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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (X) NO ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES (X) NO ( ).
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant:
The aggregate market value of Common Stock held by nonaffiliates as of December
31, 2002 was approximately $162,119,567, based on the closing price of the
registrant's Common Stock as reported on the NASDAQ National Market as of the
last business day of the registrant's most recently completed second quarter.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of September 11, 2003, there were 25,863,684 shares of PAREXEL International
Corporation Common Stock outstanding, excluding 930,829 shares in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 11, 2003 are incorporated by reference into
Item 5 of Part II and Part III of this report.
PAREXEL INTERNATIONAL CORPORATION
FORM 10-K ANNUAL REPORT
INDEX
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 32
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 57
Item 9A. Controls and Procedures 57
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 57
Item 13. Certain Relationships and Related Transactions 57
PART IV
Item 14. Principal Accountant Fees and Services 57
Item 15. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 58
SIGNATURES 59
PART I
The statements in this Annual Report on Form 10-K 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 annual report.
The forward-looking statements included in this annual report represent the
Company's estimates as of the date of this annual report. The Company
specifically disclaims any obligation to update these forward-looking statements
in the future. These forward-looking statements should not be relied upon as
representing the Company's estimates or views as of any date subsequent to the
date of this annual report.
ITEM 1. BUSINESS
GENERAL
PAREXEL International Corporation ("PAREXEL" or the "Company") is a leading
biopharmaceutical services company, providing a broad range of expertise in
clinical research, medical marketing, consulting and informatics and advanced
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. Since its founding in 1983, PAREXEL has
developed significant expertise in processes and technologies supporting this
strategy. The Company's product and service offerings include: clinical trials
management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, regulatory and medical consulting, performance
improvement, industry training and publishing, web-based portal solutions,
interactive voice response systems ("IVRS"), clinical trial management systems
("CTMS"), electronic data capture solutions, medical imaging services, and other
drug development consulting services. The Company believes that its integrated
services, depth of therapeutic area expertise, access to patients, and
sophisticated information technology, along with its experience in global drug
development and product launch services, represent key competitive strengths.
Financial data on a business unit and geographic basis are included in Note 17
to the consolidated financial statements included in Item 8 of this annual
report.
The Company's services complement the research and development ("R&D") and
marketing functions of pharmaceutical, biotechnology, and medical device
companies. Through its clinical research and product launch services, PAREXEL
seeks to help clients maximize the return on their significant investments in
research and development by reducing the time, risk, and cost of clinical
development and launch of new products. Outsourcing these types of services to
PAREXEL provides clients with a variable cost alternative to the fixed costs
associated with internal drug development. Clients no longer need to staff to
peak periods and can benefit from PAREXEL's technical resource pool, broad
therapeutic area expertise, global infrastructure designed to expedite parallel,
multi-country clinical trials, and other advisory services focused on
accelerating time-to-market. The Company's vision is to integrate and build
critical mass in the complementary businesses of clinical research, medical
marketing, drug development consulting, and information technology products and
services. The Company's goal is to provide significant benefits to sponsor
clients from this strategy, namely, a faster and less expensive development and
launch process, as well as a clinical development strategy that optimally
supports the marketing strategy for the new medical products.
The Company is one of the largest biopharmaceutical services company in the
world, based upon annual service revenue. Headquartered near Boston,
Massachusetts, the Company manages 57 locations and has approximately 5,095
employees throughout 36 countries around the world. The Company has operations
in the major health care markets around the world, including the United States
("U.S."), Canada, Japan, Germany, the United Kingdom ("U.K."), France, Italy,
Spain, Sweden, Australia, South Africa, Argentina, Brazil, Chile, Israel,
Norway, Belgium, The Netherlands, Denmark, Finland and Central and Eastern
Europe including Russia, Poland, the Czech Republic, Lithuania, Hungary,
Romania, and the Ukraine. During fiscal year 2003, PAREXEL derived 48.2% of its
service revenue from its international operations.
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The Company was founded in 1983 as a regulatory affairs consulting firm and is a
Massachusetts corporation. Josef H. von Rickenbach, Chairman of the Board and
Chief Executive Officer of PAREXEL, was a co-founder. Since its inception, the
Company has executed a focused growth strategy embracing internal expansion as
well as strategic acquisitions to expand or enhance the Company's portfolio of
services, geographic presence, therapeutic area knowledge, information
technology capabilities, and client relationships. Acquisitions have been and
may continue to be an important component of PAREXEL's growth strategy. The
Company has completed nine acquisitions over the past five fiscal years.
DESCRIPTION OF BUSINESS
The Company provides a broad range of expertise in clinical research, medical
marketing, consulting and informatics and advanced technology services to the
worldwide pharmaceutical, biotechnology, and medical device industries. The
Company is managed through four business segments: Clinical Research Services
("CRS"), the PAREXEL Consulting Group ("PCG"), Medical Marketing Services
("MMS"), and Perceptive Informatics, Inc. ("Perceptive"), a majority owned
subsidiary of the Company. CRS constitutes the Company's core business and
includes clinical trials management and biostatistics and data management, as
well as related medical advisory and investigator site services. PCG provides
technical expertise in such disciplines as clinical pharmacology, regulatory
affairs, clinical and manufacturing compliance and validation services, industry
training, publishing, and management consulting. PCG consultants identify
options and propose solutions to address clients' product development,
regulatory approval, and commercialization issues. MMS provides a full spectrum
of brand positioning, market development, product development, targeted
communications, continuing medical education, patient recruitment and strategic
reimbursement services in support of product launch. Perceptive provides
technology solutions to improve clients' product development and
commercialization processes. Perceptive offers a portfolio of products and
services that include web-based portals, interactive voice response systems,
clinical trial management systems, electronic data capture solutions,
investigator database, and medical imaging services. As of June 30, 2003, the
Company owned an approximate 97.4% interest in Perceptive.
CLINICAL RESEARCH SERVICES
The Company's CRS business unit provides clinical trials management and
biostatistical and data management services. Revenue from these services
represented approximately $312.8 million, or 61.1%, of the Company's
consolidated service revenue for fiscal year 2003.
CLINICAL TRIALS MANAGEMENT SERVICES
The CRS business unit offers complete services for the design, initiation and
management of clinical trials programs, a critical element in obtaining
regulatory approval for biopharmaceutical products. The Company has performed
services in connection with trials in most therapeutic areas, including
Cardiology, Oncology, Infectious Diseases, Neurology, Allergy/Immunology,
Endocrinology/Metabolism, Gastroenterology, Obstetrics/Gynecology, Orthopedics,
Pediatrics, Psychiatry, and Transplantation. PAREXEL's multi-disciplinary
clinical trials group examines a product's existing preclinical and clinical
data to design clinical trials to provide evidence of the product's safety and
efficacy.
PAREXEL's CRS business unit can manage every aspect of clinical trials,
including study and protocol design, Case Report Forms ("CRFs") design, site and
investigator recruitment, patient enrollment, study monitoring and data
collection, report writing and medical services. See "Government Regulations"
for additional information. CRS's clinical trials projects involve Phases II,
III, or IV clinical trials, which are generally larger, longer and more complex
than Phase I trials.
Clinical trials are monitored for and with strict adherence to good clinical
practice ("GCP"). The design of efficient CRFs, detailed operations manuals and
site monitoring by PAREXEL's clinical research associates seek to ensure that
clinical investigators and their staff follow the established protocols of the
studies. The Company has adopted standard operating procedures ("SOPs"), which
are intended to satisfy regulatory requirements and serve as a tool for
controlling and enhancing the quality of PAREXEL's worldwide clinical services.
Clinical trials represent one of the most expensive and time-consuming parts of
the overall biopharmaceutical development process. The information generated
during these trials is critical for gaining marketing approval from the Food and
Drug Administration ("FDA") and other regulatory agencies and market acceptance
by clinicians and patients. The CRS business unit clinical trials management
group assists clients with one or more of the following steps:
- - STUDY PROTOCOL DESIGN. The protocol defines the medical issues the
study seeks to examine and the statistical tests that will be
conducted. Accordingly, the protocol defines the frequency and type of
laboratory and clinical measures that are to be tracked and analyzed,
the number of patients required to produce a statistically valid
result, the period of time over which they must be tracked and the
frequency and dosage of drug administration. The study's success
depends on the protocol's ability to predict correctly the requirements
of the regulatory authorities.
4
- - CRF DESIGN. Once the study protocol has been finalized, the CRF must be
developed. The CRF is the critical source document for collecting the
necessary clinical data as dictated by the study protocol. The CRF may
change at different stages of a trial. CRFs for one patient in a given
study may consist of 100 or more pages.
- - SITE AND INVESTIGATOR RECRUITMENT. The product under investigation is
administered to patients by physicians, referred to as investigators,
at hospitals, clinics, or other locations, referred to as sites.
Medical devices are implemented or tested by investigators in similar
settings. Potential investigators may be identified and solicited by
the product sponsor. A significant portion of a trial's success depends
on the successful identification and recruitment of experienced
investigators with an adequate base of patients who satisfy the
requirements of the study protocol. The Company has access to several
thousand investigators who have conducted clinical trials for the
Company. The Company also provides additional services at the clinical
investigator site to assist physicians and expedite the clinical
research process.
- - PATIENT ENROLLMENT. The investigators, usually with the assistance of a
clinical research organization ("CRO"), find and enroll patients
suitable for the study. The speed with which trials can be completed is
significantly affected by the rate at which patients are enrolled.
Prospective patients are required to review information about the drug
and its possible side effects, and sign an informed consent form to
record their knowledge and acceptance of potential side effects.
Patients also undergo a medical examination to determine whether they
meet the requirements of the study protocol. Patients then receive the
product and are examined by the investigator as specified by the study
protocol. Investigators are responsible for administering the products
to patients, as well as examining patients and conducting necessary
tests.
- - STUDY MONITORING AND DATA COLLECTION. As patients are examined and
tests are conducted in accordance with the study protocol, data are
recorded on CRFs. CRFs are collected from study sites by specially
trained persons known as monitors. Monitors visit sites regularly to
ensure that the CRFs are completed correctly and that all data
specified in the protocol are collected. The monitors send completed
CRFs to the study coordination site, where the CRFs are reviewed for
consistency and accuracy before their data are entered into an
electronic database. The Company offers several remote data entry
("RDE") technologies through Perceptive, which significantly enhance
both the quality and timeliness of clinical data collection while
achieving significant efficiency savings. The Company's study
monitoring and data collection services comply with the FDA's adverse
events reporting guidelines.
- - REPORT WRITING. The statistical analysis findings for data collected
during the trial together with other clinical data are included in a
final report generated for inclusion in a regulatory document.
- - MEDICAL SERVICES. Throughout the course of a development program,
PAREXEL's physicians provide a wide range of medical research and
consulting services to improve the speed and quality of clinical
research, including medical supervision of clinical trials, compliance
with medical standards and safety regulations, medical writing and
strategy and product development.
BIOSTATISTICAL AND DATA MANAGEMENT SERVICES
PAREXEL's data management professionals provide a broad array of services to
support the accurate collection, organization, validation and analysis of
clinical data. For instance, they assist in the design of CRFs and investigator
training manuals to ensure that data are collected in an organized and
consistent format in compliance with the study protocol. Databases are designed
according to the analytical specifications of the project and the particular
needs of the client. Prior to data entry, PAREXEL personnel screen the data to
detect errors, omissions and other deficiencies in completed CRFs. The use of
RDE technologies to gather and report clinical data expedites data exchange
while minimizing data collection errors as a result of more timely verification
of data integrity. The CRS business unit provides clients with data abstraction,
data review and coding, data entry, database verification and editing and
resolution of data problems.
The CRS business unit has extensive experience throughout the world in the
creation of scientific databases for all phases of the drug development process,
including the creation of customized databases to meet client-specific formats,
integrated databases to support new drug application submissions and databases
in strict accordance with FDA, European and Asian specifications.
The CRS business unit biostatistics professionals assist clients with all phases
of drug development, including biostatistical consulting, database design, data
analysis and statistical reporting. These professionals develop and review
protocols, design appropriate analysis plans and design report formats to
address the objectives of the study protocol as well as the client's individual
objectives. Working with programming staff, biostatisticians perform appropriate
analyses and produce tables, graphs, listings and other applicable displays of
results according to an analysis plan. Frequently, the CRS business unit
biostatisticians represent clients during panel hearings at the FDA.
5
PAREXEL CONSULTING GROUP
The PCG business unit offers a number of consulting and advisory services in
support of product development, regulatory and marketing processes. This group
brings together experts from relevant disciplines and focuses on designing
meaningful solutions and helping clients make the best business decisions with
respect to their product lifecycle strategies. This group also serves as a
valuable resource for the Company's internal operations. PCG includes four
business units, KMI/PAREXEL, Worldwide Regulatory Affairs ("WRA"), Clinical
Pharmacology and Barnett International ("Barnett"). Service revenue from the PCG
business represented approximately $100.6 million, or 19.7%, of consolidated
service revenue for fiscal year 2003.
- - KMI/PAREXEL
KMI/PAREXEL offers manufacturing and information technology related services to
the pharmaceutical, biopharmaceutical and medical device industries in the U.S
and Europe. Employing an experienced team of former FDA investigators and
experienced engineers, the Company uses its established methodologies and
innovative information systems to assist clients in satisfying regulatory
standards for manufacturing and quality systems processes throughout a product's
lifecycle. KMI/PAREXEL has a staff of senior consultants with extensive
experience and recognized expertise in good manufacturing practices ("GMP") and
other FDA requirements. KMI/PAREXEL can evaluate clients' existing systems, help
prepare for FDA inspections, conduct new drug application ("NDA") integrity
audits, and develop regulatory correctional action plans.
KMI/PAREXEL also has the resources and experience to test processes, laboratory
systems, automated unit operations, utilities, distributed control systems, and
IS/IT management systems for manufacturing, laboratory and clinical and research
applications for compliance with regulatory standards.
- - WORLDWIDE REGULATORY AFFAIRS
Before a drug or medical device can be launched in a particular country, it must
be approved by the regulatory agency having jurisdiction in that country. WRA
provides comprehensive regulatory product registration services for
pharmaceutical and biotechnology products and medical devices in major
jurisdictions in North America, Europe, and Japan. These services include
regulatory strategy formulation, regulatory document preparation and review,
clinical quality assurance audits, regulatory training for client personnel, and
expert liaison with the FDA and other regulatory agencies.
WRA works closely with clients to devise regulatory strategies and comprehensive
registration programs. The Company's regulatory affairs experts review existing
published literature, evaluate the scientific background of a product, assess
the competitive and regulatory environment, identify deficiencies and define the
steps necessary to obtain regulatory authority approvals in the most expeditious
manner. Through these services, the Company helps its clients obtain regulatory
approval for particular products or product lines in certain specific markets
and participates fully in the product development process.
- - CLINICAL PHARMACOLOGY
Clinical pharmacology encompasses the early stages of clinical testing, when the
product is first evaluated to prove safety and efficacy. These tests vary from
"first in man" to "proof of concept studies" in Phases I and IIa of development.
See "Governmental Regulations" for additional information. PCG's Clinical
Pharmacology group provides drug development consulting, drug administration and
monitoring, bioanalytical services, and patient recruitment. PAREXEL's
international network of clinical pharmacology operations includes operations in
Berlin (Germany), Baltimore, Maryland (U.S.), Bloemfontein (South Africa) and
Harrow (U.K.), and bioanalytical laboratories in Bloemfontein and Poitiers
(France). These laboratories perform bioanalytical analyses according to Good
Laboratory Practices ("GLP") principles. With these locations, PCG's Clinical
Pharmacology group offers clinical pharmacology services (including
bioanalytical services) with a total of 245 dedicated beds (cooperating partners
not included) on three continents. The network also cooperates with a
pharmageriatrics center in Germany and a location, which specializes in renal
and hepatic impairment, in Poland, Hungary, and the Czech Republic.
6
- - BARNETT INTERNATIONAL
PCG's Barnett group offers a wide range of specialized clinical consulting,
training, and publication services for the health care industry. Barnett
provides management consulting in the clinical research area, offering a wide
range of solutions that help pharmaceutical and biotechnology companies improve
their own in-house clinical performance. These services include clinical process
optimization, benchmarking and performance management, outsourcing management,
design and development of SOPs, human performance assessment and management,
technological analysis and implementation, and clinical training.
Barnett also offers conferences, seminars and educational materials, covering a
multitude of topics in the clinical research field. The publications group
produces several well recognized periodicals and special publications covering
regulatory and drug development matters.
MEDICAL MARKETING SERVICES
Various pressures on the pharmaceutical industry have resulted in a greater
focus on decreasing the time to peak sales in order to maximize revenue and
profits over limited patent lives. MMS's strategy is to assist clients in
achieving optimal market penetration for their products by providing customized,
integrated and expert product pre-launch and launch services in the U.S.,
Europe, and internationally. Service revenue from the MMS business represented
approximately $73.8 million, or 14.4%, of consolidated service revenue in fiscal
year 2003.
