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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 MARCH 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
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 May 9, 2003, there were
25,645,241 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 - March 31, 2003 and June 30, 2002 3
Condensed Consolidated Statements of Operations - Three months ended
March 31, 2003 and 2002; Nine months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3 Quantitative and Qualitative Disclosure About Market Risk 19
Item 4 Controls and Procedures 26
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 26
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, JUNE 30,
2003 2002
----------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 57,487 $ 22,479
Marketable securities 18,643 43,630
Billed and unbilled accounts receivable, net 221,361 224,713
Prepaid expenses 10,451 8,688
Current deferred tax assets 21,195 21,642
Other current assets 4,860 6,388
--------- ---------
Total current assets 333,997 327,540
Property and equipment, net 58,088 47,624
Goodwill and other intangible assets, net 33,397 14,763
Non-current deferred tax assets 11,201 11,201
Other assets 6.707 6,033
--------- ---------
Total assets $ 443,390 $ 407,161
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 124 $ 422
Accounts payable 7,832 11,858
Deferred revenue 134,390 114,723
Accrued expenses 19,158 15,814
Accrued employee benefits and withholdings 33,079 31,713
Current deferred tax liabilities 2,538 2,538
Income taxes payable 781 7,361
Other current liabilities 6,467 5,091
--------- ---------
Total current liabilities 204,369 189,520
Long-term debt 648 432
Non-current deferred tax liabilities 9,268 9,268
Other liabilities 5,977 5,087
--------- ---------
Total liabilities 220,262 204,307
--------- ---------
Minority interest in subsidiary 3,815 2,777
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized:
5,000,000 at March 31, 2003 and June 30, 2002; Series A
Junior Participating Preferred Stock - 50,000 shares
designated, none issued and outstanding
Common stock--$.01 par value; shares authorized:
50,000,000 at March 31, 2003 and June 30, 2002; shares
issued: 26,493,328 at March 31, 2003 and
26,033,806 at June 30, 2002; shares outstanding:
25,632,328 at March 31, 2003 and 25,172,806 at
June 30, 2002 265 261
Additional paid-in capital 172,240 167,829
Treasury stock, at cost; 861,000 shares at March 31, 2003
and June 30, 2002 (8,165) (8,165)
Retained earnings 60,235 52,455
Accumulated other comprehensive loss (5,262) (12,303)
--------- ---------
Total stockholders' equity 219,313 200,077
--------- ---------
Total liabilities and stockholders' equity $ 443,390 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2003 2002 2003 2002
--------- -------- --------- --------
Service revenue $ 132,263 $112,027 $ 373,964 $320,741
Reimbursement revenue 26,899 32,863 80,793 81,821
--------- -------- --------- --------
Total revenue 159,162 144,890 454,757 402,562
Costs and expenses:
Direct costs 86,176 77,500 248,662 223,120
Reimbursable out-of-pocket expenses 26,899 32,863 80,793 81,821
Selling, general and administrative expenses 32,499 25,761 87,244 73,191
Depreciation and amortization 5,307 4,210 15,155 13,156
Restructuring charge -- 5,886 --
--------- -------- --------- --------
Total costs 150,881 140,334 437,740 391,288
--------- -------- --------- --------
Income from operations 8,281 4,556 17,017 11,274
Other income (expense) (740) 1,521 (3,122) 4,562
--------- -------- --------- --------
Income before provision for income taxes and
minority interest 7,541 6,077 13,895 15,836
Provision for income taxes 2,936 2,301 5,596 6,033
Minority interest 230 65 519 568
--------- -------- --------- --------
Net income $ 4,375 $ 3,711 $ 7,780 $ 9,235
========= ======== ========= ========
Earnings per share:
Basic $ 0.17 $ 0.15 $ 0.31 $ 0.37
Diluted $ 0.17 $ 0.14 $ 0.30 $ 0.36
Shares used in computing earnings per share:
Basic 25,376 24,984 25,238 24,880
Diluted 25,825 25,729 25,511 25,547
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE NINE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,780 $ 9,235
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 15,156 13,156
Changes in operating assets/liabilities 13,520 (305)
--------- ---------
Net cash provided by operating activities 36,456 22,086
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (175,348) (233,830)
Proceeds from sale of marketable securities 200,272 194,568
Acquisition of business, net of cash acquired (11,201) (1,793)
Proceeds from sale of fixed assets 417 1,887
Purchase of property and equipment (22,288) (14,702)
--------- ---------
Net cash used in investing activities (8,148) (53,870)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,907 2,000
Borrowings and (repayments) under credit arrangements (81) 268
--------- ---------
Net cash provided by financing activities 1,826 2,268
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 4,874 (643)
--------- ---------
Net increase (decrease) in cash for the period 35,008 (30,159)
Cash and cash equivalents at beginning of period 22,479 57,590
--------- ---------
Cash and cash equivalents at end of period $ 57,487 $ 27,431
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Taxes $ 12,802 $ 7,712
Interest $ 2,217 $ 660
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 20,633 $ 2,928
Liabilities assumed (6,925) (1,135)
--------- ---------
Cash paid and common stock issued for acquisition $ 13,708 $ 1,793
========= =========
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 nine months
ended March 31, 2003, are not necessarily indicative of the results that may be
expected for 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.
The Company accounts for out-of-pocket expenses in accordance with Emerging
Issues Task Force ("EITF") 01-14 "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". These
out-of-pocket expenses are reflected in the Company's Condensed Consolidated
Statements of Operations under "Reimbursement Revenue" and "Reimbursable
Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on behalf of
its clients with independent physician investigators in connection with clinical
trials. These investigator fees are not reflected in PAREXEL's Service Revenue,
Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses, and/or Direct Costs,
since such fees are reimbursed by clients on a "pass through" basis, without
risk or reward to the Company. The amounts of these investigator fees were $18.6
million and $18.5 million for the three months ended March 31, 2003 and 2002,
respectively, and $57.4 million and $57.3 million for the nine-month periods
ended March 31, 2003 and 2002, respectively.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 1.6 million and 1.3 million outstanding stock options were
excluded from the calculation of diluted earnings per share for the three months
ended March 31, 2003 and 2002, respectively, and approximately 2.2 million and
1.3 million outstanding stock options were excluded from the calculation of
diluted earnings per share for the nine months ended March 31, 2003 and 2002,
respectively, because they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2003 2002
------- ------- ------- -------
Net income attributable to common shares $ 4,375 $ 3,711 $ 7,780 $ 9,235
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 25,376 24,984 25,238 24,880
======= ======= ======= =======
Basic earnings per common share $ 0.17 $ 0.15 $ 0.31 $ 0.37
======= ======= ======= =======
6
DILUTED EARNINGS PER COMMON SHARE
COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock
outstanding 25,376 24,984 25,238 24,880
Shares attributable to common stock
options 449 745 273 667
------- ------- ------- -------
25,825 25,729 25,511 25,547
======= ======= ======= =======
Diluted earnings per common share $ 0.17 $ 0.14 $ 0.30 $ 0.36
======= ======= ======= =======
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 $5.8 million and $1.4 million for the
three months ended March 31, 2003 and 2002, respectively, and $14.8 million and
$8.4 million for the nine months ended March 31, 2003 and 2002, respectively.
