased by $7.3 million,
or 15.4%, to $54.7 million for the six months ended December 31, 2002 from $47.4
million in the same period in the last fiscal year. Of the total increase,
approximately 4.4% was caused by foreign currency fluctuations with the
remaining increase primarily due to increased labor and facility-related costs
associated with business growth. As a percentage of service revenue, SG&A
remained relatively flat at 22.6% in the six-month periods ended December 31,
2002 and 2001.
14
Depreciation and amortization ("D&A") expense increased by $0.9 million, or
10.1%, to $9.8 million for the six months ended December 31, 2002 from $8.9
million for the same period last fiscal year due to foreign currency
fluctuations and higher capital spending during the past twelve months. As a
percentage of service revenue, D&A remained relatively flat at 4.1% for the six
months ended December 31, 2002 compared to 4.3% for the same period one year
ago.
During the six months ended December 31, 2002, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the June 2001 restructuring charge. The changes
in prior assumptions were caused by challenging real estate market conditions
which have made it difficult to sub-lease the abandoned facilities, especially
at previously estimated rental rates. There were no special charges recorded
during the six months ended December 31, 2001.
Income from operations increased by $2.0 million, or 30.0%, to $8.7 million for
the six months ended December 31, 2002 from $6.7 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 3.6% for the six
months ended December 31, 2002 from 3.2% for the same period in the last fiscal
year. Excluding the one-time restructuring charge, income from operations for
the six months ended December 31, 2002 would have increased by $7.9 million, or
117.7%, to $14.6 million from $6.7 million in the same period last fiscal year.
Total other income/(loss) decreased $5.4 million to a loss of $2.4 million in
the six months ended December 31, 2002 from income of $3.0 million in the six
months ended December 31, 2001. The unfavorable change was primarily due to an
increase in foreign exchange losses and lower interest income in the six-month
period ended December 31, 2002 as compared with the same period in the last
fiscal year, and having no counterpart to last year's one-time $0.9 million gain
on sale of a facility.
The Company had an effective income tax rate of 41.9% for the six months ended
December 31, 2002 and 38.2% for the six months ended December 31, 2001. The
increase was primarily due to unfavorable changes in the mix of taxable income
and losses in the different jurisdictions in which 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 50 days at December 31, 2002 compared with 59 days at
December 31, 2001. The decrease in DSO in the three months ended December 31,
2002 as compared with the three months ended December 31, 2001 was primarily due
to improved billing practices, increased collection activities, and a higher
level of deferred revenue. Accounts receivable, net of the allowance for
doubtful accounts was $233.0 million ($146.2 million in billed accounts
receivable and $86.8 million in unbilled accounts receivable) at December 31,
2002 and $210.2 million ($121.3 million in billed accounts receivable and $88.9
million in unbilled accounts receivable) at December 31, 2001. Deferred revenue
was $141.4 million at December 31, 2002 and $112.0 million at December 31, 2001.
The $29.4 million increase in deferred revenue was directly attributable to
advance payments in conjunction with new business arrangements entered into by
the Company. 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.
15
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 December 31, 2002, the Company had approximately $10.0
million available under these credit arrangements.
Net cash provided by operating activities for the six months ended December 31,
2002 totaled $22.9 million and was generated from a $18.1 million decrease in
accounts receivable (net of the allowance for doubtful accounts and deferred
revenue), $9.8 million related to non-cash charges for depreciation and
amortization expense and $3.4 million of net income, partially offset by a $7.1
million decrease in other current liabilities and a $1.3 million decrease in
accounts payable. For the six months ended December 31, 2001, net cash provided
by operating activities was $15.6 million and was generated by a $15.5 million
decrease in accounts receivable (net of the allowance for doubtful accounts and
deferred revenue), $8.9 million for non-cash charges related to depreciation and
amortization, $5.5 million of net income, and a $1.1 million decrease in prepaid
expenses and other current assets, partially offset by an $11.5 million decrease
in accounts payable, a $3.1 million decrease in other liabilities, and a $0.9
million gain on sale of a building.