The Company's experience indicates that clients need assistance in creating
awareness and understanding of their products in the marketplace and in
addressing their products' rapid acceptance by opinion leaders, physicians,
managed care organizations and patient groups leading to accelerated product
acceptance and market penetration. MMS provides comprehensive, value-added pre
and post-launch services, including market and opinion leader development,
market preparation, and targeted communications support to clients. An
integrated communications plan can detail external and internal strategies,
including communications objectives, target audiences, communications priorities
and timing, key messages, key meetings and events, and target publications and
media. Other services include meetings and exhibitions planning, continuing
medical education ("CME") programs to help keep medical professionals apprised
of current medical developments, patient recruitment programs, strategies for
medical manufacturers regarding reimbursement from insurance companies and
managed care providers, telecommunications and call center support for patient
assistance programs and Phase IV studies.
PERCEPTIVE INFORMATICS, INC.
Perceptive, a majority owned (approximately 97.4% as of June 30, 2003)
subsidiary of PAREXEL, was formed by the Company in fiscal year 2000. Perceptive
is a developing business that provides a variety of technology products and
services designed to improve clients' product development and commercialization
processes. The business currently offers a portfolio of information technology
solutions that include web-based portals, interactive voice response systems,
clinical trial management systems, electronic data capture solutions, medical
imaging, and other related products and services that can be customized to
clients' needs. Perceptive's web solutions support clinical trials management,
communications, collaboration, and the viewing of metrics and clinical trial
data. IVRS solutions support patient enrollment and randomization, management of
study drug inventory and collection of diary information from clinical trial
subjects. Perceptive's CTMS offerings include IMPACT and INITIATOR. IMPACT is an
enterprise-wide clinical trial management system used to plan studies, track
progress, support monitoring activities, track costs, and track clinical
supplies. The system is used by approximately 30 pharmaceutical companies and by
approximately 14,000 users worldwide. INITIATOR is a software package that
assists in the management and conduct of trials by Phase I units. Perceptive's
electronic data capture solutions have a potential to accelerate visibility of
clinical data and decrease time to database lock. Perceptive's medical imaging
services coordinate the use of a variety of medical imaging modalities (e.g.,
radiographs, ultrasound, computed tomography, magnetic resonance imaging, etc.)
to evaluate product safety and efficacy. Perceptive performs ongoing market
surveillance to identify and support new technologies that benefit clients as
well as the Company's internal processes. Service revenue from the Perceptive
business represented approximately $24.8 million, or 4.8%, of consolidated
service revenue for fiscal year 2003.
INFORMATION SYSTEMS
PAREXEL is committed to investing in information technology designed to help the
Company provide high quality services in a cost-effective manner and to better
manage its internal resources. The Company has built upon its information
technology network by developing a number of proprietary information systems
that address critical aspects of its business, such as project proposals/budget
generation, time information management, revenue and resource forecasting,
clinical data entry, data management, and project management.
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The Company's internal Information Services group is responsible for technology
planning and procurement, applications development, program management,
operations, and management of the Company's worldwide computer network. The
Company's information systems are designed to work in support of and reinforce
the Company's SOPs. The Company's information technology system is open and
flexible, allowing it to be adapted to the multiple needs of different clients
and regulatory systems. This system also enables the Company to respond quickly
to client inquiries regarding progress on projects and, in some cases, to gain
direct access to client data on client systems.
SALES AND MARKETING
PAREXEL has personnel based in the Americas, Europe, and the Asia/Pacific region
for the purpose of carrying out the Company's global business development
activities. In addition to significant selling experience, most of these
individuals have technical and/or scientific backgrounds. The Company's senior
executives and project team leaders also participate in maintaining key client
relationships and engaging in business development activities.
Each of the Company's business segments has an independent business development
team that focuses on its particular market segment, and while all teams may work
with the same client companies, the individuals they work with within the
Company can vary. In many cases, however, the business segment selling teams
work together in order to provide clients with the most appropriate service
offering to meet their needs.
Each business development employee is generally responsible for a specific
client segment or group of clients and for developing a strategy to maintain and
strengthen an effective relationship with that client. Each individual is
responsible for developing his or her client base, responding to client requests
for information developing and defending proposals and making presentations to
clients.
The business development group is supported by PAREXEL's global marketing
organization, which is primarily based at the Company's headquarters in Waltham,
Massachusetts. The Company's marketing activities consist primarily of brand
management, collateral development, participation in industry conferences,
advertising, public relations, e-marketing, publications, website development
and maintenance, market information development and analysis, and strategic
planning.
CLIENTS
The Company has in the past derived, and may in the future derive, a significant
portion of its service revenue from a core group of major projects or clients.
Concentrations of business in the biopharmaceutical services industry are not
uncommon and the Company expects to experience such concentration in future
years. In fiscal year 2003, the Company's five largest clients accounted for 33%
of its consolidated service revenue. In fiscal year 2002, the Company's five
largest clients accounted for 34% of its consolidated service revenue. In both
fiscal years 2003 and 2002, one client, AstraZeneca PLC, accounted for 11% of
consolidated service revenue. The loss of business from a significant client
could materially and adversely affect the Company's service revenue and results
of operations.
For fiscal year 2003, approximately 51.8% of the Company's service revenue was
attributed to operations in the U.S. and approximately 48.2% of the Company's
service revenue was attributed to operations outside the U.S. Financial data on
a geographic basis are included in Note 17 to the consolidated financial
statements in Item 8 of this annual report.
BACKLOG
Backlog represents anticipated service revenue from work not yet completed or
performed under signed contracts, letters of intent, and certain verbal
commitments. Once work commences, revenue is generally recognized over the life
of the contract as services are provided. Backlog at June 30, 2003 was $586.6
million, compared with $540.0 million at June 30, 2002. The Company anticipates
that approximately $235.0 million of the backlog as of June 30, 2003 will be
recognized as revenue after fiscal year 2004 concludes.
The Company believes that its backlog as of any date is not necessarily a
meaningful predictor of future results. Projects under contracts included in
backlog are subject to termination, revision, or delay. As detailed more fully
in the "Risk Factors" section of this annual report, clients terminate, delay,
or change the scope of projects for a variety of reasons including, among
others, the failure of products being tested to satisfy safety requirements,
unexpected or undesirable clinical results of the product, the clients' decision
to forego a particular study, insufficient patient enrollment or investigator
recruitment or production problems resulting in shortages of the drug.
Generally, the Company's contracts can be terminated upon thirty to sixty days'
notice by the client. The Company typically is entitled to receive certain fees
(and, in some cases, a termination fee) for winding down a delayed or terminated
project.
8
COMPETITION
The Company competes with other biopharmaceutical services companies and other
organizations that provide one or more of the services currently being offered
by the Company. Some of the larger biopharmaceutical services companies, such as
Quintiles Transnational Corporation, Covance Inc., and Pharmaceutical Product
Development Inc., offer services that compete directly with the Company's
services at many levels.
PAREXEL believes that the synergies arising from integrating the products and
services offered by its different business units, coupled with its global
infrastructure (and related access to patients), technological expertise, and
depth of experience differentiate it from its competitors. Although there are no
guarantees that the Company will continue to do so, the Company believes that it
competes favorably in all of its business areas. Increased competition could
adversely affect operating results.
CRS
The clinical outsourcing services industry is very fragmented, with several
hundred providers offering varying levels of service, skills and capabilities.
The Company's CRS group primarily competes against in-house departments of
pharmaceutical companies, other full service biopharmaceutical services
companies, small specialty CROs, and to a lesser extent, universities, teaching
hospitals, and other site organizations. The primary competitors for the CRS
business include Quintiles Transnational Corporation, Covance Inc.,
Pharmaceutical Product Development Inc., Inveresk Research Group Inc., Kendle
International Inc. and ICON PLC.
CROs generally compete on the basis of:
- - previous experience with a client or in a specific therapeutic area;
- - medical and scientific expertise in a specific therapeutic area;
- - quality of services;
- - breadth of services;
- - the ability to organize and manage large-scale clinical trials on a
global basis;
- - the ability to manage large and complex medical databases;
- - the ability to provide statistical and regulatory services;
- - the ability to recruit investigators and patients;
- - the ability to integrate information technology with systems to improve
the efficiency of clinical research;
- - an international presence with strategically located facilities;
- - financial strength and stability; and
- - price.
The Company believes CRS's key competitive strengths are its global footprint
and the therapeutic knowledge and expertise of its employees.
PCG
PCG competes with a large and diverse group of specialty service providers,
including major consulting firms with pharmaceutical industry practices, large
and small biopharmaceutical services companies, smaller companies with a
specific service focus, and individual consultants. The Company believes that no
other company provides the unique combination of services that PCG provides.
Furthermore, there is limited overlap of competitors from one service to the
other because of the Company's varied service offerings. The competition in this
segment is generally based on expertise, experience, reputation and price. The
Company believes that PCG's key competitive strength is its breadth and depth of
expertise in regulatory strategy, submissions and manufacturing compliance, and
early stage drug development.
MMS
MMS competes with a large and fragmented group of companies including specialist
medical marketing companies, large international advertising companies that
offer medical education services, medical public relation firms, and small and
large biopharmaceutical services companies that offer medical marketing and
education services. The primary factors on which MMS competes include the
ability to understand the commercial, medical/scientific,
regulatory/reimbursement and communications issues involved in a successful
pharmaceutical product launch; the ability to develop global marketing and
communication strategies that accelerate product acceptance and market
penetration; and the ability to translate those strategies into actionable
activities and pricing. The Company believes that MMS's key competitive
strengths are the innovative marketing services provided and the breadth of its
varied service offerings.
9
PERCEPTIVE
The Perceptive business competes primarily with biopharmaceutical services
companies, information technology companies and software companies. Companies in
this segment compete based on the strength and usability of their technology
offerings, their expertise and experience, and their understanding of the
clinical development process. Perceptive's key competitive strength is its
combination of technological expertise and knowledge of clinical development.
The Company believes that its strategy of collaborating with other technology
companies to implement certain tools, rather than developing its own, allows
Perceptive to adapt to new technologies more quickly than many of its
competitors. Perceptive's market position may be affected over time by
competitors' efforts to develop and market new information technology products
and services.
INTELLECTUAL PROPERTY
The Company's trademark "PAREXEL", is of material importance to the Company and
it has registered this and other trademarks in the U.S. and many foreign
countries. The duration of trademark registrations varies from country to
country. However, trademarks are generally valid and may be renewed indefinitely
as long as they are in use and/or their registrations are properly maintained,
and they have not been found to have become generic.
EMPLOYEES
As of June 30, 2003, the Company had 5,095 employees. Approximately 42% of the
employees are located in North America and 58% are located throughout Europe,
Asia/Pacific and South America. The Company believes that its relations with its
employees are good.
The success of the Company's business depends on its ability to attract and
retain a qualified professional, scientific and technical staff. The level of
competition among employers for skilled personnel, particularly those with
Ph.D., M.D. or equivalent degrees, is high. The Company believes that its
multinational presence, which allows for international transfers, is an
advantage in attracting employees. In addition, the Company believes that the
wide range of clinical trials in which it participates allows the Company to
offer a broad experience to clinical researchers. There is no assurance that the
Company will be able to attract and retain qualified staff in the future.
GOVERNMENT REGULATIONS
PAREXEL provides clinical trial and diverse consulting services for the drug,
biologic and medical device industries. Lack of success in obtaining approval
for the conduct of clinical trials can adversely affect the business. Lack of
success in obtaining marketing approval or clearance for a product for which
PAREXEL has provided clinical trial or other regulatory services can also
adversely affect the business. However PAREXEL makes no guarantees to its
clients with regard to successful outcomes of the regulatory process.
The clinical research services provided by PAREXEL in the U.S. are subject to
ongoing FDA regulation. The Company is obligated to comply with FDA requirements
governing activities such as obtaining patient informed consents, verifying
qualifications of investigators, reporting patients' adverse reactions to
products, and maintaining thorough and accurate records. The Company is also
required to ensure that the computer systems it uses to process human data from
clinical trials are validated in accordance with the electronic records
regulations that apply to the pharmaceutical and CRO industries (21 CFR Part
11). The Company must maintain source documents for each study for specified
periods, and such documents may be reviewed according to GCP standards by the
study sponsor and the FDA during audits and inspections. Non-compliance with GCP
can result in the disqualification of data collected during a clinical trial and
in non-approval of a product application to the FDA.
The clinical investigation of new drugs, biologics and devices is highly
regulated by government agencies. The standard for the conduct of clinical
research and development studies comprises GCP, which stipulates procedures
designed to ensure the quality and integrity of data obtained from clinical
testing and to protect the rights and safety of clinical trial participants. The
FDA and many other regulatory authorities require that study results submitted
to such authorities be based on studies conducted in accordance with GCP.
Specifically, in the European Union ("E.U.") clinical trials are subject to
national regulation by each member state. Presently, the rules are not
harmonized (see discussion of the International Conference on Harmonization
("ICH") below), but most member states require some form of notification or
approval by government authorities, review and approval by independent ethics
committees, and other measures to protect the interests of human subjects. As in
the U.S., clinical trials in the E.U. are expected to be carried out in
compliance with detailed requirements for GCP. The foreign regulatory approval
process includes all of the risks and potential delays associated with the FDA
approval process.
10
Because the FDA's regulatory requirements have served as the model for much of
the regulation of new drug development worldwide, regulatory requirements
similar to those of the FDA exist in the other countries in which the Company
operates. The Company's regulatory capabilities include knowledge of the
specific regulatory requirements in numerous countries. The Company has managed
simultaneous regulatory submissions in more than one country for a number of
drug sponsors for at least the past seven years. Beginning in 1991, the FDA and
corresponding regulatory agencies of Canada, Japan and Western Europe commenced
discussions to develop harmonized standards for preclinical and clinical studies
and the format and content of applications for new drug approvals through a
process known as ICH. Data from multinational studies adhering to GCP are now
generally acceptable to the FDA, Canadian, Western European and Japanese
regulators. The ICH process has sanctioned a single common format for drug and
biologic marketing applications, known as the Common Technical Document ("CTD")
in the U.S., Europe, Japan and Canada. On July 1, 2003 the CTD format became
mandatory in Europe and Japan and highly recommended by the FDA in the U.S. and
by the Canadian regulatory authorities. The Company has been developing the
expertise to prepare CTDs for its clients in both paper and electronic form.
REGULATION OF DRUGS AND BIOLOGICS
Before a new drug or biologic may be approved and marketed, the drug or biologic
must undergo extensive testing and regulatory review in order to determine that
the drug or biologic is safe and effective. It is not possible to estimate the
time in which preclinical, Phases I, II and III studies are completed with
respect to a given product, if at all, although the time period may last many
years. The stages of this development process are as follows:
PRECLINICAL RESEARCH (APPROXIMATELY 1 TO 3.5 YEARS). In vitro ("test tube") and
animal studies in accordance with GLP to establish the relative toxicity of the
drug or biologic over a wide range of doses and to detect any potential to cause
a variety of adverse conditions and diseases, including birth defects or cancer.
If results warrant continuing development of the drug or biologic, the results
of the studies are submitted to the FDA by the manufacturer as part of an
Investigational New Drug Application ("IND"), which must be reviewed and cleared
by the FDA before proposed clinical testing can begin. An IND must include,
among other things, preclinical data, chemistry, manufacturing and control
information, and an investigational plan, and must be activated by the FDA
before such trials may begin. There can be no assurance that submission of an
IND will result in the ability to commence clinical trials.
CLINICAL TRIALS (APPROXIMATELY 3.5 TO 6 YEARS)
- Phase I-Basic safety and pharmacology testing in
approximately 20 to 80 human subjects, usually
healthy volunteers, includes studies to determine
metabolic and pharmacologic action of the product in
humans, how the drug or biologic works, how it is
affected by other drugs, how it is tolerated and
absorbed, where it goes in the body, how long it
remains active, and how it is broken down and
eliminated from the body.
- Phase II-Basic efficacy (effectiveness) and
dose-range testing, sometimes in 100 to 200 patients
afflicted with a specific disease or condition for
which the product is intended for use, to further
test safety, begin evaluating effectiveness, optimize
dose level, determine dose schedules, and determine
routes of administration. If Phase II studies yield
satisfactory results and no hold is placed on further
studies by the FDA, Phase III studies can be
commenced.
- Phase III-Larger scale, multi-center comparative
clinical trials conducted with patients afflicted by
a target disease in order to provide enough data for
a valid statistical test of safety and effectiveness
required by the FDA and others and to provide a basis
for product labeling. When results from Phase II or
Phase III show special promise in the treatment of a
serious condition for which existing therapeutic
options are nonexistent, limited or of minimal value,
the FDA may allow the sponsor to make the new drug
available to a larger number of patients through the
regulated mechanism of a Treatment Investigational
New Drug ("TIND"), which may span late Phase II,
Phase III, and FDA review. Although TINDs may enroll
and collect a substantial amount of data from tens of
thousands of patients, they are not granted in all
cases.
The FDA receives reports on the progress of each phase of clinical testing and
may require the modification, suspension, or termination of clinical trials if,
among other things, an unreasonable risk is presented to patients or if the
design of the trial is insufficient to meet its stated objective.