NOTE 4 - STOCK-BASED COMPENSATION
The Company accounts for employee stock awards using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", as described by FASB Interpretation No. 44.
Accordingly, no compensation expense is recognized because the exercise price of
the Company's stock options was equal to the market price of the underlying
stock on the date of grant. The Company has adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" for disclosure purposes only.
If the compensation cost for the Company's stock options and the employee stock
purchase plan had been determined based on the fair value at the date of grant,
as prescribed in SFAS No. 123, the Company's net income and net income per share
would have been as follows:
($ IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
MARCH 31,
2003 2002
------ ------
Net income, as reported $4,375 $3,711
Deduct total stock-based compensation, net of tax 744 541
------ ------
Pro forma net income $3,631 $3,170
====== ======
Pro forma net income per share:
Basic $ 0.14 $ 0.13
Diluted $ 0.14 $ 0.12
As stock options vest over several years and additional stock option grants are
expected to be made each year, the above pro forma disclosures are not
necessarily representative of pro forma effects on results of operations for
future periods.
7
NOTE 5 - PREFERRED STOCK RIGHTS
On March 27, 2003, the Company adopted a Shareholder Rights Plan. Under this
Plan, one Right for each outstanding share was distributed to stockholders of
record as of April 7, 2003. The Rights trade with the underlying common stock
and initially will not be exercisable. Subject to limited exceptions, the Rights
will become exercisable if a person or a group acquires 20 percent or more of
the Company's common stock or commences a tender offer for 20 percent or more of
the Company's outstanding stock. If the Rights become exercisable, the type and
amount of securities receivable upon exercise of each Rights will depend on the
circumstances at the time of exercise. Each Right will initially entitle each
stockholder to purchase one one-thousandth of a share of newly created Series A
Junior Participating Preferred Stock at an exercise price of $98.00. The
adoption of this Plan did not impact the Company's financial position or results
of its operations.
NOTE 6 - SEGMENT INFORMATION
The Company is managed through four business segments: Clinical Research
Services ("CRS"), the PAREXEL Consulting Group ("PCG"), Medical Marketing
Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS
constitutes the Company's core business and includes clinical trials management,
biostatistics and data management, as well as related medical advisory and
investigator site services. PCG provides technical expertise in such disciplines
as clinical pharmacology, regulatory affairs, industry training, publishing, and
management consulting. PCG consultants identify alternatives and propose
solutions to address clients' product development, registration, and
commercialization issues. MMS provides a full spectrum of market development,
product development, and targeted communications services in support of product
launch. Perceptive provides technology solutions to improve clients' product
development and commercialization processes. Perceptive offers a portfolio of
services that include the design of web-based portals, interactive voice
response systems ("IVRS"), clinical trial management systems ("CTMS"),
electronic data capture solutions, and medical diagnostics.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include selling, general, and administrative expenses;
depreciation and amortization expense; other income (expense); or income taxes
in segment profitability.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
($ IN THOUSANDS) 2003 2002 2003 2002
-------- -------- -------- --------
Service revenue:
Clinical Research Services $ 81,496 $ 64,786 $228,542 $188,925
PAREXEL Consulting Group 26,248 25,776 76,122 71,205
Medical Marketing Services 17,940 16,211 52,338 46,190
Perceptive Informatics, Inc. 6,579 5,254 16,962 14,421
-------- -------- -------- --------
$132,263 $112,027 $373,964 $320,741
======== ======== ======== ========
Gross profit on service revenue:
Clinical Research Services $ 31,384 $ 20,656 $ 82,036 $ 60,926
PAREXEL Consulting Group 6,563 7,378 20,392 18,982
Medical Marketing Services 5,456 5,260 16,900 15,039
Perceptive Informatics, Inc. 2,684 1,233 5,974 2,674
-------- -------- -------- --------
$ 46,087 $ 34,527 $125,302 $ 97,621
======== ======== ======== ========
NOTE 7 - 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 Company's June 2001 restructuring. In June
2001, the Company made certain reasonable assumptions based upon market
conditions, which indicated that sub-lease payments for these abandoned
facilities were probable. The June 2001 restructuring charge involved fourteen
properties. The Company has been successful in exiting or subleasing ten of
those properties. After much effort in trying to sub-lease the remaining
properties in a time of a declining commercial real estate market, it became
apparent to the Company during the quarter ended December 31, 2002 that the
original assumptions for the remaining four properties were no longer valid
under current market conditions. In determining the amount of the required
additional charge, $8.0 million of sub-lease payments were estimated by the
Company to be collected over the next six years. This represented the Company's
best estimate based upon current market conditions.
8
Current quarter activity charged against the restructuring accrual (which is
included in "Accrued Expenses" in the Condensed Consolidated Balance Sheet) was
as follows:
BALANCE AS OF BALANCE AS OF
DECEMBER 31, 3RD QUARTER MARCH 31,
($ IN THOUSANDS) 2002 PROVISION PAYMENTS 2003
------------- --------- ----------- -------------
Employee severance costs $ 611 -- $ (321) $ 290
Facilities-related charges 6,486 -- (764) 5,722
------ ------- ------- ------
$7,097 -- $(1,085) $6,012
====== ======= ======= ======
NOTE 8 - 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
application of FIN 46 did not have a material effect on the Company's financial
position or its results of operations.
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 adopted SFAS 148 on January 1, 2003 and
included the disclosure modifications in these condensed consolidated financial
statements. The adoption of this Statement did not have a material effect on the
Company's financial position or its results of operations.
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.