Net cash used by investing activities for the six months ended December 31, 2002
totaled $5.2 million and consisted of $13.2 million used for capital
expenditures and $2.1 million used for business acquisitions, offset by $9.7
million of net proceeds from the sale of marketable securities and $0.4 million
in proceeds from sale of fixed assets. Net cash used in investing activities for
the six months ended December 31, 2001 totaled $33.3 million and consisted of
$23.3 million related to net purchases of marketable securities, $10.0 million
used for capital expenditures, and $1.5 million used for the acquisition of
EDYABE, offset by $1.5 million in proceeds from the sale of a building.
Net cash provided by financing activities for the six months ended December 31,
2002 totaled $1.5 million which was primarily generated by proceeds from the
issuance of common stock associated with the Company's stock option and employee
stock purchase plans. For the six months ended December 31, 2001, net cash
provided by financing activities totaled $1.8 million and consisted of $1.5
million of proceeds from the issuance of common stock in association with the
Company's stock option and employee stock purchase plans, and $0.3 million from
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 may 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 January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. Until now, one company generally
has included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 changes that guidance by
requiring a variable interest entity, as defined, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. FIN 46 also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. The consolidation requirements
of FIN 46 apply immediately to variable interest entities created after January
31, 2003 and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company is currently evaluating
the requirements and impact of FIN 46 on its consolidated results of operations
and financial position.
16
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition Disclosure, An Amendment of FASB Statement No. 123".
This statement provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement No. 123 to require more prominent and more frequent disclosure in
financial statements regarding the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company will continue to apply Accounting Principles Board Opinion No.
25 as the method used to account for stock-based employee compensation
arrangements, where applicable, but will adopt the disclosure requirements of
SFAS 148 beginning with its third quarter ending March 31, 2003.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under the
guarantee. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The adoption of FIN 45 did not
impact the Company's consolidated results of operations or financial position.
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.
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 48% and 43% of its service revenue for the
three-month periods ended December 31, 2002 and 2001, respectively, and 47% and
44% for the six-month periods ended December 31, 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
fluctuations in the relative values of the contract currency and the currency in
which the expenses are incurred. For the three months ended December 31, 2002
and 2001, the Company recorded a foreign exchange loss of $1.0 million and a
gain of $1.1 million, respectively. For the six months ended December 31, 2002
and 2001, the Company recorded foreign exchange losses of $2.2 million and a
$0.9 million gain, 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.
17
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;
- 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.
18
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.
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.
19
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 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 December 31, 2002, the Company's five largest clients
accounted for 32% of its consolidated service revenue, and one client accounted
for 11% of consolidated service revenue. In the three months ended December 31,
2001, the Company's five largest clients accounted for 39% 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
20
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.
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.
21
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.
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 48% of
its total service revenue for the three months ended December 31, 2002 and
approximately 47% for the six months ended December 31, 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;
22
- 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 48% of the Company's service revenue for the three months ended
December 31, 2002 and 47% for the six months ended December 31, 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.
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:
23
- 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 4. Submission of Matters to a Vote of Security Holders
(a) On November 21, 2002, the Company held its 2002 Annual Meeting
of Stockholders.
(b) Not applicable.
(c) At the meeting, the stockholders of the Company voted:
(1) to elect the following persons to serve as Class I
directors, to serve for a three-year term (until the 2005
Annual Meeting). The votes cast were as follows:
FOR WITHHELD
--- --------
Patrick J. Fortune 22,362,893 367,675
William U. Parfet 17,930,272 4,800,296
(2) to approve an amendment to the Company's 2000 Employee Stock
Purchase Plan. The votes cast were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
20,165,478 560,568 2,004,522 0
(3) to ratify the selection of Ernst & Young LLP as
independent auditors for the fiscal year ending June 30, 2003.
The votes cast were as follows:
FOR AGAINST ABSTAIN
---- ------- -------
22,514,242 210,139 6,187
24
(d) Not applicable.
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 December 31, 2002.
25
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 February 2003.
PAREXEL International Corporation
Date: February 14, 2003 By: /s/ Josef H. von Rickenbach
---------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
Date: February 14, 2003 By: /s/ James F. Winschel, Jr.
----------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
26
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: February 14, 2003 /s/ Josef H. von Rickenbach
-------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
27
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: February 14, 2003 /s/ James F. Winschel, Jr.
-----------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
(principal financial officer)
28
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
29