NDA OR BIOLOGIC LICENSE APPLICATION ("BLA") PREPARATION AND SUBMISSION. Upon
completion of Phase III trials, the sponsor assembles the statistically analyzed
data from all phases of development, along with the chemistry and manufacturing
and pre-clinical data and the proposed labeling, among other things, into a
single large document, the NDA or BLA (in CTD format as of July 1, 2003), which
today comprises, on average, roughly 100,000 pages.
11
FDA REVIEW OF NDA OR BLA. Careful scrutiny of data from all phases of
development (including a TIND) to confirm that the manufacturer has complied
with regulations and that the drug or biologic is safe and effective for the
specific use (or "indication") under study. The FDA may refuse to accept the NDA
or BLA for filing and substantive review if certain administrative and content
criteria are not satisfied and even after accepting the submission for review,
the FDA may also require additional testing or information before approval of an
NDA or BLA. The FDA must deny approval of an NDA or BLA if applicable regulatory
requirements are not ultimately satisfied.
POST-MARKETING SURVEILLANCE AND PHASE IV STUDIES. Federal regulation requires
the sponsor to collect and periodically report to the FDA additional safety and
efficacy data on the drug or biologic for as long as the manufacturer markets
the product (post-marketing surveillance). If the product is marketed outside
the U.S., these reports must include data from all countries in which the
product is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the product, to test new dosage formulations, or
to confirm selected non-clinical benefits, e.g., increased cost-effectiveness or
improved quality of life. Product approval may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
REGULATION OF MEDICAL DEVICES
Unless a medical device is exempted from pre-market submission and clearance,
FDA approval or clearance of the device is required before the product may be
marketed in the U.S. In order to obtain clearance for marketing, a manufacturer
must demonstrate substantial equivalence to a similar legally marketed product
by submitting a premarket notification, 510(k), to the agency. The FDA may
require preclinical and clinical data to support a substantial equivalence
determination, and there can be no assurance the FDA will find a device
substantially equivalent. Clinical trials can take extended periods of time to
complete. In addition, if the FDA requires an approved Investigational Device
Exemption ("IDE") before clinical device trials may commence, there can be no
guarantee that the agency will approve the IDE. An IDE approval process could
also result in significant delay.
After submission of a premarket notification containing, among other things, any
data collected, the FDA may find the device substantially equivalent and the
device may be marketed. If the FDA finds that a device is not substantially
equivalent, the manufacturer may request that the FDA make a risk-based
classification to place the device in Class I or Class II. However, if a timely
request for risk-based classification is not made, or if the FDA determines that
a Class III designation is appropriate, an approved pre-market approval
application ("PMA") will be required before the device may be marketed.
The PMA approval process is lengthy, expensive, and typically requires, among
other things, extensive data from preclinical testing and a well-controlled
clinical trial or trials that demonstrate a reasonable assurance of safety and
effectiveness. There can be no assurance that review will result in timely or
any PMA approval. There may also be significant conditions on approval,
including limitations on labeling and advertising claims and the imposition of
post-market testing, tracking, or surveillance requirements.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
Recent legislative changes protecting confidential medical information could
impact the manner in which the Company conducts certain components of its
business. On August 14, 2002, the Department of Health and Human Services issued
final modifications to privacy regulations (the "Privacy Rule") under the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). These
regulations impose new restrictions governing the disclosure of confidential
medical information in the U.S. The Privacy Rule requires all companies subject
to the rule to comply with its provisions on or before April 14, 2003.
The failure on the part of the Company, its clients and/or the physician
investigators from whom the Company receives confidential medical information to
comply with the Privacy Rule could result in the termination of ongoing research
or the disqualification of data for submission to regulatory authorities.
Additionally, the issuance of a notice of finding by a governmental authority
against either the Company or its clients, based upon a material violation by
the Company of any applicable regulation, could materially and adversely affect
its business.
POTENTIAL LIABILITY AND INSURANCE
PAREXEL's clinical research services focuses on the testing of experimental
drugs and devices on human volunteers pursuant to a study protocol. Clinical
research involves a risk of liability for personal injury or death to patients
due, among other reasons, to possible unforeseen adverse side effects or
improper administration of the new drug. PAREXEL does not provide healthcare
services directly to patients. Rather, PAREXEL physicians or physician
investigators are responsible for administering drugs and evaluating patients.
Many of these patients are already seriously ill and are at risk of further
illness or death.
12
The Company believes that the risk of liability to patients in clinical trials
is mitigated by various regulatory requirements, including the role of
institutional review boards ("IRBs") and the need to obtain each patient's
informed consent. The FDA requires each human clinical trial to be reviewed and
approved by the IRB at each study site. An IRB is an independent committee that
includes both medical and non-medical personnel and is obligated to protect the
interests of patients enrolled in the trial. The IRB monitors the protocol and
measures designed to protect patients, such as the requirement to obtain
informed consent.
To reduce its potential liability, PAREXEL is generally successful in
incorporating indemnity provisions into its contracts with clients and with
investigators hired by the Company on behalf of its clients. These indemnities
generally do not, however, protect PAREXEL against certain of its own actions,
such as those involving negligence. Moreover, these indemnities are contractual
arrangements that are subject to negotiation with individual clients, and the
terms and scope of such indemnities can vary from client to client and from
study to study. Finally, the financial performance of these indemnities is not
secured, so that the Company bears the risk that an indemnifying party may not
have the financial ability to fulfill its indemnification obligations. PAREXEL
could be materially and adversely affected if it were required to pay damages or
incur defense costs in connection with an uninsured claim that is outside the
scope of an indemnity or where the indemnity, although applicable, is not
performed in accordance with its terms.
The Company currently maintains an errors and omissions professional liability
insurance policy, subject to deductibles and coverage limits. There can be no
assurance that this insurance coverage will be adequate, or that insurance
coverage will continue to be available on terms acceptable to the Company.
AVAILABLE INFORMATION
The Company's Internet website is http://www.parexel.com. The Company makes
available through its website the Company's annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended. The Company makes these reports available free
of charge through its website as soon as reasonably practicable after they have
been electronically filed with, or furnished to, the Securities and Exchange
Commission.
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.
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE 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 both fiscal years 2003 and 2002, AstraZeneca accounted for
11% of the Company's consolidated service revenue. If AstraZeneca terminated all
of its contracts with the Company, it would adversely affect the Company's
operating results, possibly materially.
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.
13
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 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.
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY
INDUSTRY CHANGES, 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, that,
for example, streamline procedures or 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 U.S., 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 E.U. by adopting standards for GCP and by
making the clinical trial application and approval process more uniform across
member states starting in May 2004. In the past several years, Japan also has
adopted GCP. The FDA has had GCP in place as a regulatory standard and
requirement for new drug approval for many years. The U.S., Europe and Japan
have also collaborated in the 11-year-long 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.
For example, parts of PAREXEL's PCG business advise clients on how to satisfy
regulatory standards for manufacturing processes and on other matters related to
the enforcement of government regulations by the FDA and other regulatory
bodies. Any reduction in levels of review of manufacturing processes or levels
of regulatory enforcement, generally, would result in fewer business
opportunities for the PCG business in this area.
14
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 of
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.
For instance, 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.
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 the
Company's current or future technologies, products or services, or render its
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and the Company cannot
make enhancements to its technologies, products and services necessary 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.
15
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 fiscal year
ended June 30, 2003, the Company's five largest clients accounted for 33% of its
consolidated service revenue, and one client, AstraZeneca, accounted for 11% of
consolidated service revenue. In the fiscal year ended June 30, 2002, the
Company's five largest clients accounted for 34% of its consolidated service
revenue, and one client, AstraZeneca, accounted for 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.
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 CRS business competes is the ability
to recruit patients for the clinical studies the Company is managing. These
clinical trials rely upon the ready accessibility and willing participation of
volunteer subjects. These subjects generally include volunteers from the
communities in which the studies are conducted. 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 CRS business, which could have a material adverse effect on its CRS
business.
IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of its Chairman and Chief Executive Officer,
Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and
expensive to find a qualified replacement with the level of specialized
knowledge of the Company's products and services and the biopharmaceutical
services industry. The Company is a party to an employment agreement with Mr.
von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach
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.
16
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.
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS 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 48.2% of total
service revenue for the year ended June 30, 2003 and approximately 43.3% of
total service revenue for the year ended June 30, 2002. In addition, the
Company's service revenue from operations in the United Kingdom represented
approximately 18.8% of total service revenue for the year ended June 30, 2003
and approximately 19.0% of total service revenue for the year ended June 30,
2002. The Company anticipates that service revenue from international operations
may grow in the future. Accordingly, the Company's 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, $8.3
million for the quarter ended March 31, 2003, and $3.6 million for the quarter
ended June 30, 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.
17
Many of these factors, such as the timing of cancellations of significant
projects and exchange rate fluctuations between quarters or years, are beyond
the Company's control.
Approximately 80-85% of the Company's operating costs are fixed in the short
term. In particular, a significant portion of the Company's operating costs
relate to personnel, which are estimated to have accounted for 70-75% of the
Company's total operating costs in fiscal year 2003. 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 48.2% of the Company's service revenue for the year ended June 30,
2003 and approximately 43.3% of the Company's service revenue for the year ended
June 30, 2002 were from non-U.S. operations. The Company's financial statements
are denominated in U.S. dollars; thus, factors associated with international
operations, including changes in foreign currency exchange rates, could have a
significant effect on its operating 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 year ended June 30, 2003,
approximately 20.4% of total service revenue was
denominated in British pounds and approximately 21.9%
of total service revenue was denominated in Euros.
For the year ended June 30, 2002, approximately 19.5%
of total service revenue was denominated in British
pounds and approximately 17.4% 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 of the
U.S., and may not be able to favorably reduce the currency transaction risk
associated with its 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.
18
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.
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.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH
COULD LEAD TO LOSSES BY INVESTORS
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future. On August 15, 2003, the closing sale
price of the Company's common stock on the NASDAQ National Market was $16.46 per
share. During the period from July 1, 2001 to June 30, 2003, the closing sale
price of the Company's common stock ranged from a high of $19.60 per share to a
low of $8.05 per share. Investors in the Company's common stock must be willing
to bear the risk of such fluctuations in stock price and the risk that the value
of an investment in the Company's stock could decline.
19
The Company's stock price can be affected by quarter-to-quarter variations in:
- operating results;
- earnings estimates by analysts;
- market conditions in the industry;
- prospects of health care reform;
- changes in government regulations; and
- general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations.
ITEM 2. PROPERTIES
As of June 30, 2003, the Company occupied approximately 1,375,000 square feet of
building space in 57 locations in 27 countries around the world. Except for the
property in Poitiers, France, the Company does not own any properties but leases
its building space under various leases that expire between 2003 and 2022.
The Company's headquarters occupy 212,000 square feet of leased space in
Waltham, Massachusetts under a lease that expires in 2009 and the Company's CRS
and PCG segment, along with General Administrative staffs occupy 87,000 square
feet of leased space in Uxbridge, U.K. under a lease that expires in 2022. The
Company's non-U.S. facilities account for approximately 660,000 square feet. In
particular, the Company occupies approximately 215,000 square feet in various
locations in the United Kingdom, 185,000 square feet in various locations in
Germany and 75,000 square feet in various locations in France.
The following table indicates the approximate square footage of property
attributable to each of the Company's operating segments:
Total Sq. Ft.
-------------
CRS................................ 618,750
PCG................................ 247,500
MMS................................ 151,250
Perceptive......................... 68,750
General Administrative............. 288,750
See Note 14 to the consolidated financial statements included in Item 8 of this
annual report for further information regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company periodically becomes involved in various claims and lawsuits that
are incidental to its business. The Company believes, after consultation with
counsel, that no matters currently pending would, in the event of an adverse
outcome, have a material impact on its consolidated financial position, results
of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2003.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ National Market under the
symbol "PRXL". The table below shows the high and low sales prices of the common
stock for each quarter of the fiscal years ended June 30, 2003 and 2002,
respectively, on the NASDAQ National Market. The quotations in the table below
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
2003 2002
---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 14.45 $ 8.47 $ 19.74 $ 10.46
Second Quarter $ 13.53 $ 8.05 $ 16.20 $ 10.14
Third Quarter $ 14.87 $ 10.17 $ 17.40 $ 13.00
Fourth Quarter $ 14.75 $ 11.80 $ 16.08 $ 11.95
As of September 8, 2003, there were approximately 94 stockholders of record. The
number does not include shareholders for which shares were held in a "nominee"
or "street" name.
The Company has never declared or paid any cash dividends on its Common Stock
and does not anticipate paying any cash dividend in the foreseeable future. The
Company intends to retain future earnings for the development and expansion of
its business.
Information with respect to securities authorized for issuance under the
Company's equity compensation plans may be found under the caption "Equity
Compensation Plan Information" in the Proxy Statement for the Company's 2003
Annual Meeting of Stockholders. Such information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data and number of employees)
2003 2002 2001 2000 1999
------------ --------- ------------- ------------ ------------
OPERATIONS
Service revenue $ 512,054 $ 444,318 $ 387,560 $ 378,150 $ 348,486
Income (loss) from operations 20,605(1) 20,493 (6,860)(2) 2,983(3) 20,564(4)
Net income (loss) 10,662 13,235 (825) 4,388 15,622
Basic earnings (loss) per share $ 0.42 $ 0.53 $ (0.03) $ 0.18 $ 0.63
Diluted earnings (loss) per share $ 0.42 $ 0.52 $ (0.03) $ 0.17 $ 0.62
FINANCIAL POSITION
Cash, cash equivalents and marketable securities $ 82,724 $ 66,109 $ 60,949 $ 90,530 $ 89,957
Working capital 134,346 138,020 123,488 123,680 132,757
Total assets 464,237 407,161 361,534 351,940 333,565
Long-term debt 644 432 12 104 79
Stockholders' equity $ 227,100 $ 200,077 $ 177,822 $ 186,133 $ 192,032
OTHER DATA
Purchase of property and equipment $ 29,985 $ 23,808 $ 18,145 $ 19,089 $ 18,910
Depreciation and amortization $ 20,656 $ 17,893 $ 21,453 $ 21,934 $ 17,932
Number of employees 5,095 4,930 4,640 4,200 4,198
Weighted average shares used in computing:
Basic earnings (loss) per share 25,371 24,928 24,637 24,981 24,848
Diluted earnings (loss) per share 25,683 25,582 24,637 25,140 25,128
21
(1) Income from operations for the year ended June 30, 2003 includes $9.4
million in facilities-related restructuring charges 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. The changes in assumptions were caused by the
deterioration in the commercial real estate market. See Note 7 to the
consolidated financial statements included in Item 8 of this annual
report for further detail.
(2) Loss from operations for the year ended June 30, 2001, includes a
restructuring benefit of $0.7 million. This consisted of a $1.5 million
reduction in previously accrued restructuring charges due to changes in
estimates related to the third quarter 2000 restructuring, offset by
$0.8 million for exiting a business location in the U.S. Also in the
year ended June 30, 2001, the Company recorded restructuring charges of
$7.2 million. These charges included $3.1 million of employee severance
and related costs for eliminating approximately 125 managerial and
staff positions worldwide (44% in the U.S. and 56% in Europe), $3.9
million related to consolidation and abandonment of certain facilities
(40% in the U.S. and 60% in Europe), and approximately $0.2 million
primarily related to miscellaneous costs associated with the Company's
fourth quarter restructuring plan. Additionally, the Company recorded
$1.0 million in accelerated depreciation expense due to changes in the
estimated useful lives of leasehold improvements in abandoned leased
facilities, $0.9 million of one-time asset write-offs, as well as $0.6
million in expenses associated with discontinued services.
(3) Income from operations for the year ended June 30, 2000 includes $13.1
million related to restructuring and other charges recorded in the
third quarter, consisting primarily of severance and lease termination
costs and $1.0 million related to accelerated depreciation expense due
to changes in the estimated useful lives of leasehold improvements on
abandoned leased facilities.
(4) Income from operations for the year ended June 30, 1999 includes $4.7
million in nonrecurring charges including $1.9 million in costs related
to the terminated merger agreement with Covance Inc. and $2.8 million
in leasehold abandonment charges resulting primarily from the
consolidation of certain facilities in North America and Europe.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading biopharmaceutical services company, providing a broad
range of expertise in clinical research, medical marketing, consulting and
informatics and advanced 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. Since its founding
in 1983, PAREXEL has developed significant expertise in processes and
technologies supporting this strategy. The Company's product and service
offerings include: clinical trials management, data management, biostatistical
analysis, medical marketing, clinical pharmacology, regulatory and medical
consulting, performance improvement, industry training and publishing, web-based
portal solutions, interactive voice response systems, clinical trial management
systems, electronic data capture solutions, medical imaging services, and other
drug development consulting services. The Company believes that its integrated
services, depth of therapeutic area expertise, access to patients, 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 includes the design of web-based
portals, IVRS, CTMS, electronic data capture solutions, and medical imaging.
Perceptive is a majority-owned subsidiary of the Company. As of June 30, 2003,
the Company owned an approximate 97.4% interest in Perceptive.