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 became
effective in the third quarter ended March 31, 2003. The adoption of SFAS 146
did not impact the Company's financial position or results of its operations.
9
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 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, 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 expertise in 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,
CTMS, electronic data capture solutions, medical diagnostics services, and other
drug development consulting services. The Company believes that its integrated
services, depth of therapeutic area expertise, and sophisticated information
technology, along with its experience in global drug development and product
launch services, represent key competitive strengths.
The Company is managed through four business segments, namely, CRS, PCG, MMS and
Perceptive. CRS constitutes the Company's core business and includes clinical
trials management and biostatistics and data management, as well as related
medical advisory and investigator site services. PCG provides technical
expertise in such disciplines as clinical pharmacology, regulatory affairs,
industry training, publishing, and management consulting. PCG consultants
identify 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 services that include the design of web-based
portals, IVRS, CTMS, electronic data capture solutions, and medical diagnostics.
Perceptive is a majority-owned subsidiary of the Company. As of March 31, 2003,
the Company owned an approximate 97.4% interest in Perceptive.
10
The Company conducts a significant portion of its operations in foreign
countries. Approximately 47.6% of the Company's service revenue for the three
months ended March 31, 2003 and 47.3% of the Company's service revenue for the
nine months ended March 31, 2003 were from non-U.S. operations. Because the
Company's financial statements are denominated in U.S. dollars, changes in
foreign currency exchange rates can have a significant effect on its operating
results. For the three months ended March 31, 2003, approximately 17.6% of total
service revenue was denominated in British pounds and 20.6% of total service
revenue was denominated in Euros. For the nine months ended March 31, 2003,
approximately 17.5% of total service revenue was denominated in British pounds
and approximately 19.8% of total service revenue was denominated in Euros. As a
result of the weakened U.S. dollar against the British Pound and the Euro in
fiscal year 2003, the Company's revenues and the Company's direct costs
increased in 2003 from the comparable 2002 periods due to these exchange rate
fluctuations.
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.
The Company accounts for out-of-pocket expenses in accordance with EITF 01-14
"Income Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred". These out-of-pocket expenses are reflected in the Company's
Condensed Consolidated Statements of Operations under "Reimbursement Revenue"
and "Reimbursable Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on behalf of
its clients with independent physician investigators in connection with clinical
trials. These investigator fees are not reflected in PAREXEL's Service Revenue,
Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses, and/or Direct Costs,
since such fees are reimbursed by clients on a "pass through" basis, without
risk or reward to the Company. The amounts of these investigator fees were $18.6
million and $18.5 million for the three months ended March 31, 2003 and 2002,
respectively, and $57.4 million and $57.3 million for the nine-month periods
ended March 31, 2003 and 2002, respectively.
Direct costs primarily consist of compensation and related fringe benefits for
project-related employees, other project-related costs not reimbursed by
clients, and allocated costs related to facilities and information systems.
Selling, general and administrative expenses consist principally of compensation
and related fringe benefits for selling and administrative employees,
professional services, advertising costs, and certain costs related to
facilities and information systems.
The Company's stock is quoted on the NASDAQ Stock Market under the symbol
"PRXL."
11
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.
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 billed
or unbilled receivables, there may be a material impact to the Company's
consolidated results of operations and 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 and
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 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.
12
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.
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 nine months ended March 31,
2003 and 2002 were as follows:
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE NINE MONTHS ENDED MARCH 31,
------------------------------------------ ---------------------------------------------
($ IN THOUSANDS) INCREASE INCREASE
2003 2002 (DECREASE) % 2003 2002 (DECREASE) %
-------- -------- ------- ---- -------- -------- ------- ------
Service revenue:
CRS $ 81,496 $ 64,786 $16,710 25.8% $228,542 $188,925 $39,617 21.0%
PCG 26,248 25,776 472 1.8% 76,122 71,205 4,917 6.9%
MMS 17,940 16,211 1,729 10.7% 52,338 46,190 6,148 13.3%
Perceptive 6,579 5,254 1,325 25.2% 16,962 14,421 2,541 17.6%
-------- -------- ------- -------- -------- -------
$132,263 $112,027 $20,236 18.1% $373,964 $320,741 $53,223 16.6%
======== ======== ======= ======== ======== =======
Direct costs:
CRS $ 50,112 $ 44,130 $ 5,982 13.6% $146,506 $127,999 $18,507 14.5%
PCG 19,685 18,398 1,287 7.0% 55,730 52,223 3,507 6.7%
MMS 12,484 10,951 1,533 14.0% 35,438 31,151 4,287 13.8%
Perceptive 3,895 4,021 (126) -3.1% 10,988 11,747 (759) -6.5%
-------- -------- ------- -------- -------- -------
$ 86,176 $ 77,500 $ 8,676 11.2% $248,662 $223,120 $25,542 11.4%
======== ======== ======= ======== ======== =======
Gross profit on
service revenue:
CRS $ 31,384 $ 20,656 $10,728 51.9% $ 82,036 $60,926 $21,110 34.6%
PCG 6,563 7,378 (815) -11.0% 20,392 18,982 1,410 7.4%
MMS 5,456 5,260 196 3.7% 16,900 15,039 1,861 12.4%
Perceptive 2,684 1,233 1,451 117.7% 5,974 2,674 3,300 123.4%
-------- -------- ------- -------- -------- -------
$ 46,087 $ 34,527 $11,560 33.5% $125,302 $97,621 $27,681 28.4%
======== ======== ======= ======== ======== =======
13
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002:
Service revenue increased by $20.2 million, or 18.1%, to $132.3 million for the
three months ended March 31, 2003 from $112.0 million for the same period one
year ago. On a geographic basis, service revenue for the three months ended
March 31, 2003 was distributed as follows: The Americas - $70.0 million (52.9%),
Europe - $57.8 million (43.7%), and Asia/Pacific - $4.5 million (3.4%). For the
three months ended March 31, 2002, service revenue was distributed as follows:
The Americas - $67.2 million (60.0%), Europe - $40.7 million (36.3%), and
Asia/Pacific - $4.1 million (3.7%). On a segment basis, CRS service revenue
increased by $16.7 million, or 25.8%, to $81.5 million for the three months
ended March 31, 2003 from $64.8 million in the same period in fiscal year 2002.