22
The Company conducts a significant portion of its operations in foreign
countries. Approximately 48.2% and 43.3% of the Company's service revenue for
the fiscal years ended June 30, 2003 and 2002, respectively, 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 fiscal year ended June 30, 2003,
approximately 20.4% of total service revenue was denominated in British Pounds
and approximately 21.9% of total service revenue was denominated in Euros. For
the fiscal year ended June 30, 2002, approximately 19.5% of total service
revenue was denominated in British Pounds and approximately 17.4% 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 costs increased in 2003 from the comparable 2002
periods due to these exchange rate fluctuations.
Approximately 90% 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and other financial information. On an
ongoing basis, the Company evaluates its estimates and judgments, including
those related to revenue recognition. The Company bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
While the Company's significant accounting policies are more fully described in
Note 2 to the consolidated financial statements included in Item 8 of this
annual report, the Company believes that the following accounting policies are
most critical to aid in fully understanding and evaluating its reported
financial results.
REVENUE
Service revenue on fixed-price contracts is recognized as services are
performed. The Company measures progress for fixed-price contracts using the
concept of proportional performance based upon a direct labor cost-to-cost
methodology or by the unit based output method. These methods require the
Company to estimate total expected revenue and total expected costs. 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
historic collectability and specific identification of potential problem
accounts. In the event the Company is unable to collect portions of its
outstanding billed or unbilled receivables, there may be a material impact to
the Company's consolidated results of operations and financial position.
23
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 if 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.
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 the expected useful life.
Subsequent to the adoption of SFAS No. 142, goodwill is subject to annual
impairment testing. The Company has assessed the impairment of goodwill under
SFAS No. 142 in fiscal years 2003 and 2002. Based on this assessment, there was
no impairment identified at June 30, 2003 and 2002. Any future impairment of
goodwill could have a material impact to the Company's financial position or its
results of operations.
24
RESULTS OF OPERATIONS
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
two years ended June 30, 2003 and 2002.
For the year ended June 30, 2003
(in thousands, except per share data)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Service revenue $119,353 $122,348 $132,263 $138,090 $512,054
Income from operations 7,003 1,733 8,281 3,588 20,605
Net income 3,263 142 4,375 2,882 10,662
Diluted earnings per share $ 0.13 $ 0.01 $ 0.17 $ 0.11 $ 0.42
For the year ended June 30, 2002
(in thousands, except per share data)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Service revenue $101,840 $106,874 $112,027 $123,577 $444,318
Income from operations 2,517 4,201 4,556 9,219 20,493
Net income 2,456 3,068 3,711 4,000 13,235
Diluted earnings per share $ 0.10 $ 0.12 $ 0.14 $ 0.16 $ 0.52
ACQUISITIONS AND IMPACT OF RESTRUCTURING AND OTHER CHARGES
On January 31, 2003, the Company acquired 100% of the outstanding stock of FWPS
Group Limited (FW Pharma), a provider of software for clinical trial management
systems in Birmingham, United Kingdom, for approximately $11.9 million in the
form of a combination of cash and shares of the Company's common stock. The
Company originally issued an aggregate of 238,095 shares (valued at
approximately $3.0 million) of its common stock to stockholders of FWPS Group
Limited in connection with the acquisition. Of these shares, 32,854 shares were
surrendered back to the Company by FW Pharma stockholders pursuant to the
purchase price adjustment provisions of the purchase agreement between the
parties. Under the agreement, the Company is obligated to make additional
payments of up to a maximum of $4.3 million in contingent purchase price if FW
Pharma achieves certain established financial and non-financial targets through
January 31, 2005. In connection with this transaction, the Company recorded
approximately $9.4 million of excess cost over the fair value of the interest in
the net assets acquired as goodwill. Goodwill is subject to impairment testing
under SFAS No. 142.
On October 28, 2002, the Company acquired the assets of Pracon & HealthIQ, a
provider of specialized sales and marketing services based in Reston, Virginia
and Orange, California, for approximately $1.7 million in cash. Pracon &
HealthIQ was a division of Excerpta Medica, Inc. In connection with this
transaction, the Company recorded approximately $1.6 million of excess cost over
the fair value of the interest in the net assets acquired as goodwill. Goodwill
is subject to impairment testing under SFAS No. 142.
Effective July 1, 2001, the Company acquired EDYABE, a clinical research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.6 million in cash. In connection with this transaction, the
Company recorded approximately $1.4 million of excess cost over the fair value
of the interest in the net assets acquired as goodwill. Goodwill is subject to
impairment testing under SFAS No. 142.
During the three-month periods ended June 30, 2003 and December 31, 2002 the
Company recorded facilities-related restructuring charges totaling $3.5 million
and $5.9 million, respectively, as a result of changes in prior assumptions
regarding certain leased facilities which were abandoned as part of the
Company's June 2001 restructuring. The changes in prior assumptions were caused
by a further deterioration in challenging real estate market conditions, which
made it difficult to sub-lease the abandoned facilities at previously estimated
rental rates.
25
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 eleven of
those properties. After significant 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 fiscal year 2003 that the original assumptions
for the remaining three properties were no longer valid under current market
conditions.
ANALYSIS BY SEGMENT
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographical basis. Accordingly, the
Company does not include selling, general, and administrative expenses,
depreciation and amortization expense, interest income (expense), other income
(expense), and income taxes expense in segment profitability. Service revenue,
direct costs and gross profit on service revenue for fiscal years 2003, 2002,
and 2001 were as follows:
2003 vs. 2002 2002 vs. 2001
----------------------- -----------------------
IN THOUSANDS Increase % Increase %
2003 2002 (Decrease) Change 2001 (Decrease) Change
------------ ------------ ------------ --------- ------------ ------------ ---------
Service revenue:
CRS $ 312,847 $ 261,727 $ 51,120 19.5% $ 240,501 $ 21,226 8.8%
PCG 100,621 97,775 2,846 2.9% 80,796 16,979 21.0%
MMS 73,786 64,829 8,957 13.8% 54,277 10,552 19.4%
Perceptive 24,800 19,987 4,813 24.1% 11,986 8,001 66.8%
------------ ------------ ------------ ------------ ------------
$ 512,054 $ 444,318 $ 67,736 15.2% $ 387,560 $ 56,758 14.6%
============ ============ ============ ============ ============
Direct costs:
CRS $ 199,359 $ 175,120 $ 24,239 13.8% $ 165,337 $ 9,783 5.9%
PCG 75,964 71,466 4,498 6.3% 63,611 7,855 12.3%
MMS 49,829 43,464 6,365 14.6% 37,347 6,117 16.4%
Perceptive 15,156 15,873 (717) -4.5% 11,465 4,408 38.4%
------------- ------------ ------------ ------------ ------------
$ 340,308 $ 305,923 $ 34,385 11.2% $ 277,760 $ 28,163 10.1%
============ ============ ============ ============ ============
Gross profit:
CRS $ 113,488 $ 86,607 $ 26,881 31.0% $ 75,164 $ 11,443 15.2%
PCG 24,657 26,309 (1,652) -6.3% 17,185 9,124 53.1%
MMS 23,957 21,365 2,592 12.1% 16,930 4,435 26.2%
Perceptive 9,644 4,114 5,530 134.4% 521 3,593 689.6%
------------ ------------ ------------ ------------ ------------
$ 171,746 $ 138,395 $ 33,351 24.1% $ 109,800 $ 28,595 26.0%
============ ============ ============ ============ ============
For additional financial information on a segment and geographic basis, see Note
17 to the consolidated financial statements included in Item 8 of this annual
report.
26
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2002
Service revenue increased by $67.7 million, or 15.2%, to $512.1 million for the
fiscal year ended June 30, 2003 from $444.3 million for fiscal year 2002. On a
geographic basis, service revenue for the fiscal year ended June 30, 2003 was
distributed as follows: The Americas $268.6 million (52.5%), Europe $225.6
million (44.0%), and Asia/Pacific $17.9 million (3.5%). For the fiscal year
ended June 30, 2002, service revenue was distributed as follows: The Americas
$255.4 million (57.5%), Europe $171.7 million (38.6%), and Asia/Pacific $17.2
million (3.9%). On a segment basis, CRS service revenue increased by $51.1
million, or 19.5%, to $312.8 million for the fiscal year ended June 30, 2003
from $261.7 million in fiscal year 2002. Of the total 19.5% increase,
approximately 6.7% was attributed to the positive impact of foreign currency
fluctuations, with the remaining 12.8% primarily due to higher business volume
in Phases IIIb and IV of the clinical trial business, increases in activity with
the biotech client sector and the impact of changes in scope. PCG service
revenue increased by $2.8 million, or 2.9%, to $100.6 million in the fiscal year
ended June 30, 2003 from $97.8 million in fiscal year 2002. Approximately 5.9%
of PCG service revenue for fiscal year 2003 was attributed to the positive
impact of foreign currency fluctuations. The increase in service revenue due to
positive foreign currency fluctuations was offset by reduced revenue in fiscal
year 2003. The reduction in year-over-year PCG service revenue was due primarily
to reduced levels of discretionary spending by biopharmaceutical companies and a
reduction in FDA enforcement activity, which impacted certain segments of PCG's
business. MMS service revenue increased by $8.9 million, or 13.8%, to $73.8
million in fiscal year 2003 from $64.8 million in the same period one year ago.
Of the total 13.8% increase, approximately 7.8% was attributed to incremental
revenue from the Pracon and HealthIQ acquisition completed during the second
quarter of fiscal year 2003, while the remaining 6.0% was caused by an increase
in the number of projects serviced by the group. Perceptive service revenue
increased by $4.8 million, or 24.1%, to $24.8 million in fiscal year 2003 as
compared with $20.0 million in fiscal year 2002. Of the total 24.1% increase,
approximately 18.8% was attributed to incremental revenue associated with the FW
Pharma acquisition completed during the third quarter of this fiscal year, 3.5%
was attributed to the positive impact of foreign currency fluctuations, and the
remaining 1.8% was principally attributed to new business growth in web, voice,
and data product offerings.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and is 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 $34.4 million, or 11.2%, to $340.3 million in fiscal
year 2003 from $305.9 million in fiscal year 2002. On a segment basis, CRS
direct costs increased by $24.2 million, or 13.8%, to $199.4 million for fiscal
year 2003 from $175.1 million in fiscal year 2002. Of the total 13.8% increase,
approximately 6.4% was attributed to increased costs as a result of foreign
currency fluctuations, and the remaining 7.4% was primarily due to higher labor
costs associated with business growth. As a percentage of service revenue, CRS
direct costs for fiscal year 2003 decreased by 3.2 percentage points to 63.7%
from 66.9% over fiscal year 2002, primarily due to improved operational labor
efficiencies, and leveraging of strong business growth. PCG direct costs
increased $4.5 million, or 6.3%, to $76.0 million in fiscal year 2003 from $71.5
in fiscal year 2002. Of the total 6.3% increase, approximately 1.6% was
attributed to severance costs and the remaining 4.7% was primarily due to
increased costs as a result of foreign currency fluctuations. As a percentage of
service revenue, PCG direct costs for fiscal year 2003 increased by 2.4
percentage points to 75.5% in fiscal year 2003 from 73.1% in fiscal year 2002
primarily due to the year over year decline in revenue levels. MMS direct costs
increased $6.4 million, or 14.6%, to $49.8 million in fiscal year 2003 from
$43.5 million in fiscal year 2002. Of the total 14.6% increase, approximately
5.5% was attributed to increased costs as a result of foreign currency
fluctuations, 5.2% was attributed to incremental labor costs associated with the
Pracon and HealthIQ acquisition and the remaining 3.9% was primarily due to
increased labor costs associated with an increased number of projects serviced
by the group. As a percentage of service revenue, MMS direct costs were 67.5% in
fiscal year 2003 and 67.0% in fiscal year 2002. Perceptive direct costs
decreased by $0.7 million, or 4.5%, to $15.2 million in fiscal year 2003 from
$15.9 million in fiscal year. An incremental increase in direct costs associated
with the FW Pharma acquisition of approximately 4.9% was offset by a decrease in
physician reader costs and lower labor costs. As a percentage of service
revenue, Perceptive's direct costs for fiscal year 2003 decreased by 18.3
percentage points to 61.1% in fiscal year 2003 from 79.4% in the same period one
year ago, primarily due to a more favorable business mix, lower physician reader
costs, and better labor cost leveraging.
Selling, general and administrative ("SG&A") expenses increased by $21.1
million, or 21.1%, to $121.1 million in fiscal year 2003 from $100.0 million in
fiscal year 2002. Of the total 21.1% increase, approximately 8.7% was caused by
foreign currency fluctuations, and approximately 2.7% was attributed to
incremental expenses associated with the Pracon & HealthIQ and FW Pharma
acquisitions, while the remaining 9.7% increase was driven primarily by
increased selling and marketing expenses, higher research and development costs
and the impact of recording $2.4 million in severance costs. As a percentage of
service revenue, SG&A increased by 1.2 percentage points to 23.7% in the fiscal
year ended June 30, 2003 as compared with 22.5% in the fiscal year ended June
30, 2002.
27
The Company had 5,095 employees at the end of fiscal year 2003 and 4,930
employees at the end of fiscal year 2002. The increase was primarily due to the
acquisitions of Pracon & HealthIQ and FW Pharma, as well as hiring of additional
employees to support revenue growth.
Depreciation and amortization ("D&A") expense increased by $2.8 million, or 15.4
%, to $20.7 million in fiscal year 2003 from $17.9 million in fiscal year 2002
primarily due to higher expenses as a result of foreign currency fluctuations
and an increase in capital spending of $6.2 million over fiscal year 2002. As a
percentage of service revenue, D&A was 4.0% for fiscal years 2003 and 2002.
Income from operations increased marginally to $20.6 million in fiscal year 2003
from $20.5 million one year ago. Income from operations decreased as a
percentage of service revenue to 4.0% in fiscal year 2003 from 4.6% in the last
fiscal year due to the reasons noted in the preceding paragraphs.
Facilities-related restructuring charges of $9.4 million recorded during the
fiscal year 2003 had an adverse impact on operating margin of 1.9 points.
Total other income/(loss) was $(2.1) million in fiscal year 2003 and $2.4
million in fiscal year 2002. The decrease was primarily due to a year-over-year
increase in foreign exchange losses of $4.5 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 39.2% in fiscal year 2003
compared with 39.3% in fiscal year 2002. Any future changes in the mix of
taxable income in the different jurisdictions in which the Company operates
could materially impact the Company's effective tax rate. The Company is
projecting its fiscal year 2004 income tax rate to be around 39.5%.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2001
Service revenue increased by $56.8 million, or 14.6%, to $444.3 million for the
fiscal year ended June 30, 2002 from $387.6 million for the same period in 2001.
On a geographic basis, service revenue for fiscal year 2002 was distributed as
follows: Americas $255.4 million (57.5%), Europe $171.7 million (38.6%), and
Asia/pacific $17.2 million (3.9%). In fiscal year 2001, service revenue was
distributed as follows: Americas $228.3 million (58.9%), Europe $146.0 million
(37.7%), and Asia/pacific $13.3 million (3.4%). On a segment basis, CRS service
revenue increased by $21.2 million, or 8.8%, to $261.7 million in fiscal year
2002 from $240.5 million in fiscal year 2001. The year-over-year increase in CRS
service revenue was driven mainly by a 21.7% increase in new business awards,
principally in the biotech business and with Phase IIIb and Phase IV related
studies. These increases in new business were offset in part by an unusually
high rate of cancellations in fiscal year 2002, which in the vast majority of
cases, were due to client safety and efficacy issues and budgetary reasons. PCG
service revenue increased by $17.0 million, or 21.0%, to $97.8 million in fiscal
year 2002 from $80.8 million in fiscal year 2001 largely due to new business
awards and incremental revenue resulting from fiscal year 2001 clinical
pharmacology acquisitions, as well as solid increases in regulatory consulting
in connection with recent increases in FDA enforcement activity. MMS service
revenue increased by $10.6 million, or 19.4%, to $64.8 million in fiscal year
2002 as compared with $54.3 million in fiscal year 2001 primarily due to an
increase in the number of projects serviced by the business, which was in part
attributable to an expansion of the MMS client base in the North America market.
Perceptive service revenue increased by $8.0 million, or 66.8%, to $20.0 million
in fiscal year 2002 from $12.0 million in fiscal year 2001 principally due to a
significant increase in new business awards from existing clients, and continued
business expansion to new customers. These increases were attributable
principally to growth in the web, voice, and data product offerings.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and is reimbursable by, clients. It does not yield any gross
profit to the Company, nor does it have an impact on net income.
28
Direct costs increased by $28.2 million, or 10.1%, to $305.9 million in fiscal
year 2002 from $277.8 million in fiscal year 2001. On a segment basis, CRS
direct costs increased $9.8 million, or 5.9%, to $175.1 million in fiscal year
2002 from $165.3 million in fiscal year 2001 primarily due to higher labor costs
associated with increased business volume. As a percentage of service revenue,
CRS direct costs improved by 1.8 percentage points in fiscal year 2002, as
compared with fiscal year 2001 primarily due to improved operational labor
efficiencies and effective implementation of cost control measures as part of
focused profitability improvement initiatives (e.g. enhanced billing practices
and improved project management). PCG direct costs increased by $7.9 million, or
12.3%, to $71.5 million in fiscal year 2002 from $63.6 million in fiscal year
2001 primarily due to inclusion of fiscal year 2001 acquisitions in the results
for the full year and higher employee-related expenses associated with increased
business volume across all business lines. As a percentage of service revenue,
PCG direct costs improved by 5.6 percentage points as a result of greater fixed
cost efficiency associated with revenue growth, as well as the impact of some
higher margin regulatory projects in fiscal year 2002. MMS direct costs
increased by $6.1 million, or 16.4%, to $43.5 million in fiscal year 2002, as
compared with $37.3 million in fiscal year 2001 primarily due to higher
employee-related expenses required to support increased business volume. As a
percentage of service revenue, MMS direct costs improved by 1.8 percentage
points primarily due to increased efficiency and further improvements in direct
cost management. Perceptive's direct costs increased by $4.4 million, or 38.4%,
to $15.9 million in fiscal year 2002 from $11.5 million in fiscal 2001 primarily
due to increased labor expense needed to support revenue growth within the
business segment. As a percentage of service revenue, Perceptive's direct costs
improved 16.3 percentage points, as compared with fiscal year 2001, primarily
due to greater cost efficiency.
Selling, general and administrative ("SG&A") expense increased by $11.3 million,
or 12.7%, to $100.0 million in fiscal year 2002 from $88.7 million in fiscal
year 2001 primarily due to increased labor costs associated with business growth
(80% of total increase), marketing and promotion expense (13% of total
increase), and other miscellaneous costs. As a percentage of service revenue,
SG&A decreased by 0.4 percentage points.
The Company had approximately 4,930 employees at the end of fiscal year 2002 and
4,640 employees at the end of fiscal year 2001. The increase was primarily due
to the acquisition of EDYABE, as well as hiring of additional employees needed
to support revenue growth in all business segments.
Depreciation and amortization ("D&A") expense decreased $3.6 million, or 16.6%,
to $17.9 million in fiscal year 2002 from $21.5 million in fiscal year 2001
primarily due to foreign currency fluctuations compared with fiscal year 2001,
adjustments which were made to the estimated useful lives of assets abandoned
during the first quarter of fiscal year 2001 as part of the Company's
restructuring plan, the current year impact of past restructuring activities,
and the adoption of SFAS No. 142, under which the Company eliminated
approximately $0.8 million in amortization expense in fiscal year 2002. As a
percentage of service revenue, D&A expense decreased to 4.0% in fiscal year
2002, from 5.5% in fiscal year 2001.
Income from operations increased $27.4 million to $20.5 million in fiscal year
2002 from a loss of $6.9 million one year ago, primarily for the reasons noted
in the preceding paragraphs, and the absence of restructuring charges in fiscal
year 2002 when compared with fiscal year 2001. Income from operations as a
percentage of service revenue increased to 4.6% in fiscal year 2002, as compared
with a negative 1.8% in the last fiscal year.
Total other income decreased $5.3 million, or 68.4%, to $2.4 million in fiscal
year 2002 from $7.7 million in fiscal year 2001. The decrease was primarily due
to lower worldwide interest rates and a reduction in foreign exchange gains
related to the weakened U.S. dollar versus the Euro and the British Pound
primarily during the fourth quarter of fiscal year 2002. The decrease was
partially offset by a $0.9 million gain from the sale of a building.
The Company had an effective income tax rate of 39.3% in fiscal year 2002
compared with 142.5% in fiscal year 2001. The reduction was primarily due to
favorable changes in the mix of taxable income in the different jurisdictions
where the Company operates and restructuring and other charges taken in fiscal
year 2001, which were not benefited in fiscal year 2001. Without the impact of
restructuring and other charges, the effective tax rate for fiscal year 2001
would have been 41.8%. As of June 30, 2002, there was approximately $7.8 million
of net operating loss carryforward tax benefits still remaining to be used in
future years. As of June 30, 2002, there was a valuation reserve established of
approximately $10.0 million related to the benefit of these losses and other tax
assets.
29
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.
Approximately 90% 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 45 days at June 30, 2003 compared with 56 days at June 30,
2002. The decrease in DSO in fiscal year 2003 as compared with fiscal 2002 was
primarily due to improved billing practices and increased collection activities,
as well as a higher level of deferred revenue. Accounts receivable, net of the
allowance for doubtful accounts, was $222.7 million ($144.0 million in billed
accounts receivable and $78.7 million in unbilled accounts receivable) at June
30, 2003 and $224.7 million ($131.5 million in billed accounts receivable and
$93.2 million in unbilled accounts receivable) at June 30, 2002. Deferred
revenue was $130.7 million at June 30, 2003 and $114.7 million at June 30, 2002.
Days sales outstanding is calculated by adding the end-of-period balances for
billed and unbilled account receivables, net of deferred revenue and allowances
for doubtful accounts, then dividing the resulting amount by gross revenue
(service revenue, reimbursement revenue, and investigator fees) for the most
recent quarter, and multiplying the resulting fraction by the number of days in
the quarter.
Net cash provided by operating activities for the fiscal year 2003 totaled $47.8
million and was generated from $10.7 million of net income, $20.7 million
related to depreciation and amortization expense, a $15.4 million decrease in
accounts receivable (net of allowance of doubtful accounts and deferred
revenue), a $6.5 million increase in current and non-current liabilities, a $2.9
million increase in accounts payable, and $0.6 million in minority interest in
net income of a consolidated subsidiary, offset by a $4.1 million increase in
other assets, a $3.4 million increase in deferred tax assets, and a $1.5 million
increase in prepaid and other current assets. Net cash provided by operating
activities in fiscal year 2002 consisted of $13.2 million of net income, $17.9
million related to depreciation and amortization expense, an $11.3 million
increase in other liabilities, a $3.8 million decrease in accounts receivable
(net of the allowance for doubtful accounts and deferred revenue), and $0.7
million of minority interest in the net income of a consolidated subsidiary,
partially offset by a $14.7 million decrease in accounts payable, a $6.2 million
increase in deferred income taxes, a $2.7 million increase in prepaids and other
assets, and a $1.0 million gain on the disposal of assets. The $25.5 million
increase in net cash provided by operating activities for the year ended June
30, 2003 compared with the fiscal year 2002 was primarily attributable to a
$20.0 million decrease in accounts receivable and a $17.7 million increase in
accounts payable partially offset by a $9.7 million decrease in deferred
revenue, a $2.8 million increase in non-cash charges for depreciation and
amortization expense and a $2.5 million decrease in net income. The
year-over-year changes in accounts receivable and deferred revenue was a direct
result of the Company's continued effort in billing and collections and the
year-over-year change in accounts payable was primarily due to the timing of
receipt of invoices.
Net cash used by investing activities for fiscal year 2003 totaled $10.0 million
and consisted of $30.0 million used for capital expenditures (primarily computer
software/hardware and leasehold improvements) and $11.1 million used for the
acquisitions of Pracon & HealthIQ and FW Pharma, offset by $30.6 million of net
proceeds from the sale of marketable securities and $0.5 million in proceeds
from the sale of assets. Net cash used by investing activities for fiscal year
2002 totaled $63.9 million and consisted of $40.3 million of net cash used to
purchase marketable securities, $23.8 million used primarily for software and
hardware purchases across all business segments, and $1.8 million used for a
business acquisition, partly offset by $1.9 million in proceeds from the sale of
certain assets.
Net cash provided by financing activities for the fiscal year 2003 totaled $3.7
million which was primarily generated by the proceeds from the issuance of
common stock in conjunction with the Company's stock option and employee stock
purchase plans. For fiscal year 2002, net cash provided by financing activities
totaled $3.3 million and consisted primarily of proceeds from the issuance of
common stock in association with the Company's stock option and employee stock
purchase plans.
The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro
12.0 million. This line-of-credit is not collateralized, is payable on demand,
and bears interest at a rate ranging between 3% to 5%. The Company primarily
entered into this line-of-credit to facilitate business transactions with the
bank. At June 30, 2003, the Company had approximately Euro 12.0 million
available under this line of credit.
30
The Company has other foreign lines-of-credit with banks totaling approximately
$1.7 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 6%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At June 30, 2003, the Company
had approximately $1.7 million available credit under these arrangements.
The Company has a cash pooling arrangement with ABN AMRO Bank. Pooling occurs
when debit balances are offset against credit balances and the net position is
used as a basis by the bank for interest calculation. Each legal entity owned by
the Company and party to this arrangement remains the owner of either a credit
or debit balance. Therefore, interest income is earned in legal entities with
credit balances, while interest expense is charged in legal entities with debit
balances. Based on the pool's overall balance, the bank than recalculates the
overall interest to be charged or earned, compares this amount with the sum of
already charged/earned interest amounts per account and additionally
pays/charges the difference. Interest income and interest expense are recorded
separately in the Company's consolidated statements of operations.
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 facilities-related
expenses. The Company's principal source of cash is from contracts with clients.
If the Company is unable to generate new contracts with existing and new clients
and/or if the level of contract cancellations increases, revenue and cash flow
will be adversely affected (see "Risk Factors" for further detail). Absent a
material adverse change in the level of the Company's new business bookings or
contract cancellations, PAREXEL believes that its existing capital resources
together with cash flow from operations and borrowing capacity under existing
lines of credit will be sufficient to meet its foreseeable cash needs.
In the future, the Company expects to consider acquiring businesses to enhance
its service offerings, expand its therapeutic expertise, and/or increase its
global presence. Any such acquisitions may require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuance of equity or debt securities. The Company may be
unable to secure such financing on terms acceptable to the Company.
CONTINGENT LIABILITIES AND GUARANTEES
The Company's contractual obligations and commitments for fiscal years
subsequent to June 30, 2003 are as follows:
($ IN THOUSANDS) 2004 2005 2006 2007 2008 Thereafter 2008
--------- -------- -------- -------- -------- ----------- ----------
Operating leases $ 27,666 $ 27,439 $ 23,434 $ 19,510 $ 17,708 $ 58,054 $ 173,811
Obligations under
capital leases 97 105 114 92 - - 408
--------- -------- -------- -------- -------- ----------- ----------
$ 27,763 $ 27,544 $ 23,548 $ 19,602 $ 17,708 $ 58,054 $ 174,219
========= ======== ======== ======== ======== =========== ==========
The Company expects capital expenditures to total approximately $27.0 million in
fiscal year 2004.
In association with the FW Pharma acquisition as discussed in Note 3 to the
consolidated financial statements included in Item 8 of this annual report, the
Company is obligated to make a maximum additional payment of $4.3 million in
contingent purchase price if FW Pharma achieves certain established financial
and non-financial targets through January 31, 2005.
The Company has letter-of-credit agreements with banks totaling approximately
$1.0 million guaranteeing performance under various operating leases and vendor
agreements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to the
Company.
31
FOREIGN CURRENCY EXCHANGE RATES
The Company derived approximately 48% of its service revenue for fiscal year
2003, 43% of its service revenue for fiscal year 2002 and 41% of its service
revenue for fiscal year 2001, from operations outside of the U.S. The Company
does not have significant operations in countries in which the economy is
considered to be highly inflationary. The Company's financial statements are
denominated in U.S. dollars, and accordingly, changes in exchange rates between
foreign currencies and the U.S. dollar will affect the translation of such
subsidiaries' financial results into U.S. dollars for purposes of reporting the
Company's consolidated financial results.
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in a currency
other than the foreign subsidiary's functional (local) currency. During fiscal
years 2003 and 2002, the Company recorded foreign-exchange losses of $1.9
million and gains of $0.2 million, respectively. To the extent the Company is
unable to shift the effects of currency fluctuations to its clients, foreign
exchange fluctuations could have a material effect on the Company's results of
operations. The Company occasionally enters into currency exchange contracts to
offset the impact of currency fluctuations. These currency exchange contracts
generally have maturity dates ranging from one to six months. The Company does
not expect gains or losses on these contracts to have a material impact on its
financial results (see Note 2 to the consolidated financial statements included
in Item 8 of this annual report).
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RELATED PARTY TRANSACTIONS
The Company contributed the shares of stock of FWPS Group Limited, a company
organized under the laws of the United Kingdom, which it acquired in January
2003, to its indirect majority owned subsidiary, Perceptive Informatics, Inc.,
in July 2003. Perceptive issued shares of common stock to PAREXEL International
Trust, a wholly owned subsidiary of the Company, as consideration for this
contribution. As a result of the transaction, the Company's ownership in
Perceptive increased from 97.4% to 98.2%. Certain officers and Directors of the
Company own less than 2% of the issued and outstanding common stock of
Perceptive."
During the years ended June 30, 2003 and 2002, certain members of the Company's
Board of Directors were affiliated with certain companies in which PAREXEL made
investments in fiscal year 2001. The total sum of all of these investments by
PAREXEL was $0.9 million. During the year ended June 30, 2002 and a portion of
the year ended June 30, 2003, a member of the Company's Board of Directors was
also a director of one of the Company's customers. Revenue recognized from this
customer in fiscal year 2002 was $16.0 million. The accounts receivable balance
at June 30, 2002 from this customer was $8.6 million. Related party amounts
included in accounts receivable were on standard terms and manner of settlement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. For the year ended June 30, 2003, approximately 20.4% of total service
revenue was denominated in British pounds and approximately 21.9% of total
service revenue was denominated in Euros. The Company enters into foreign
currency exchange contracts to offset the impact of currency fluctuations. Such
contracts are not treated as hedges for accounting purposes. The notional
contract amount of outstanding currency exchange contracts was approximately
$28.3 million at June 30, 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 $2.9 million.
32
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 approximately $0.6
million as of June 30, 2003 and $0.4 million as of June 30, 2002.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
----------------------------
(in thousands, except per share data)
2003 2002 2001
--------- --------- ---------
Service revenue $ 512,054 $ 444,318 $ 387,560
Reimbursement revenue 107,161 120,606 93,728
--------- --------- ---------
TOTAL REVENUE 619,215 564,924 481,288
Costs and expenses:
Direct costs 340,308 305,923 277,760
Reimbursable out-of-pocket expenses 107,161 120,606 93,728
Selling, general and administrative 121,111 100,009 88,745
Depreciation and amortization 20,656 17,893 21,453
Restructuring charges 9,374 - 6,462
--------- --------- ---------
TOTAL COSTS 598,610 544,431 488,148
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 20,605 20,493 (6,860)
Interest income 4,403 2,693 2,677
Interest expense (3,240) (1,452) (96)
Other income (loss), net (3,281) 1,200 5,151
--------- --------- ---------
TOTAL OTHER INCOME (LOSS) (2,118) 2,441 7,732
Income before provision for income taxes 18,487 22,934 872
Provision for income taxes 7,250 9,013 1,243
Minority interest 575 686 454
--------- --------- ---------
NET INCOME (LOSS) $ 10,662 $ 13,235 $ (825)
========= ========= =========
Earnings (loss) per share:
Basic $ 0.42 $ 0.53 $ (0.03)
Diluted $ 0.42 $ 0.52 $ (0.03)
Weighted average shares
Basic 25,371 24,928 24,637
Diluted 25,683 25,582 24,637
The accompanying notes are an integral part of the consolidated financial
statements.
34
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30,
2003 2002
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 69,734 $ 22,479
Marketable securities (Note 4) 12,990 43,630
Billed and unbilled accounts receivable, net (Note 5) 222,726 224,713
Prepaid expenses 12,087 8,688
Current deferred tax assets 27,604 21,642
Other current assets 4,936 6,388
------------ ----------
Total current assets 350,077 327,540
Property and equipment, net (Note 6) 61,924 47,624
Goodwill (Note 2) 29,803 12,257
Other intangible assets, net (Note 2) 5,763 2,506
Non-current deferred tax assets 10,043 11,201
Other assets 6,627 6,033
------------ ----------
Total assets $ 464,237 $ 407,161
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 118 $ 422
Accounts payable 14,462 11,858
Deferred revenue 130,650 114,723
Accrued expenses 13,766 12,513
Accrued restructuring charges (Note 7) 8,750 3,301
Accrued employee benefits and withholdings 37,849 31,713
Current deferred tax liabilities 2,557 2,538
Income taxes payable 1,801 7,361
Other current liabilities 5,778 5,091
------------ ----------
Total current liabilities 215,731 189,520
Long-term debt 644 432
Non-current deferred tax liabilities 10,674 9,268
Other liabilities 6,092 5,087
------------ ----------
Total liabilities 233,141 204,307
------------ ----------
Commitments and contingencies (Note 14)
Minority interest in subsidiary 3,996 2,777
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized: 5,000,000 at June 30,
2003 and June 30, 2002; Series A Junior Participating Preferred Stock -
50,000 shares designated, none issued and outstanding
Common stock--$.01 par value; shares authorized:
50,000,000 at June 30, 2003 and 2002; shares
issued: 26,683,055 at June 30, 2003 and
26,033,808 at June 30, 2002; shares outstanding:
25,822,055 at June 30, 2003 and 25,172,808 at June 30, 2002 267 261
Additional paid-in capital 174,734 167,829
Treasury stock, at cost; 861,000 shares at June 30, 2003 and 2002 (8,165) (8,165)
Retained earnings 63,117 52,455
Accumulated other comprehensive loss (2,853) (12,303)
------------ ----------
Total stockholders' equity 227,100 200,077
------------ ----------
Total liabilities and stockholders' equity $ 464,237 $ 407,161
============ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
35
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
Common Stock
------------------------------
Accum.