Of the total 25.8% increase, approximately 9.2% was attributed to the positive
impact of foreign currency fluctuations, with the remaining 16.6% of the
increase primarily attributed to new business wins and a lower level of
cancellations in the first six months of this fiscal year. PCG service revenue
increased by $0.5 million, or 1.8%, to $26.2 million from $25.8 million one year
ago. The increase in PCG service revenue was driven largely by the positive
impact of foreign currency fluctuations (approximately 7.3%), offset by a
reduction in enforcement activities on the part of the Food and Drug
Administration ("FDA"), which reduced demand for PCG's services, and a reduction
in discretionary spending by large pharmaceutical companies. MMS service revenue
increased by $1.7 million, or 10.7%, to $17.9 million in the three-month period
ended March 31, 2003 from $16.2 million in the same three-month period in the
last fiscal year primarily due to $1.7 million of incremental revenue from the
second quarter 2003 acquisition of the Pracon and HealthIQ division ("Pracon and
HealthIQ") of Excerpta Medica, Inc. Perceptive service revenue increased by $1.3
million, or 25.2%, to $6.6 million in the three months ended March 31, 2003 from
$5.3 million in the same three-month period in fiscal year 2002. The increase
was a direct result of the FW Pharma acquisition completed during the third
quarter of this fiscal year.
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 $8.7 million, or 11.2% to $86.2 million in the three
months ended March 31, 2003 from $77.5 million in the same period one year ago.
On a segment basis, CRS direct costs increased by $6.0 million, or 13.6%, to
$50.1 million in the three months ended March 31, 2003 from $44.1 million in the
same three-month period last fiscal year. Of the total 13.6% increase,
approximately 8.2% was attributed to increased costs as a result of foreign
currency fluctuations, with the remaining 5.4% of the increase caused by
increased labor costs associated with business growth. As a percentage of
service revenue, CRS direct costs for the three months ended March 31, 2003
decreased by 6.6 percentage points to 61.5% from 68.1% in 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 by $1.3 million,
or 7.0% to $19.7 million in the three months ended March 31, 2003 from $18.4
million in the three months ended March 31, 2002 primarily due to approximately
7.7% increase in foreign currency fluctuations, offset by approximately 0.7%
lower direct labor costs associated with decreased demand for PCG services as
noted previously. As a percentage of service revenue, PCG direct costs for the
three months ended March 31, 2003 increased by 3.6 percentage points to 75.0%
from 71.4% primarily due to a less favorable business mix. MMS direct costs
increased $1.5 million, or 14.0%, to $12.5 million in the three months ended
March 31, 2003 from $11.0 million in the same three-month period one year ago
primarily due to an approximate 5.9% increase in costs as a result of foreign
currency fluctuations, with the remainder of the increase primarily due to
increased labor costs associated with the Pracon and HealthIQ acquisition. As a
percentage of service revenue, MMS direct costs for the three months ended March
31, 2003 increased by 2.0 percentage points to 69.6% from 67.6% primarily due to
less favorable business mix. Perceptive direct costs decreased by $0.1 million,
or 3.1%, to $3.9 million in the three months ended March 31, 2003 from $4.0
million in the same three-month period in the last fiscal year primarily due to
a reduction in physician reader costs (approximately 11.7%) incurred in
connection with various imaging programs, partially offset by incremental direct
costs (approximately 8.6%) in association with the FW Pharma acquisition that
was completed during the quarter. As a percentage of service revenue, Perceptive
direct costs decreased by 17.3 percentage points to 59.2% from 76.5% primarily
due to more favorable business mix and lower physician reader costs.
Selling, general and administrative ("SG&A") expenses increased by $6.7 million,
or 26.2%, to $32.5 million for the three months ended March 31, 2003 from $25.8
million in the same period in the last fiscal year. Of the total 26.2% increase,
approximately 11.3% was caused by increased costs as a result of foreign
currency fluctuations, approximately 4.7% was attributed to incremental expenses
associated with the Pracon & HealthIQ and FW Pharma acquisitions, approximately
6.2% was attributed to increased labor costs, and 4.0% was associated with
higher facility-related costs. As a percentage of service revenue, SG&A
increased by 1.6 percentage points to 24.6% in the three months ended March 31,
2003 as compared with 23.0% in the same period in the last fiscal year.
Depreciation and amortization ("D&A") expense increased by $1.1 million, or
26.1%, to $5.3 million for the three months ended March 31, 2003 from $4.2
million for the same period in the last fiscal year primarily due to higher
14
expenses as a result of foreign currency fluctuations and an increase in capital
spending of $7.6 million over the preceding twelve months. As a percentage of
service revenue, D&A was 4.0% and 3.8% for the three months ended March 31, 2003
and 2002, respectively.
Income from operations increased by $3.7 million, or 81.8%, to $8.3 million for
the three months ended March 31, 2003 from $4.6 million in the same period one
year ago. Income from operations increased as a percentage of service revenue to
6.3% for the three months ended March 31, 2003 from 4.1% for the same period in
the last fiscal year for the reasons noted in the preceding paragraphs.
Total other income/(loss) decreased $2.3 million to a loss of $0.7 million in
the three months ended March 31, 2003 from income of $1.5 million in the three
months ended March 31, 2002. The decrease was primarily due to a year-over-year
increase in foreign exchange losses of $2.0 million, as a result of a weakening
of the U.S. dollar versus both the British Pound and the Euro.
The Company had an effective income tax rate of 38.9% for the three months ended
March 31, 2003 and 37.9% for the three months ended March 31, 2002. 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.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002:
Service revenue increased by $53.2 million, or 16.6%, to $374.0 million for the
nine months ended March 31, 2003 from $320.7 million for the same period one
year ago. On a geographic basis, service revenue for the nine months ended March
31, 2003 was distributed as follows: The Americas - $199.6 million (53.4%),
Europe - $160.4 million (42.9%), and Asia/Pacific - $14.0 million (3.7%). For
the nine months ended March 31, 2002, service revenue was distributed as
follows: The Americas - $186.6 million (58.2%), Europe - $121.4 million (37.9%),
and Asia/Pacific - $12.7 million (3.9%). On a segment basis, CRS service revenue
increased by $39.6 million, or 21.0%, to $228.5 million for the nine months
ended March 31, 2003 from $188.9 million in the same period in fiscal year 2002.