Other
Add Retained Compre- Total Compre-
Additional Treasury Earnings hensive Stock- hensive
Number Par Paid-in Stock, (Accum. Income holders' Income/
Of Shares Value Capital At Cost Deficit) (Loss) Equity (Loss)
------------------------------------------------------------------------------------------
Balance at June 30, 2000 24,719,158 $ 254 $ 162,057 $ (6,424) $ 40,173 $ (9,927) $ 186,133 $ (1,960)
========
Shares issued under stock option/
purchase plans 266,062 3 1,874 1,877
Income tax benefit from exercise
of stock options 227 227
Shares repurchased (210,000) (1,758) (1,758)
Foreign currency translation adjustment (7,704) (7,704) (7,704)
Retirement of treasury stock (17) 17
Elimination of net income of
subsidiary for change in fiscal year (128) (128)
Net loss (825) (825) (825)
------------------------------------------------------------------------------------------
Balance at June 30, 2001 24,775,220 $ 257 $ 164,141 $ (8,165) $ 39,220 $ (17,631) $ 177,822 $ (8,529)
========
Shares issued under stock option/
purchase plans 397,588 4 3,263 3,267
Income tax benefit from exercise
of stock options 425 425
Foreign currency translation adjustment 5,328 5,328 5,328
Net income 13,235 13,235 13,235
------------------------------------------------------------------------------------------
Balance at June 30, 2002 25,172,808 $ 261 $ 167,829 $ (8,165) $ 52,455 $ (12,303) $ 200,077 $ 18,563
========
Shares issued under stock option/
purchase plans 411,154 4 3,797 3,801
Shares issued for acquisitions 238,095 2 2,887 2,889
Income tax benefit from exercise
of stock options 221 221
Foreign currency translation adjustment 9,450 9,450 9,450
Net income 10,662 10,662 10,662
------------------------------------------------------------------------------------------
Balance at June 30, 2003 25,822,057 $ 267 $ 174,734 $ (8,165) $ 63,117 $ (2,853) $ 227,100 $ 20,112
==========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
36
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended June 30,
2003 2002 2001
------------- ------------ -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,662 $ 13,235 $ (825)
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Minority interest in net income of consolidated subsidiary 575 686 454
Depreciation and amortization 20,656 17,893 21,453
(Gain) loss on disposal of assets 122 (963) (108)
Deferred income taxes (3,379) (6,206) 4,063
Allowance for doubtful accounts 1,391 47 875
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable 3,114 (16,911) (46,901)
Prepaid expenses and other current assets (1,469) (1,962) 1,163
Other assets (4,144) (737) (2,130)
Accounts payable 2,935 (14,727) 6,316
Deferred revenue 10,904 20,614 7,354
Other current liabilities 5,445 10,205 (16)
Other liabilities 1,005 1,140 2,665
------------- ------------ -------------
Net cash provided (used) by operating activities 47,817 22,314 (5,637)
------------- ------------ -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of marketable securities (204,589) (364,594) (93,120)
Proceeds from sale of marketable securities 235,229 324,323 126,735
Purchases of property and equipment (29,985) (23,808) (18,145)
Acquisition of a business, net of cash acquired (11,131) (1,793) (2,994)
Proceeds from sale of assets 488 1,945 915
------------- ------------ -------------
Net cash provided (used) by investing activities (9,988) (63,927) 13,391
------------- ------------ -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,801 3,267 1,878
Payments to repurchase common stock - - (1,758)
Borrowings (repayments) under lines of credit and long-term debt (92) 45 (129)
Proceeds from issuance of subsidiary's common stock - - 386
------------- ------------ -------------
Net cash provided by financing activities 3,709 3,312 377
------------- ------------ -------------
Elimination of net loss of a subsidiary for change in fiscal year - - (128)
Effect of exchange rate changes on cash and cash equivalents 5,717 3,190 (3,921)
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 47,255 (35,111) 4,082
Cash and cash equivalents at beginning of year 22,479 57,590 53,508
------------- ------------ -------------
Cash and cash equivalents at end of year $ 69,734 $ 22,479 $ 57,590
============= ============ =============
The accompanying notes are an integral part of the consolidated financial
statements
37
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
For the years ended June 30,
2003 2002 2001
-------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,236 $ 1,448 $ 50
Income taxes $ 16,343 $ 9,975 $ 3,202
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Asset purchased under capital lease - $ 525 -
======== ======= ========
Fair value of assets acquired and goodwill $ 21,294 $ 2,928 $ 5,550
Liabilities and minority interest assumed (7,213) (1,135) (2,556)
-------- ------- --------
Cash paid and common stock issued for acquisitions $ 14,081 $ 1,793 $ 2,994
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Income tax benefit from exercise of stock options $ 221 $ 425 $ 227
The accompanying notes are an integral part of the consolidated financial
statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
The Company is a leading biopharmaceutical services company, providing a broad
range of expertise in clinical research, medical marketing, consulting and
informatics and advanced 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. Since its founding
in 1983, 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 imaging
services, and other drug development consulting services. The Company believes
that its integrated services, depth of therapeutic area expertise, access to
patients, and sophisticated information technology, along with its experience in
global drug development and product launch services, represent key competitive
strengths.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PAREXEL
International Corporation, its wholly owned and majority-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
The Company changed the fiscal year end for one of its subsidiaries, MMS, from
May 31 to June 30 in fiscal year 2001. The effect of this change resulted in the
reduction of retained earnings in the amount of $0.1 million during fiscal year
2001.
RECLASSIFICATIONS
Certain fiscal year 2002 amounts have been reclassified to conform to the fiscal
year 2003 presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and
disclosures of contingent assets and liabilities. Actual results may differ from
those estimates.
REVENUE
In the Company's CRS, PCG and MMS business units, fixed-price contract revenue
is recognized as services are performed. The Company measures progress for fixed
price contracts using the concept of proportional performance based upon a
direct labor cost-to-cost methodology or by the unit based output method. Under
the proportional performance method, revenue is recognized based upon an
estimate by comparing the ratio of direct labor costs incurred to total
estimated direct labor costs. Under the unit based output method, output units
are predefined in the contract and revenue is recognized based upon completion
of such output units.
In the Company's Perceptive business unit, software revenue is recognized based
on percentage of completion in accordance with Statement of Position ("SOP")
97-2 "Software Revenue Recognition" and the relevant guidance provided by SOP
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", due to the significant nature of customization of
each project.
Revenue related to contract modifications is recognized when realization is
assured and the amounts are reasonably determinable. Adjustments to contact cost
estimates are made in the periods in which the facts that require the revisions
become known. When the revised estimates indicate a loss, such loss is provided
in the current period in its entirety. Unbilled accounts receivable represent
revenue recognized in excess of amounts billed. Deferred service revenue
represents amounts billed in excess of revenue recognized.
39
Effective January 1, 2002, the Company adopted EITF 01-14 Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.
These out-of-pocket expenses are reflected in the Company's Consolidated
Statements of Operations under "Reimbursement Revenue" and "Reimbursable
Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on behalf of
its clients with independent physician investigators in connection with clinical
trials. These investigator fees are not reflected in PAREXEL's Service Revenue,
Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses, and/or Direct Costs,
since such fees are reimbursed by customers on a "pass through basis", without
risk or reward to the Company. The amounts of these investigator fees were $78.6
million, $74.6 million and $56.2 million for the fiscal years ended June 30,
2003, 2002 and 2001, respectively.
CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments purchased with original
maturities of 30 days or less to be cash equivalents. Marketable securities
include securities purchased with original maturities of greater than 30 days.
Marketable securities are classified as "available for sale" and are carried at
fair market value, which approximates amortized cost.
CONCENTRATION OF CREDIT RISK
Financial instruments, which may potentially expose the Company to
concentrations of credit risk, include trade accounts receivable. However, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management expectations. In fiscal years 2003 and
2002, one client, AstraZeneca PLC, accounted for 11% of consolidated service
revenue. In fiscal year 2001, Novartis AG accounted for 10% of consolidated
service revenue. The accounts receivable balance for AstraZeneca PLC was $28.2
million at June 30, 2003 and $23.4 million at June 30, 2003.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method based on estimated useful lives of 40 years for buildings,
3 to 8 years for computer hardware and software, and 5 years for office
furniture, fixtures and equipment. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the improvements or the remaining lease
term. Repair and maintenance costs are expensed as incurred.
GOODWILL
Effective July 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets". Under this statement, goodwill as well
as certain other intangible assets, determined to have an indefinite life, are
no longer amortized. Instead, these assets are reviewed for impairment at least
annually or more frequently if an event occurs or circumstances change that
would more likely than not reduce the carrying value of the reporting unit below
its fair value. The Company has performed its annual impairment test, with no
evidence of impairment to the Company's goodwill for fiscal years 2003 and 2002.
The changes in the carrying amount of goodwill for fiscal years 2003 and 2002
were as follows (in thousands):
Carrying amount as of June 30, 2001 $ 12,381
Add: EDYABE 1,400
Effect of change in rates used for translation (1,524)
---------
Carrying amount as of June 30, 2002 $ 12,257
Add: Pracon & HealthIQ 1,632
FW Pharma 9,445
Effect of change in rates used for translation and adjustments 6,469
---------
Carrying amount as of June 30, 2003 $ 29,803
=========
40
The pro forma effect on fiscal year 2001 earnings of excluding amortization
expense, net of tax, was as follows:
($ in thousands, except per share data) 2001
---------
Net loss, as reported $ (825)
Add: goodwill amortization, net of tax 800
---------
Pro forma net loss $ (25)
=========
Basis loss per common share:
Net loss, as reported $ (0.03)
Pro forma net loss $ 0.00
INTANGIBLE ASSETS
Intangible assets consist primarily of technology and customer lists acquired in
association with the FW Pharma acquisition (see Note 3 to the consolidated
financial statements included in Item 8 of this annual report for more detail).
The estimated useful lives for all intangible assets are between 3 to 10 years.
Intangible assets of $5.8 million and $2.5 million are net of accumulated
amortization of $0.6 million and $0.2 million as of June 30, 2003 and 2002,
respectively. Amortization expense was $0.5 million, $0.06 million and $0.2
million for the fiscal years ended June 30, 2003, 2002, and 2001, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences (utilizing current tax rates) of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets are recognized for the estimated future tax benefits of
deductible temporary differences and tax operating loss and credit carryforwards
and are net of valuation allowances established in jurisdictions where the
realization of those benefits is questionable. Deferred income tax expense
represents the change in the net deferred tax asset and liability balances.
FOREIGN CURRENCY
Assets and liabilities of the Company's international operations are translated
into U.S. dollars at exchange rates that are in effect on the balance sheet date
and equity accounts are translated at historical exchange rates. Income and
expense items are translated at average exchange rates, which are in effect
during the year. Translation adjustments are accumulated in other comprehensive
loss as a separate component of stockholders' equity in the consolidated balance
sheet. Transaction gains and losses are included in other income, in the
consolidated statements of operations. Transaction gains/(losses), net of
foreign currency exchange contract gains and losses were $(1.9) million, $0.2
million and $5.0 million in fiscal years 2003, 2002, 2001, respectively.
EARNINGS PER SHARE
Earnings per share has been calculated in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing net
income for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares plus the
dilutive effect of outstanding stock options and shares issuable under the
employee stock purchase plan.
41
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", as amended by SFAS No. 148 for
disclosure purposes only.
The fair value for options granted was estimated at the time of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the three years ended June 30, 2003, 2002 and 2001: Risk free
interest rates of 3.32% in fiscal year 2003, 4.08% in fiscal year 2002 and 5.52%
in fiscal year 2001; dividend yield of 0.0% for each year; volatility factor of
the expected market price of the Company's common stock of 57% for fiscal year
2003, 64% for fiscal year 2002 and 67% for fiscal year 2001; and an average
holding period of 5 years for fiscal year 2003 and 6 years for fiscal years 2002
and 2001. During the fiscal years 2003, 2002 and 2001, the weighted-average
grant-date fair value of the stock options granted were $11.19, $13.19 and
$11.17 per share, respectively.
If the compensation cost for the Company's stock options and the employee stock
purchase plan had been determined based on the fair value at the date of grant,
as prescribed in SFAS No. 123, the Company's net income and net income per share
would have been as follows:
($ in thousands, except per share data) 2003 2002 2001
------- ------- -------
Net income (loss), as reported $10,662 $13,235 $ (825)
Deduct total stock-based compensation, net of tax 2,154 5,858 4,068
------- ------- -------
Pro forma net income (loss) $ 8,508 $ 7,377 $(4,893)
======= ======= =======
Pro forma net income (loss) per share:
Basic $ 0.34 $ 0.30 $ (0.20)
Diluted $ 0.33 $ 0.29 $ (0.20)
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.
FINANCIAL INSTRUMENTS
From time to time, the Company enters into currency exchange contracts to hedge
foreign currency exposures. These currency exchange contracts were entered into
as economic hedges, which have not been designated as hedges for accounting
purposes as defined under FAS 133.
Realized gains or losses on currency exchange contracts, acquired for the
purpose of reducing exposure to currency fluctuations associated with expected
cash flows denominated in currencies other than functional currencies, are
reflected in other income, in the consolidated statements of operations.
Currency exchange contracts are marked to market with the unrealized gain or
loss reflected in other income, in the consolidated statements of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standard Board ("FASB") issued SFAS No.
150, "Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"), which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company's adoption of the initial recognition and initial
measurement provisions of SFAS 150, effective June 1, 2003, did not have a
material impact on the Company's results of operations or financial position.
42
In April 2003, the FASB issued SFAS No 149, "Derivatives and Hedging, an
Amendment of FASB Statement 133" ("SFAS 149"). This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133, Accounting for Derivative Instruments and Hedging Activities. The
changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative of Statement
133, clarifies when a derivative contains a financing component, amends the
definition of an "underlying" to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and amends
certain other existing pronouncements. Those changes will result in more
consistent reporting of contracts as either derivatives or hybrid instruments.
This Statement is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The
Company will adopt SFAS 149 effective July 1, 2003, and does not expect that the
provisions of SFAS 149 will have a material impact on the Company's results of
operations or financial position.
In January 2003, the Emerging Issues Task Force ("EITF"), published EITF Issue
00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables", which
requires companies to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying EITF 00-21,
revenue arrangements with multiple deliverables should be divided into separate
units of accounting if the deliverables in the arrangement meet certain
criteria. Arrangement consideration should be allocated among the separate units
of accounting based on their relative fair values. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company does not believe the adoption of EITF 00-21 will have a
material impact on the Company's results of operations or financial position.
In January 2003, the FASB issued 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 the consolidation of variable interest entities created after
January 31, 2003 and the disclosure requirements of FIN 46 did not have a
material effect on the Company's financial position or its results of operations
and the Company is in the process of assessing the impact, if any, the
consolidation of variable interest entities created prior to January 31, 2003
will have on its financial position and results of operations.
In December 2002, the FASB issued SFAS No 148, "Accounting for Stock-Based
Compensation Transition Disclosure" ("SFAS 148"), 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 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 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.
43
In June 2002, the FASB issued SFAS No 146 ("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.
NOTE 3. ACQUISITIONS
FISCAL YEAR 2003
On January 31, 2003, the Company acquired 100% of the outstanding stock of FWPS
Group Limited (FW Pharma), a provider of software for clinical trial management
systems in Birmingham, United Kingdom, for approximately $11.9 million in the
form of a combination of cash and shares of the Company's common stock. The
Company originally issued an aggregate of 238,095 shares (valued at
approximately $3.0 million) of its common stock to stockholders of FWPS Group
Limited in connection with the acquisition. Of these shares, 32,854 shares were
surrendered back to the Company by FW Pharma stockholders pursuant to the
purchase price adjustment provisions in the purchase agreement between the
parties. Under the agreement, the Company is obligated to make additional
payments of up to a maximum of $4.3 million in contingent purchase price if FW
Pharma achieves certain established financial and non-financial targets through
January 31, 2005. In connection with this transaction, the Company recorded
approximately $9.4 million of excess cost over the fair value of the interest in
the net assets acquired as goodwill. Goodwill is subject to impairment testing
under SFAS No. 142.
On October 28, 2002, the Company acquired the assets of Pracon & HealthIQ, a
provider of specialized sales and marketing services based in Reston, Virginia
and Orange, California, for approximately $1.7 million in cash. Pracon &
HealthIQ was a division of Excerpta Medica, Inc. In connection with this
transaction, the Company recorded approximately $1.6 million of excess cost over
the fair value of the interest in the net assets acquired as goodwill. Goodwill
is subject to impairment testing under SFAS No. 142.