Of the total 21.0% increase, approximately 6.1% was attributed to the positive
impact of foreign currency fluctuations, with the remaining 14.9% primarily due
to higher business volume in the biotech client sector and in Phases IIIb and IV
of the clinical trial business, partly offset by a lower rate of cancellations
during the first six months of the fiscal year. PCG service revenue increased by
$4.9 million, or 6.9%, to $76.1 million in the nine months ended March 31, 2003
from $71.2 million in the nine months ended March 31, 2002. Of the total 6.9%
increase, approximately 5.3% was attributed to foreign currency fluctuations,
with the remaining 1.6% primarily due to increases in the group's regulatory
consulting and clinical pharmacology businesses. MMS service revenue increased
by $6.1 million, or 13.3%, to $52.3 million in the nine-month period ended March
31, 2003 from $46.2 million in the same period one year ago. Of the total 13.3%
increase, approximately 5.8% was attributed to incremental revenue from the
Pracon and HealthIQ acquisition completed during the second quarter of fiscal
year 2003, while the remaining 7.5% was primarily due to an increase in the
number of projects serviced by the group. Perceptive service revenue increased
by $2.5 million, or 17.6%, to $17.0 million in the nine months ended March 31,
2003, as compared with $14.4 million in the same period one year ago. Of the
total 17.6% increase, 9.9% was attributed to incremental revenue associated with
the FW Pharma acquisition completed during the third quarter of this fiscal
year, and approximately 7.7% was attributed to new business growth.
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.
15
Direct costs increased by $25.5 million, or 11.4%, to $248.7 million for the
nine months ended March 31, 2003 from $223.1 million in the same period last
fiscal year. On a segment basis, CRS direct costs increased by $18.5 million, or
14.5%, to $146.5 million for the nine months ended March 31, 2003 from $128.0
million in the same nine-month period in fiscal year 2002. Of the total 14.5%
increase, approximately 5.8% was attributed to increased costs as a result of
foreign currency fluctuations, and the remaining 8.7% was primarily due to
higher labor costs associated with business growth. As a percentage of service
revenue, CRS direct costs for the nine months ended March 31, 2003 decreased by
3.7 percentage points to 64.1% from 67.8% over the same period in the last
fiscal year, primarily due to improved operational labor efficiencies, and
leveraging of strong business growth. PCG direct costs increased $3.5 million,
or 6.7%, to $55.7 million in the nine months ended March 31, 2003 from $52.2
million in the same period one year ago. Of the total 6.7% increase,
approximately 5.3% was attributed to increased costs as a result of foreign
currency fluctuations, and the remaining 1.4% was caused primarily by higher
employee-related expenses associated with increased business volume. As a
percentage of service revenue, PCG direct costs for the nine months ended March
31, 2003 remained relatively flat at 73.2% as compared with 73.3% in the nine
months ended March 31, 2002. MMS direct costs increased $4.3 million, or 13.8%,
to $35.4 million in the nine months ended March 31, 2003 from $31.2 million for
the nine months ended March 31, 2002. Of the total 13.8% increase, approximately
5.3% was attributed to increased costs as a result of foreign currency
fluctuations, and the remaining 8.5% was primarily due to 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 remained relatively flat at
67.7% in the nine months ended March 31, 2003 compared with 67.4% in the nine
months ended March 31, 2002. Perceptive direct costs decreased $0.8 million, or
6.5%, to $11.0 million in the nine months ended March 31, 2003 from $11.7
million in the same period in the last fiscal year. Of the total 6.5% decrease,
a reduction in physician reader costs incurred in connection with various
imaging programs contributed to 11.8% of the total decrease, offset by an
approximately 2.2% increase in costs as a result of foreign currency
fluctuations and a 3.1% increase in incremental direct costs associated with the
FW Pharma acquisition completed during the third quarter in this fiscal year. As
a percentage of service revenue, Perceptive's direct costs for the nine months
ended March 31, 2003 decreased by 16.7 percentage points to 64.8% from 81.5% in
the same period one year ago, primarily due to a more favorable business mix,
lower physician reader costs, and better labor cost leveraging.
SG&A expenses increased by $14.1 million, or 19.2%, to $87.2 million for the
nine months ended March 31, 2003 from $73.2 million in the same period in the
last fiscal year. Of the total 19.2% increase, approximately 5.7% was caused by
foreign currency fluctuations, approximately 5.5% was attributed to increased
labor costs, 3.1% was attributed to increased facility related costs, 1.6% was
attributed to incremental expenses associated with the Pracon & HealthIQ and FW
Pharma acquisitions, and the remaining 3.3% increase was primarily due to higher
costs associated with business growth. As a percentage of service revenue, SG&A
was 23.3% and 22.8% for the nine months ended March 31, 2003 and 2002,
respectively.
Depreciation and amortization ("D&A") expense increased by $2.0 million, or
15.2%, to $15.2 million for the nine months ended March 31, 2003 from $13.2
million for the same period last fiscal year primarily due to foreign currency
fluctuations and a year-over-year increase in capital spending of $7.6 million
over the preceding twelve months. As a percentage of service revenue, D&A
remained flat at 4.1% for both the nine-months period ended March 31, 2003 and
2002.
During the second quarter 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 Company's June 2001 restructuring. In June
2001, the Company made certain reasonable assumptions based upon market
conditions that the sub-lease payments were deemed probable. The June 2001
restructuring charge involved fourteen properties. The Company has been
successful in exiting or subleasing ten of those properties. After much effort
in trying to sub-lease the remaining properties in a time of a declining
commercial real estate market, it became apparent to the Company during the
quarter ended December 31, 2002 that the original assumptions for the remaining
four properties were no longer valid under current market conditions. In
determining the amount of the required additional charge, $8.0 million of
sub-lease payments were estimated to be collected over the next six years. This
represented the Company's best estimate based upon current market conditions.
Income from operations increased by $5.7 million, or 50.9%, to $17.0 million for
the nine months ended March 31, 2003 from $11.3 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 4.6% for the
nine months ended March 31, 2003 from 3.5% for the same period in the last
fiscal year.
16
Total other income/(loss) decreased $7.7 million to a loss of $3.1 million in
the nine months ended March 31, 2003 from income of $4.6 million in the nine
months ended March 31, 2002. The change was primarily due to an unfavorable $5.0
million swing in foreign exchange losses and a $1.0 decrease in gains from the
sale of assets.
The Company had an effective income tax rate of 40.3% for the nine months ended
March 31, 2003 and 38.1% for the nine months ended March 31, 2002. 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.