FISCAL YEAR 2002
Effective July 1, 2001, the Company acquired EDYABE, a clinical research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.6 million in cash. In connection with this transaction, the
Company recorded approximately $1.4 million of excess cost over the fair value
of the interest in the net assets acquired as goodwill. Goodwill is subject to
impairment testing under SFAS No. 142.
FISCAL YEAR 2001
On September 29, 2000, the Company acquired a clinical pharmacology unit located
in Northwick Park Hospital in Harrow, U.K from Glaxo Wellcome. The fair value of
the assets acquired and the amount the Company paid for this transaction was
nominal. As such, there was no goodwill recorded for this transaction.
Effective September 1, 2000, the Company acquired 60% of FARMOVS, a clinical
pharmacology research business and bioanalytical laboratory located in
Bloemfontein, South Africa for approximately $3.0 million in cash. In connection
with this transaction, the Company recorded approximately $2.0 million related
to the excess cost over the fair value of the interest in the net assets
acquired as goodwill. Goodwill is subject to impairment testing under SFAS No.
142.
NOTE 4. MARKETABLE SECURITIES
Available-for-sale securities included in marketable securities at June 30, 2003
and 2002, consisted entirely of municipal debt and money market securities. At
June 30, 2003, all available-for-sale securities were scheduled to mature on
varying dates within one year.
The Company's investments are reflected at fair market value, which approximates
amortized cost. During fiscal year 2003, gross realized gains were minimal and
there were no gross realized losses. During fiscal year 2002, gross realized
gains totaled $0.2 million and gross realized losses totaled $0.2 million. In
fiscal year 2001, gross realized gains totaled $0.3 million and gross realized
losses totaled $0.3 million.
44
NOTE 5. BILLED AND UNBILLED ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2003 and 2002, consisted of the following:
($ IN THOUSANDS) 2003 2002
----------- -----------
Billed $ 147,411 $ 134,720
Unbilled 81,328 94,615
Allowance for doubtful accounts (6,013) (4,622)
----------- -----------
$ 222,726 $ 224,713
=========== ===========
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2003 and 2002, consisted of the following:
($ IN THOUSANDS) 2003 2002
----------- -----------
Owned assets:
Computer and office equipment $ 67,374 $ 65,402
Computer software 44,447 32,735
Furniture and fixtures 20,084 22,859
Leasehold improvements 20,147 11,346
Buildings 4,202 4,354
Other 5,121 974
----------- -----------
161,375 137,670
Less: accumulated depreciation (99,836) (90,536)
----------- -----------
$ 61,539 $ 47,134
----------- -----------
Assets held under capital lease:
Computer software 525 525
Less: accumulated amortization (140) (35)
----------- -----------
385 490
----------- -----------
$ 61,924 $ 47,624
=========== ===========
Depreciation and amortization expense relating to property and equipment was
$20.2 million, $17.9 million, and $20.6 million, for the years ended June 30,
2003, 2002, and 2001, respectively. Depreciation expense for the year ended June
30, 2001 includes $0.9 million of accelerated depreciation due to changes in the
estimated useful lives of leasehold improvements on abandoned leased facilities.
NOTE 7. RESTRUCTURING CHARGES
During the three-month periods ended June 30, 2003 and December 31, 2002 the
Company recorded facilities-related restructuring charges totaling $3.5 million
and $5.9 million, respectively, as a result of changes in prior assumptions
regarding certain leased facilities which were abandoned as part of the
Company's June 2001 restructuring. The changes in prior assumptions were caused
by a further deterioration in challenging real estate market conditions, which
made it difficult to sub-lease the abandoned facilities at previously estimated
rental rates.
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 eleven of
those properties. After significant 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 fiscal year 2003 that the original assumptions
for the remaining three properties were no longer valid under current market
conditions.
45
The Company did not record any restructuring provisions in fiscal year 2002.
During the quarter ended June 30, 2001, the Company recorded restructuring and
other charges totaling $7.2 million. These charges included $3.1 million of
employee severance and related costs for eliminating approximately 125
managerial and staff positions worldwide (44% in the U.S. and 56% in Continental
Europe), $3.9 million related to consolidation and abandonment of certain
facilities (40% in the U.S. and 60% in Continental Europe), and approximately
$0.2 million primarily related to miscellaneous costs associated with the
Company's fourth quarter restructuring plan. Additionally, the Company recorded
restructuring benefits of $0.7 million during the first quarter of fiscal 2001.
This consisted of a $1.5 million reduction in previously accrued restructuring
charges due to changes in estimates related to the third quarter 2000
restructuring, offset by $0.8 million for exiting a consulting business location
in the U.S.
During the three months ended March 31, 2000, the Company announced that
Novartis, a key client, reduced the amount of work outsourced to the CRS
business segment, due to Novartis' reprioritization of its research projects. As
a result, the Company estimated that total revenue for fiscal year 2000 and 2001
would be reduced by $50 to $55 million in the aggregate. Consequently, during
the year ended June 30, 2000, the Company recorded restructuring and other
charges of $13.1 million. These charges included $7.2 million for employee
severance costs related to the Company's decision to eliminate approximately 475
managerial and staff positions in order to reduce personnel costs as a result of
a material dollar volume of contract cancellations. The charges also included
$4.3 million for lease termination costs related to continued efforts to
consolidate certain facilities and reduce excess space in certain locations, in
addition to a benefit derived from a change in the Company's original estimate
of when certain facilities would be sublet. The remaining charges, totaling $1.6
million, primarily related to the write-off of certain intangible assets and
other investments, which were not expected to produce future value.
Fiscal years 2003, 2002, and 2001 activities against the restructuring accrual
were as follows and are recorded under accrued restructuring charges in the
Company's Consolidated Balance Sheet:
Balance at Gross Payments/ Balance at
($ IN THOUSANDS) June 30, 2002 Provisions Adjustments June 30, 2003
------------- ---------- ----------- -------------
Employee severance costs $ 1,176 - $ (932) $ 244
Facilities related charge 2,125 9,374 (2,993) 8,506
------------- ---------- ----------- -------------
$ 3,301 $ 9,374 $ (3,925) $ 8,750
============= ========== =========== =============
Balance at Gross Payments/ Balance at
June 30, 2001 Provisions Adjustments June 30, 2002
------------- ---------- ----------- -------------
Employee severance costs $ 2,785 - $ (1,609) $ 1,176
Facilities related charge 5,709 - (3,584) 2,125
Other charges 242 - (242) -
------------- ---------- ----------- -------------
$ 8,736 - $ (5,435) $ 3,301
============= ========== =========== =============
Balance at Gross Payments/ Balance at
June 30, 2000 Provisions Adjustments June 30, 2001
------------- ---------- ----------- -------------
Employee severance costs $ 4,183 $ 3,070 $ (4,468) $ 2,785
Facilities related charge 4,976 3,891 (3,158) 5,709
Other charges (15) 269 (12) 242
------------- ---------- ----------- -------------
$ 9,144 $ 7,230 $ (7,638) $ 8,736
============= ========== =========== =============
46
NOTE 8. CREDIT ARRANGEMENTS
The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro
12.0 million. This line-of-credit is not collateralized, is payable on demand,
and bears interest at a rate ranging between 3% to 5%. The Company primarily
entered into this line-of-credit to facilitate business transactions with the
bank. At June 30, 2003, the Company had approximately Euro 12.0 million
available under this line-of-credit.
The Company has other foreign lines-of-credit with banks totaling approximately
$1.7 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 6%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At June 30, 2003, the Company
had approximately $1.7 million available credit under these arrangements.
NOTE 9. STOCKHOLDERS' EQUITY
As of June 30, 2003 and 2002, there were 5,000,000 shares of preferred stock,
$0.01 par value, authorized. Of the total shares authorized, 50,000 shares have
been designated as Series A Junior Participating Preferred Stock, but none were
issued or outstanding. Preferred stock may be issued at the discretion of the
Board of Directors (without stockholder approval) with such designations, rights
and preferences as the Board of Directors may determine.
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20 million of the Company's common stock.
Repurchases are made in the open market subject to market conditions. The
Company did not repurchase any of its common stock during fiscal years ended
June 30, 2003 and 2002. During the fiscal year ended June 30, 2001, the Company
acquired 210,000 shares at a total cost of $1.8 million.
2003 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 are not 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 Right 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 10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 1.9 million, 1.2 million, 3.6 million outstanding stock options
were excluded from the calculation of diluted earnings per share for the fiscal
years ended June 30, 2003, 2002 and 2001, respectively, because they were
anti-dilutive.
47
The following table is a summary of shares used in calculating basic and diluted
earnings per share:
Years ended June 30,
(IN THOUSANDS) 2003 2002 2001
---------- ----------- ---------
Net income (loss) $ 10,662 $ 13,235 $ (825)
Weighted average number of shares outstanding, used
in computing basic earnings per share 25,371 24,928 24,637
Dilutive common stock options 312 654 -
---------- ----------- ---------
Weighted average shares used in computing
diluted earnings per share 25,683 25,582 24,637
========== =========== =========
Basic earnings (loss) per share $ 0.42 $ 0.53 $ (0.03)
Diluted earnings (loss) per share $ 0.42 $ 0.52 $ (0.03)
NOTE 11. STOCK AND EMPLOYEE BENEFIT PLANS
The Stock Option Committee of the Board of Directors is responsible for
administration of the Company's stock option plans and determines the term of
each option, the option exercise price, the number of option shares granted, and
the rate at which options become exercisable.
2001 STOCK INCENTIVE PLAN
In September 2001, the Company adopted the 2001 Stock Incentive Plan, ("2001
Plan") which provides for the grant of incentive and non-qualified stock options
for the purchase of up to an aggregate of 1,000,000 shares of common stock to
employees, officers, directors, consultants, and advisors (and any individuals
who have accepted an offer for employment) of the Company. Options under the
2001 Plan expire in ten years from the date of grant and the vesting period may
vary at the board of directors' discretion.
1998 STOCK PLAN
In February 1998, the Company adopted the 1998 Non-qualified, Non-officer Stock
Option Plan (the "1998 Plan") which provides for the grant of non-qualified
options to purchase up to an aggregate of 500,000 shares of common stock to any
employee or consultant of the Company who is not an executive officer or
director of the Company. In January 1999, the Company's Board of Directors
approved an increase in the number of shares issuable under the 1998 Plan to
1,500,000 shares. Options under the 1998 Plan expire in eight years from the
date of grant and vest at dates ranging from the issuance date to five years.
1995 STOCK PLAN
The 1995 Stock Plan ("1995 Plan") provides for the grant of incentive stock
options for the purchase of up to an aggregate of 3,028,674 shares of common
stock to directors, officers, employees, and consultants to the Company. Options
under the 1995 Plan expire eight years from the date of grant and vest over
ninety days to five years.
EMPLOYEE STOCK PURCHASE PLANS
In September 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(the "Purchase Plan"). Under the Purchase Plan, employees had the opportunity to
purchase common stock at 85% of the average market value on the first or last
day of the plan period (as defined by the Purchase Plan), whichever was lower,
up to specified limits. An aggregate of 600,000 shares could have been issued
under the Purchase Plan. The Purchase Plan terminated in fiscal year 2000.
48
In March 2000, the Board of Directors of the Company adopted the 2000 Employee
Stock Purchase Plan (the "2000 Purchase Plan"). Under the 2000 Purchase Plan,
employees have the opportunity to purchase common stock at 85% of the average
market value on the first day of each opening period or last day of each
purchase period (as defined by the Purchase Plan), whichever is lower, up to
specified limits. An aggregate of approximately 800,000 shares may be issued
under the 2000 Purchase Plan.
During fiscal year 2003, there were 273,093 shares purchased at a range of $7.17
to $10.59 per share and during fiscal year 2002, there were 267,112 shares
purchased at a range of $7.17 to $11.69 per share.
STOCK OPTIONS OF SUBSIDIARY
In August 2000, Perceptive Informatics, Inc. ("Perceptive"), a majority owned
subsidiary of the Company, adopted the 2000 Stock Incentive Plan ("the Plan") to
grant rights to purchase up to an aggregate of 7,030,000 shares of Perceptive
common stock. Under the Plan, Perceptive may grant to its employees, officers,
directors, consultants and advisors, options, restricted stock awards, or other
stock-based awards. As of June 30, 2003 and 2002, Perceptive was not publicly
traded and the shares outstanding under this plan were 3,200,427 and 3,182,927,
respectively.
SUMMARY DATA FOR PAREXEL STOCK OPTION PLANS
Aggregate stock option activities for all plans, excluding Perceptive's Plan,
for the three years ended June 30, 2003 were as follows:
Weighted
Average
Exercise
Options Price
--------- ----------
Outstanding at June 30, 2000 2,658,495 $ 18.38
Granted 1,400,500 $ 11.17
Exercised (83,297) $ 6.82
Canceled (381,175) $ 19.27
---------
Outstanding at June 30, 2001 3,594,523 $ 15.76
Granted 876,000 $ 13.19
Exercised (130,324) $ 8.41
Canceled (325,629) $ 17.79
---------
Outstanding at June 30, 2002 4,014,570 $ 15.20
Granted 129,000 $ 11.19
Exercised (138,061) $ 9.23
Canceled (346,148) $ 17.81
---------
Outstanding at June 30, 2003 3,659,361 $ 15.05
=========
Exercisable at June 30, 2001 1,292,204
Exercisable at June 30, 2002 1,830,609
Exercisable at June 30, 2003 2,251,228
Available for future grant at June 30, 2003 1,399,269
49
Summary information related to options outstanding and exercisable as of June
30, 2003 was as follows:
OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices June 30, 2003 Life (Years) Price June 30, 2003 Price
$ 0.0000 - $ 3.7810 28,993 0.8 $ 0.01 28,993 $ 0.01
$ 3.7811 - $ 7.5620 76,000 0.4 $ 7.43 76,000 $ 7.43
$ 7.5621 - $11.3430 1,024,800 4.9 $ 9.55 597,449 $ 9.58
$11.3431 - $15.1240 1,495,292 6.0 $ 12.75 554,508 $ 12.63
$15.1241 - $18.9050 205,975 3.0 $ 17.83 175,311 $ 18.06
$18.9051 - $22.6860 249,741 3.5 $ 21.24 240,407 $ 21.27
$22.6861 - $26.4670 121,010 2.6 $ 24.23 121,010 $ 24.23
$26.4671 - $30.2480 220,050 2.7 $ 27.09 220,050 $ 27.09
$30.2481 - $34.0290 187,000 2.0 $ 31.78 187,000 $ 31.78
$34.0291 - $37.8100 50,500 2.7 $ 36.19 50,500 $ 36.19
----------- ----------
3,659,361 2,251,228
=========== ==========
401(K) PLAN
The Company sponsors an employee savings plan ("the Plan") as defined by Section
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all employees in the U.S. who elect to participate. Participants
have the opportunity to invest on a pre-tax basis in a variety of mutual fund
options. The Company matches 100% of each participant's voluntary contributions
up to 3% of gross salary per payroll period subject to an annual cap of $3,000.
Company contributions vest to the participants in 20% increments for each year
of employment and become fully vested after five years of continuous employment.
Company contributions to the Plan were $2.8 million, $2.6 million and $2.4
million, for the years ended June 30, 2003, 2002, and 2001, respectively.
NOTE 12. FINANCIAL INSTRUMENTS
As of June 30, 2003 and 2002, the Company had entered into currency exchange
contracts to exchange Euro and British Pounds for U.S. dollars. The notional
contract amount of outstanding currency exchange contracts were approximately
$28.3 million and $24.0 million at June 30, 2003 and 2002, respectively.
While it is not the Company's intention to terminate the above derivative
financial instruments, fair values were estimated based on market rates, which
represented the amounts that the Company would receive or pay if the instruments
were terminated at the balance sheet date. The fair values of currency exchange
contracts were approximately $0.2 million at June 30, 2003 and $0.4 million at
June 30, 2002.
At June 30, 2003, maturities of the Company's currency exchange contracts ranged
from one to two months.
NOTE 13. INCOME TAXES
Domestic and foreign income (loss) before income taxes for the three years ended
June 30, were as follows:
($ IN THOUSANDS) 2003 2002 2001
- ----------------- ---------- ---------- --------
Domestic $ 1,743 $ 23,413 $ 8,119
Foreign 16,744 (479) (7,247)
---------- ---------- --------
$ 18,487 $ 22,934 $ 872
========== ========== ========
50
Provisions for income taxes for the three years ended June 30, were as follows:
($ IN THOUSANDS) 2003 2002 2001
- ---------------- ---------- ---------- ----------
Current:
Federal $ 5,209 $ 8,512 $ 4,362
State 1,027 3,060 1,324
Foreign 4,393 2,849 733
---------- ---------- ----------
10,629 14,421 6,419
---------- ---------- ----------
Deferred:
Federal (2,714) (4,351) (2,088)
State (409) (89) (55)
Foreign (256) (968) (3,033)
---------- ---------- ----------
(3,379) (5,408) (5,176)
---------- ---------- ----------
$ 7,250 $ 9,013 $ 1,243
========== ========== ==========
The Company's consolidated effective income tax rate differed from the U.S.
federal statutory income tax rate as set forth below:
($ IN THOUSANDS) 2003 % 2002 % 2001 %
--------- ---- --------- ------ --------- ------
Income tax expense computed at the federal
statutory rate $ 6,470 35.0% $ 8,027 35.0% $ 305 35.0%
State income taxes, net of federal benefit 408 2.2% 1,989 8.7% 871 100.0%
Foreign rate differential (956) -5.2% (344) -1.5% 1,406 161.2%
Foreign permanent tax adjustments (780) -4.2% (109) -0.5% 257 29.5%
U.S. permanent tax adjustments 21 0.1% (2,928) -12.8% (130) -14.9%
Change in valuation allowances 1,911 10.3% 2,625 11.4% (2,170) -248.9%
U.S. separate return limitation year loss - - - - - -
Other 176 1.0% (247) -1.1% 704 80.6%
--------- ---- --------- ------ --------- ------
$ 7,250 39.2% $ 9,013 39.3% $ 1,243 142.5%
========= ==== ========= ====== ========= ======
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries as those earnings have been
permanently reinvested. Such taxes, if any, are not expected to be significant.