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 44 days at March 31, 2003 compared with 51 days at March
31, 2002. The decrease in DSO in the three months ended March 31, 2003 as
compared with the three months ended March 31, 2002 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 $221.4 million ($138.5 million in billed accounts receivable and
$82.9 million in unbilled accounts receivable) at March 31, 2003 and $203.2
million ($108.2 million in billed accounts receivable and $95.0 million in
unbilled accounts receivable) at March 31, 2002. Deferred revenue was $134.4
million at March 31, 2003 and $110.0 million at March 31, 2002. The $24.4
million increase in deferred revenue was directly attributable to advance
payments in conjunction with new business arrangements entered into by the
Company. DSO is calculated by adding the end-of-period balances for billed and
unbilled account receivables, net of deferred revenue and the allowance for
doubtful accounts, then dividing the resulting amount by the sum of total
revenue plus investigator fees billed for the most recent quarter, and
multiplying the resulting fraction by the number of days in the quarter.
The Company has lines-of-credit with foreign banks in the aggregate of
approximately $11.0 million. These lines-of-credit are not collateralized and
are payable on demand. The Company primarily enters into lines-of-credit because
foreign banks require them as a condition to providing banking services to the
Company's foreign subsidiaries. At March 31, 2003, the Company had approximately
$11.0 million available under these credit arrangements.
Net cash provided by operating activities for the nine months ended March 31,
2003 totaled $36.5 million and was generated from a $20.5 million decrease in
accounts receivable (net of the allowance for doubtful accounts and deferred
revenue), $15.2 million related to non-cash charges for depreciation and
amortization expense and $7.8 of net income, offset by a $3.7 million decrease
in accounts payable and a $3.3 million increase in other assets. For the nine
months ended March 31, 2002, net cash provided by operating activities was $22.1
million and was generated by a $20.5 million decrease in accounts receivable
(net of allowance for doubtful accounts and deferred revenue), $13.2 million in
non-cash charges related to depreciation and amortization, $9.2 million of net
income, a $0.8 million increase in other liabilities, and a $0.6 million
decrease in prepaid expenses and other assets, offset by a $21.2 million
decrease in accounts payable, and a $1.0 million gain on sale of a building and
equipment. The $14.4 million increase in net cash provided by operating
activities for the nine months ended March 31, 2003 compared with the nine
months ended March 21, 2002 is attributable to a $2.0 million increase in
non-cash charges for depreciation and amortization expense and a $13.8 million
change in operating assets/liabilities, offset by a $1.5 million decrease in net
income. The $13.8 million year-over-year change in operating assets/liabilities
was primarily due to a $17.5 million decrease in accounts payable, partly offset
by a $3.3 million increase in other assets. The decrease in accounts payable was
a result of continued efforts to bring payment of outstanding invoices more
current.
17
Net cash used by investing activities for the nine months ended March 31, 2003
totaled $8.1 million and consisted of $22.3 million used for capital
expenditures (primarily computer software/hardware and leasehold improvement)
and $11.2 million used for the acquisitions of Pracon & HealthIQ and FW Pharma,
which was offset by $25.0 million of net proceeds from the sale of marketable
securities and $0.4 million in proceeds from sale of equipment. Net cash used in
investing activities for the nine months ended March 31, 2002 totaled $53.9
million and consisted of $39.3 million related to net purchases of marketable
securities, $14.7 million used for capital expenditures, and $1.8 million used
for the acquisition of EDYABE, which was offset by $1.9 million in proceeds from
the sale of a building and equipment.
Net cash provided by financing activities for the nine months ended March 31,
2003 totaled $1.8 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 nine months ended March 31, 2002, net cash
provided by financing activities totaled $2.3 million and consisted of $2.0
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 were 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. The Company may be unable to secure such
financing on terms acceptable to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
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, 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 application of FIN 46 did not have
a material effect on the Company's financial position or its results of
operations.
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 adopted SFAS 148 on January 1, 2003 and
included the disclosure modifications in these condensed consolidated financial
statements. The adoption of this Statement did not have a material effect on the
Company's financial position or its results of operations.
18
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 became effective in the third
quarter ended March 31, 2003. The adoption of SFAS 146 did not impact 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 may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts or incur liabilities
denominated in a currency other than the foreign subsidiary's functional
currency. The Company occasionally enters into foreign currency exchange
contracts to offset the impact of currency fluctuations. The notional contract
amount of outstanding currency exchange contracts was approximately $25.4
million at March 31, 2003. The potential loss in the fair value of these
currency exchange contracts that would result from a hypothetical change of 10%
in exchange rates would be approximately $2.6 million.
INTEREST RATES
The Company's exposure to interest rate changes is minimal as the level of
long-term debt the Company has is minimal. Long-term debt was $0.6 million as of
March 31, 2003 and $0.4 million as of June 30, 2002.
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, the Company's business,
financial condition, or results of operations could be materially adversely
affected.
19
THE LOSS, MODIFICATION, OR DELAY OF LARGE CONTRACTS MAY NEGATIVELY IMPACT THE
COMPANY'S FINANCIAL PERFORMANCE
The Company's clients generally can terminate their contracts with the Company
upon thirty to sixty days notice or can delay execution of services. The loss or
delay of a large contract or the loss or delay of multiple contracts could
adversely affect its operating results, possibly materially. The Company has in
the past experienced contract cancellations, which have adversely affected its
operating results. In fiscal year 2002, Astra Zeneca accounted for 11% of the
Company's consolidated service revenue. If Astra Zeneca terminated all of its
contracts with the Company, it would adversely affect the Company's operating
results.
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 to prove effective;
- 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 companies regulated by the FDA- 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 COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE
COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED
The biopharmaceutical services industry is highly competitive, and the Company
faces numerous competitors in many areas of its business. If the Company fails
to compete effectively, the Company may lose clients, which would cause its
business to suffer.
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. Some of the larger CROs against which the Company
competes include Quintiles Transnational Corporation, Covance, Inc. and
Pharmaceutical Product Development Inc. 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, a majority owned subsidiary of the Company, 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, those of the Company's competitors that are
smaller specialized companies may compete effectively against the Company
because of their concentrated size and focus.
THE FIXED PRICE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
Approximately 90% 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 the Company experiences significant cost overruns, its
gross margins on the contract would be reduced and the Company could lose money
on contracts. 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.