51
Significant components of the Company's net deferred tax assets as of June 30,
2003 and 2002 were as follows:
($ IN THOUSANDS) 2003 2002
---------- ----------
Deferred tax assets:
Foreign loss carryforwards $ 8,749 $ 7,838
Accrued expenses 25,361 21,521
Allowance for doubtful accounts 484 736
Deferred contract profit 14,840 12,667
Other 81 39
---------- ----------
Gross deferred tax assets 49,515 42,801
Deferred tax asset valuation allowance (11,868) (9,958)
---------- ----------
Total deferred tax assets 37,647 32,843
---------- ----------
Deferred tax liabilities:
Property and equipment (9,031) (8,704)
Deferred contract profit (2,687) (1,838)
Other (1,513) (1,264)
---------- ----------
Total deferred tax liabilities (13,231) (11,806)
---------- ----------
$ 24,416 $ 21,037
========== ==========
The net deferred tax assets and liabilities included in the consolidated balance
sheets as of June 30, 2003 and 2002 were as follows:
($ IN THOUSANDS) 2003 2002
---------- ----------
Current deferred tax assets $ 27,604 $ 21,642
Non-current deferred tax assets 10,043 11,201
Current deferred tax liabilities (2,557) (2,538)
Non-current deferred tax liabilities (10,674) (9,268)
---------- ----------
$ 24,416 $ 21,037
========== ==========
The Company has foreign tax loss carryforwards, tax effected, of approximately
$8.7 million that are available to offset future liabilities for foreign income
taxes. Substantially all of the foreign tax losses are carried forward
indefinitely, subject to certain limitations. A valuation allowance has been
established for certain future foreign income tax benefits related to income tax
loss carryforwards and temporary tax adjustments based on an assessment that it
is more likely than not that these benefits will not be realized. In fiscal year
2003, the valuation allowance increased by $1.9 million. As of June 30, 2003,
$11.8 million of future tax rate benefit remains. The ultimate realization of
this benefit is dependent upon the generation of sufficient taxable income in
respective jurisdictions.
52
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases that include renewal
and escalation clauses. Total rent expense was $30.2 million, $25.4 million, and
$23.7 million for fiscal years 2003, 2002 and 2001, respectively. Future minimum
lease payments due under non-cancellable leases are as follows:
($ IN THOUSANDS) 2004 2005 2006 2007 2008 Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating leases $ 27,666 $ 27,439 $ 23,434 $ 19,510 $ 17,708 $ 58,054 $ 173,811
In association with the FW Pharma acquisition as discussed in Note 3 to the
consolidated financial statements included in Item 8 of this annual report, the
Company is obligated to make a maximum additional payment of $4.3 million in
contingent purchase price if FW Pharma achieves certain established financial
and non-financial targets through January 31, 2005.
NOTE 16. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2003 and 2002, certain members of the Company's
Board of Directors were affiliated with certain companies in which PAREXEL made
investments in fiscal year 2001. The total sum of all of these investments by
PAREXEL was $0.9 million. During the year ended June 30, 2002 and a portion of
the year ended June 30, 2003, a member of the Company's Board of Directors was
also a director of one of the Company's customers. Revenue recognized from this
customer in fiscal year 2002 was $16.0 million. The accounts receivable balance
at June 30, 2002 from this customer was $8.6 million. Related party amounts
included in accounts receivable were on standard terms and manner of settlement.
NOTE 17. GEOGRAPHIC AND SEGMENT INFORMATION
Financial information by geographic area for the three years ended June 30,
2003, 2002 and 2001 were as follows:
($ IN THOUSANDS) 2003 2002 2001
---------- ---------- ----------
Service revenue:
United States $ 265,332 $ 252,082 $ 228,351
United Kingdom 96,183 84,208 62,055
Europe (excluding U.K.) 129,402 87,476 83,896
Japan and Other 21,137 20,552 13,258
---------- ---------- ----------
$ 512,054 $ 444,318 $ 387,560
========== ========== ==========
Income (loss) from operations:
United States $ 8,397 $ 18,690 $ 6,324
United Kingdom 5,724 7,683 (10,040)
Europe (excluding U.K.) 11,192 (3,852) (941)
Japan and Other (4,708) (2,028) (2,203)
---------- ---------- ----------
$ 20,605 $ 20,493 $ (6,860)
========== ========== ==========
Tangible Long-lived assets:
United States $ 2,187 $ 2,206 $ 2,583
United Kingdom - - -
Europe (excluding U.K.) 3,375 2,484 2,361
Japan and Other 1,065 940 499
---------- ---------- ----------
$ 6,627 $ 6,033 $ 5,443
========== ========== ==========
53
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 imaging.
Perceptive is a majority-owned subsidiary of the Company. As of June 30, 2003,
the Company owned approximately 97.4% of Perceptive.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographical basis. Accordingly, the
Company does not include selling, general, and administrative expenses,
depreciation and amortization expense, interest income (expense), other income
(expense), and income tax expense in segment profitability. The accounting
policies of the segments are the same as those described in Note 2 to the
consolidated financial statements included in Item 8 of this annual report.
Furthermore, the Company attributes revenue to individual countries based upon
the number of hours of services performed in the respective countries and
inter-segment transactions are not included in service revenue.
The Company evaluates its assets (including long-lived assets) on a geographical
basis because it has a global infrastructure supporting all four business
segments.
($ IN THOUSANDS) CRS PCG MMS PERCEPTIVE TOTAL
---------- ---------- ---------- ---------- ----------
Service revenue:
2003 $ 312,847 $ 100,621 $ 73,786 $ 24,800 $ 512,054
2002 $ 261,727 $ 97,775 $ 64,829 $ 19,987 $ 444,318
2001 $ 240,501 $ 80,796 $ 54,277 $ 11,986 $ 387,560
Gross profit on service revenue:
2003 $ 113,488 $ 24,657 $ 23,957 $ 9,644 $ 171,746
2002 $ 86,607 $ 26,309 $ 21,365 $ 4,114 $ 138,395
2001 $ 75,164 $ 17,185 $ 16,930 $ 521 $ 109,800
54
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of PAREXEL International Corporation:
We have audited the accompanying consolidated balance sheets of PAREXEL
International Corporation and its subsidiaries as of June 30, 2003 and June 30,
2002 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 15(a) for the fiscal years ended June 30, 2003 and June 30, 2002.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of PAREXEL
International Corporation for the year ended June 30, 2001 was audited by other
auditors whose report dated August 14, 2001 expressed an unqualified opinion on
those statements and schedule, prior to the reclassifications made to those
financial statements related to the adoption of EITF 01-14, as described in Note
2.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PAREXEL
International Corporation and its subsidiaries at June 30, 2003 and June 30,
2002, and the consolidated results of its operations, stockholders' equity and
cash flows for each of the two years in the period ended June 30, 2003 in
conformity with accounting principles generally accepted in the United States.
We also audited the reclassifications described in Note 2 that were applied to
restate the 2001 financials statements. In our opinion such reclassifications
are appropriate and have been properly applied. However, we were not engaged to
audit, review or apply any procedures to the 2001 financial statements of the
Company other than with respect to such reclassifications, accordingly, we do
not express an opinion or any other form of assurance on the 2001 financial
statements taken as a whole. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the Consolidated Financial Statements, effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets."
Ernst & Young LLP
Boston, Massachusetts
August 6, 2003
55
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of PAREXEL International Corporation:
In our opinion, the consolidated statements of operations, stockholders' equity
and cash flows for the year ended June 30, 2001 present fairly, in all material
respects, the results of operations and cash flows of PAREXEL International
Corporation and its subsidiaries for the year ended June 30, 2001, prior to the
revisions related to the adoption of EITF 01-14, further described in Note 2, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, MA
August 14, 2001
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company's
chief executive officer and chief financial officer concluded that, as of June
30, 2003, the Company's disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance 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.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item may be found under the captions "Elections
of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the Company's 2003 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found under the captions
"Directors' Compensation," "Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," "Employment Agreements," "Stock
Performance Graph" and "Compensation Committee and Committee Report on Executive
Compensation" in the Proxy Statement for the Company's 2003 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to this item may be found under the caption "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Proxy Statement for the Company's 2003 Annual Meeting
of Stockholders. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found under the captions "Certain
Relationships and Related Transactions" in the Proxy Statement for the Company's
2003 Annual Meeting of Stockholders. Such information is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item may be found under the caption "Audit
Fees" in the Proxy Statement for the Company's 2003 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
57
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS. The following financial statements and
supplementary data are included in Item 8 of this annual report.
FINANCIAL STATEMENTS FORM 10-K PAGES
-------------------- ---------------
Report of Independent Auditors for the year ended
June 30, 2003 and 2002 55
Report of Independent Accountants for the years ended
June 30, 2001 56
Consolidated Statements of Operations for each of the
three years ended June 30, 2003, 2002, and 2001 34
Consolidated Balance Sheets at June 30, 2003 and 2002 35
Consolidated Statements of Stockholders' Equity for
each of the three years ended June 30, 2003, 2002, and 2001 36
Consolidated Statements of Cash Flows for each of the
three years ended June 30, 2003, 2002, and 2001 37-38
Notes to Consolidated Financial Statements 39-54
(2) FINANCIAL STATEMENT SCHEDULES:
For the three years ended June 30, 2003:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or Notes thereto.
(3) EXHIBITS. The list of Exhibits filed as a part of this Annual Report on
Form 10-K are set forth on the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by this reference.
(B) Reports on Form 8-K
1. The Company furnished a Current Report on Form 8-K on April 8,
2003 to furnish under Item 12 the Company's Press Release
dated April 8, 2003 containing earnings guidance.
2. The Company furnished a Current Report on Form 8-K on April
23, 2003 to furnish under Item 12 the Company's Press Release
dated April 23, 2003 containing financial results for the
quarter ended March 31, 2003.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PAREXEL INTERNATIONAL CORPORATION
By: /s/ Josef H. von Rickenbach Dated: September 15, 2003
- -----------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title(s) Date
/s/ Josef H. von Rickenbach
- ----------------------------------------
Josef H. von Rickenbach Chairman of the Board and Chief September 15, 2003
Executive Officer (principal executive
officer)
/s/ James F. Winschel, Jr.
- ----------------------------------------
James F. Winschel, Jr. Senior Vice President and Chief September 15, 2003
Financial Officer (principal financial and
accounting officer)
/s/ A. Dana Callow, Jr.
- ----------------------------------------
A. Dana Callow, Jr. Director September 15, 2003
/s/ A. Joseph Eagle
- ----------------------------------------
A. Joseph Eagle Director September 15, 2003
/s/ Patrick J. Fortune
- ----------------------------------------
Patrick J. Fortune Director September 15, 2003
/s/ Richard L. Love
- ----------------------------------------
Richard L. Love Director September 15, 2003
/s/ Serge Okun
- ----------------------------------------
Serge Okun Director September 15, 2003
/s/ William U. Parfet
- ----------------------------------------
William U. Parfet Director September 15, 2003
59
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Articles of Organization of the Company,
as amended (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333-104968) and incorporated
herein by this reference).
3.2 Amended and Restated By-laws of the Company (filed as Exhibit
4.2 to the Company's Registration Statement on Form S-8 (File
No. 333-104968) and incorporated herein by this reference).
4.1 Specimen certificate representing the Common Stock of the
Company (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 33-97406) and incorporated
herein by this reference).
4.2 Rights Agreement dated March 27, 2003 between the Corporation
and Equiserve Trust Company, N.A., as Rights Agent, which
includes as Exhibit A the Form of Certificate of Vote of
Series A Junior Participating Preferred Stock, as Exhibit B
the Form of Rights Certificate and as Exhibit C the Summary of
Rights to Purchase Common Stock (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K/A dated March 31, 2003
and incorporated herein by this reference).
10.1* Form of Stock Option Agreement of the Company (filed as
Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (File No. 333-1188) and incorporated herein by reference).
10.2* 1986 Incentive Stock Option Plan of the Company (filed as
Exhibit 10.10 to the Company's Registration Statement on Form
S-1 (File No. 33-97406) and incorporated herein by this
reference).
10.3* 1987 Stock Plan of the Company (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
33-97406) and incorporated herein by this reference).
10.4* 1989 Stock Plan of the Company (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No.
33-97406) and incorporated herein by this reference).
10.5* Second Amended and Restated 1995 Stock Plan of the Company
(filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended June 30, 1998 and incorporated herein
by this reference).
10.6* 1995 Non-Employee Director Stock Option Plan of the Company
(filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File No. 33-97406) and incorporated
herein by this reference).
10.7* Corporate Plan for Retirement of the Company (filed as Exhibit
10.16 to the Company's Registration Statement on Form S-1
(File No. 33-97406) and incorporated herein by this
reference).
10.8 First Amendment dated as of January 3, 1992 to the Lease dated
June 14, 1991 between 200 West Street Limited Partnership and
the Company (filed as Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (File No. 33-97406) and
incorporated herein by this reference).
60
10.9 Second Amendment dated as of June 28, 1993 to the Lease dated
June 14, 1991 between 200 West Street Limited Partnership and
the Company (filed as Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (File No. 33-97406) and
incorporated herein by this reference).
10.10* 1998 Non-Qualified, Non-Officer Stock Option Plan, as amended
(filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for the year ended June 30, 1999 and incorporated herein
by this reference).
10.11* Amended and Restated Employment Agreement dated December 6,
1999 between Josef H. von Rickenbach and the Company (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 and incorporated
herein by this reference).
10.12 Third Amendment to Lease dated November 17, 1998 between
Boston Properties Limited Partnership and the Company (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 and incorporated
herein by this reference).
10.13 Lease dated November 17, 1998 between Boston Properties
Limited Partnership and the Company (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998 and incorporated herein by this
reference).
10.14 Lease dated June 14, 1991 between 200 West Street Limited
Partnership and the Company (filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.15.1* Employment Agreement dated August 30, 1996 between Ulf
Schneider and PAREXEL GmbH (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.15.2* Amendment to Employment Agreement, dated November 22, 1999,
between Ulf Schneider and PAREXEL GmbH (filed as Exhibit
10.19.2 to the Company's Annual Report on Form 10-K for the
year ended ended June 30, 2001 and incorporated herein by this
reference).
10.15.3* Amendment to Employment Agreement, dated June 21, 2000 between
Ulf Schneider and PAREXEL GmbH (filed as Exhibit 10.19.3 to
the Company's Annual Report on Form 10-K for the year ended
ended June 30, 2001 and incorporated herein by this
reference).
10.16 Fourth Amendment dated August 28, 2000 to the lease dated
November 17, 1998 between Boston Properties Limited
Partnership and the Company (filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by this reference).
10.17* Change of Control/Severance Agreement, dated as of April 9,
2001, by and between the Company and Carl A. Spalding (filed
as Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended June 30, 2001 and incorporated herein by
this reference).
10.18* Change of Control/Severance Agreement, dated as of April 3,
2001,
61
by and between the Company and James F. Winschel, Jr. (filed
as Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the year ended June 30, 2001 and incorporated herein by
this reference).
10.19* 1998 Non-Qualified, Non-Officer Stock Option Plan (filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (File No. 333-47033) and incorporated herein by this
reference).
10.20* PAREXEL International Nonqualified Deferred Compensation Plan
(filed as Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended June 30, 2002).
10.21 ABN - AMRO Cash Pooling Agreement, dated as of September 14,
2001.
10.22 Lease dated April 10, 2002 between API (No. 23) Limited,
Arlington Property Investments Limited, PAREXEL International
Limited and the Company.
21.1 List of subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 CFO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 CEO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 CFO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* denotes management contract or any compensatory plan, contract or arrangement.
62
SCHEDULE II
PAREXEL INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($ in thousands)
Balance at Charged to Balance at
beginning costs and Deductions end of
of year expenses and write-offs year
-------------- -------------- --------------- --------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended June 30, 2001 $ 3,700 $ 1,117 $ (242) $ 4,575
Year ended June 30, 2002 4,575 961 (914) 4,622
Year ended June 30, 2003 $ 4,622 $ 2,408 $ (1,017) $ 6,013
63