20
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY PRODUCT
DEVELOPMENT PROCESS IS STREAMLINED, THE NEED FOR THE COMPANY'S SERVICES COULD
DECREASE
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. If companies needed fewer of PAREXEL's
services, the Company would have fewer business opportunities and its revenues
would decrease, possibly materially.
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 standards for
good clinical practice, or GCP, and by making the process more uniform and
streamlined. In the past several years, Japan also has adopted GCP. The United
States, Europe and Japan have also collaborated in the 11-year-long
International Conference on Harmonization, or 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.
IF THE COMPANY FAILS TO COMPLY WITH EXISTING REGULATIONS, ITS REPUTATION AND
OPERATING RESULTS WOULD BE HARMED
The Company's business is subject to numerous governmental regulations,
primarily relating to pharmaceutical product development and the conduct of
clinical trials. If the Company fails to comply with these governmental
regulations, it could result in the termination of the Company's ongoing
research, development or sales and marketing projects, or the disqualification
of data for submission to regulatory authorities. The Company also could be
barred from providing clinical trial services in the future or be subjected to
fines. Any of these consequences would harm the Company's reputation, its
prospects for future work and its operating results. In addition, the Company
may have to repeat research or redo trials. The Company may be contractually
required to take such action at no further cost to the customer, but at
substantial cost to the Company.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS
Numerous governments, including the U.S. government and governments outside the
U.S., have undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
drug companies. If these efforts are successful, 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 and its revenues could decrease, possibly materially.
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 has not yet adopted any comprehensive
reform proposals, members of Congress may raise similar proposals in the future.
The Company is unable to predict the likelihood that health care reform
proposals will be enacted into law.
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 would have fewer
business opportunities and its revenues could decrease, possibly materially.
21
NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT
INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY OR INCREASED COSTS TO
THE COMPANY, OR COULD LIMIT THE COMPANY'S 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, or HIPAA, the U.S. Department of Health and Human Services has
issued regulations mandating heightened privacy and confidentiality protections.
The federal government and state governments have proposed or adopted additional
legislation governing the possession, use and dissemination of medical record
information and other personal health information. Proposals being considered by
state governments may contain privacy and security provisions that are more
burdensome than the federal regulations. In order to comply with these
regulations, the Company may need to implement new security measures, which may
require the Company to make substantial expenditures or cause the Company to
limit the products and services it offers. In addition, if the Company violates
applicable laws, regulations or duties relating to the use, privacy or security
of health information, it could be subject to civil or criminal liability.
IF THE COMPANY DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS
AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN THE
COMPANY'S PERCEPTIVE INFORMATICS BUSINESS
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 its
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 to remain
competitive, its competitive position will be harmed. If the Company is unable
to compete successfully, it may lose customers or be unable to attract new
customers, which could lead to a decrease in revenue.
BECAUSE THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL
OF ITS BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM ITS
BUSINESS, REVENUE AND FINANCIAL CONDITION
The loss of, or a material reduction in the business of, a significant client
could cause a substantial decrease in the Company's revenue and adversely affect
its business and financial condition, possibly materially. In the three months
ended March 31, 2003, the Company's five largest clients accounted for 32% of
its consolidated service revenue, and one client, Astra Zeneca, accounted for
11% of consolidated service revenue. In the nine months ended March 31, 2003,
the Company's five largest clients accounted for 33% of its consolidated service
revenue, and one client, Astra Zeneca, accounted for of 11% of its consolidated
service revenue. The Company expects that a small number of clients will
continue to represent a significant part of its revenue. The Company's contracts
with these clients generally can be terminated on short notice. The Company has
in the past experienced contract cancellations with significant clients.
IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN
CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE,
SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS
WILL BE HARMED
The Company's Perceptive Informatics business involves 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. If 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. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact Perceptive's business.
Although Perceptive's computer and communications hardware is protected through
physical and software safeguards, 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 could contain data, design or software errors
that could be difficult to detect and correct. 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.
22
IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL
TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MAY SUFFER
One of the factors on which the Company's Clinical Research Services 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. Although to date these
communities have provided a substantial pool of potential subjects for research
studies, there may not be enough patients available with the traits necessary to
conduct the studies. For example, if the Company manages a study for a treatment
of a particular type of cancer, its ability to conduct the study may be limited
by the number of patients that it can recruit that have that form of cancer. If
multiple organizations are conducting similar studies and competing for
patients, it could also make the Company's recruitment efforts more difficult.
If the Company is unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by
its Clinical Research Services business, which could have a material adverse
effect on its Clinical Research Services business.
IF THE COMPANY 'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of a number of key executives, particularly
Josef H. von Rickenbach, its Chairman and Chief Executive Officer. If any of the
Company's key executives left, it could be difficult and expensive to find
qualified replacements with the level of specialized knowledge of its products
and services and the biopharmaceutical services industry. The Company is a party
to employment agreements with Mr. von Rickenbach and other of its key
executives. Each of these agreements may be terminated by the Company or the
executive upon notice to the other party.
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 Clinical Research Services business primarily involves the testing
of experimental drugs or other regulated FDA products on consenting human
volunteers pursuant to a study protocol. These 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
some cases, these patients are already seriously ill and are at risk of further
illness or death.
In order to mitigate the risk of liability, the Company seeks to include
indemnity provisions in its Clinical Research Services contracts with clients.
However, the Company is not able to include indemnity provisions in all of its
contracts. The indemnity provisions the Company includes in these contracts
would not cover its exposure 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
- a client failed to indemnify the Company in accordance with the terms
of an indemnity agreement because it did not have the financial ability
to fulfill its indemnification obligation or for any other reason.
The Company also carries product liability insurance to cover its risk of
liability. However, the Company's insurance is subject to deductibles and
coverage limits and may not be adequate to cover product liability claims. In
addition, product liability coverage is expensive. In the future, the Company
may not be able to maintain or obtain product liability insurance on reasonable
terms, at a reasonable cost or in sufficient amounts to protect it against
losses due to product liability claims.
23
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS CONSOLIDATED RESULTS OF OPERATIONS OR
FINANCIAL POSITION
The Company provides most of its services worldwide. The Company's service
revenue from non-U.S. operations represented approximately 47.6% of total
service revenue for the three months ended March 31, 2003 and approximately
47.3% of total service revenue for the nine months ended March 31, 2003. In
addition, the Company's service revenue from operations in the United Kingdom
represented approximately 17.6% of total service revenue for the three months
ended March 31, 2003 and approximately 18.4% of total service revenue for the
nine months ended March 31, 2003. The Company anticipates that service revenue
from international operations may grow in the future. Accordingly, the Company's
business is subject to risks associated with doing business internationally,
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
its ability to repatriate profits;
- difficulty in staffing and managing widespread operations;
- unfavorable labor regulations applicable to its European operations;
- changes in foreign currency exchange rates; and
- longer payment cycles of foreign customers and difficulty of
collecting receivables in foreign jurisdictions.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF ITS
COMMON STOCK
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. For example,
the Company's income from operations was $7.0 million for the quarter ended
September 30, 2002, $1.7 million for the quarter ended December 31, 2002, and
$8.3 million for the quarter ended March 31, 2003. 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 project;
- 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 the related financial impact of acquisitions;
- the timing of internal expansion;
- 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.
Many of these factors are beyond the Company's control, such as the timing of
cancellations of significant projects and exchange rate fluctuations between
quarters or years.
A high percentage of the Company's operating costs are fixed. In particular, a
significant portion of the Company's operating costs relate to personnel costs.
As a result, the effect on the Company's revenues of the timing of the
completion, delay or loss of contracts, or the progress of client projects,
could cause its operating results to vary substantially between reporting
periods.
If the Company's operating results do not match the expectations of securities
analysts and investors as a result of these factors, the trading price of its
common stock will likely decrease.
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 47.6% of the Company service revenue for the three months ended
March 31, 2003 and 47.3% of the Company's service revenue for the nine months
ended March 31, 2003 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 have a significant effect on its operating
24
results. 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, primarily the
British pound and the Euro, and then are translated into U.S. dollars for
financial reporting purposes. For the three months ended March 31, 2003,
approximately 17.6% of total service revenue was denominated in British pounds
and 20.6% of total service revenue was denominated in Euros. For the nine months
ended March 31, 2003, approximately 17.5% of total service revenue was
denominated in British pounds and approximately 19.8% of total service revenue
was denominated in Euros.
Foreign Currency Transaction Risk. The Company's service contracts may be
denominated in a currency other than the functional currency in which it
performs the service related to such contracts.
Although the Company tries to limit these risks through exchange rate
fluctuation provisions stated in its service contracts, or by hedging
transaction risk with foreign currency exchange contracts, it may still
experience fluctuations in financial results from its operations outside the
United States, and may not be able to favorably reduce the currency transaction
risk associated with service contracts.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND
SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN ITS RESOURCES IF NOT
PROPERLY MANAGED
The Company has expanded its business 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 operating, administrative and information systems;
- accurately predict 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.
If the Company does not take these actions and is not able to manage the
expanded business, the expanded business may be less successful than
anticipated, and the Company may be required to allocate additional resources to
the expanded business, which it would have otherwise allocated to another part
of its business.
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 ITS ONGOING BUSINESS
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 business. The
success of an acquisition will depend upon, among other things, the Company's
ability to:
- assimilate the operations and services or products of the acquired
- company; integrate acquired personnel;
- retain and motivate key employees;
- retain customers; and
- minimize the diversion of management's attention from other business
concerns.
Acquisitions of foreign companies may also involve additional risks, including
assimilating differences in foreign business practices and overcoming language
and cultural barriers.
In the event that the operations of an acquired business do not meet the
Company's performance expectations, the Company may have to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business.
25
THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS
ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND
MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT
STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of the Company's articles of organization, by-laws and its
shareholder rights plan, as well as provisions of Massachusetts law, may enable
the Company's management to resist acquisition of the Company by a third party,
or may discourage a third party from acquiring the Company. These provisions
include the following:
- the Company has divided its board of directors into three classes
that serve staggered three-year terms;
- the Company is subject to Section 50A of the Massachusetts Business
Corporation Law which provides that directors may only be removed by
stockholders for cause, vacancies in the Company's board of
directors may only be filled by a vote of the Company's board of
directors and the number of directors may be fixed only by the
Company's board of directors;
- the Company is subject to Chapter 110F of the Massachusetts General
Laws which limits its ability to engage in business combinations
with certain interested stockholders;
- the Company's stockholders are limited in their ability to call or
introduce proposals at stockholder meetings; and
- the Company's shareholder rights plan would cause a proposed
acquirer of 20% or more of the Company's outstanding shares of
common stock to suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a
change in control of the Company or a change in the Company's management that
stockholders may consider favorable or beneficial. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of the
Company's stock. In addition, the Company's board of directors may issue
preferred stock in the future without stockholder approval. If the Company's
board of directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. The Company's board
of directors' ability to issue the preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the Company's stock.
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 officer 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 31, 2003, the Company acquired FWPS Group Limited, a provider of
software for clinical trial management systems, for a combination of cash and
shares of the Company's common stock. The Company issued an aggregate of 238,095
shares of common stock to stockholders of FWPS Group Limited in connection with
the acquisition. These shares were issued in connection with a share purchase
agreement between the parties and no person served as an underwriter with
respect to this transaction. The Company issued these shares in reliance on the
exemptions from registration provided by Section 4(2) and Regulation S of the
Securities Act of 1933, as amended.
26
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) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K on March 27, 2003, to
report that the Company's Board of Directors voted to adopt a
Shareholder Rights Plan, to subject the Company to Section 50A of
the Massachusetts Business Corporation Law relating to classified
boards of directors and associated matters and to amend the
Company's bylaws with respect to the calling of special meetings of
stockholders.
2. The Company filed Amendment No. 1 to Current Report on Form 8-K/A on
March 31, 2003, to refile as an exhibit the Shareholder Rights Plan
dated March 27, 2003 between the Corporation and Equiserve Trust
Company, N.A., as Rights Agent, in order to correct formatting
errors in the Shareholder Rights Plan as originally filed.
27
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 15th day of May 2003.
PAREXEL International Corporation
Date: May 15, 2003 By: /s/ Josef H. von Rickenbach
---------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2003 By: /s/ James F. Winschel, Jr.
---------------------------------------------
James F. Winschel, Jr.
Senior Vice President and
Chief Financial Officer
28
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 officer 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 officer 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 officer 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: May 15, 2003 /s/ Josef H. von Rickenbach
---------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
(principal executive officer)
29
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 officer 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 officer 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 officer 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: May 15, 2003 /s/ James F. Winschel, Jr.
--------------------------
James F. Winschel, Jr.
Senior Vice President and Chief Financial Officer
(principal financial officer)
30
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
31