UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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 incorporation or organization) (I.R.S. Employer Identification Number)
195 West Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 9, 2002, there were
25,022,351 shares of PAREXEL International Corporation common stock outstanding,
excluding 861,000 shares in treasury.
1
PAREXEL INTERNATIONAL CORPORATION
INDEX
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Page
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Part I. Financial Information
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - March 31, 2002 and June 30, 2001 3
Condensed Consolidated Statements of Operations - Three months
ended March 31, 2002 and 2001; Nine months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Nine months ended 5
March 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results 9
of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 16
Part II. Other Information
Item 6 Exhibits and Reports of Form 8-K 22
Signatures 23
2
Part I. Financial Information
Item 1 - Financial Statements
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
March 31, June 30,
2002 2001
------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,431 $ 57,590
Marketable securities 42,313 3,359
Billed accounts receivable, net 108,229 121,484
Unbilled accounts receivable, net 94,980 85,420
Prepaid expenses 7,229 10,025
Deferred tax assets 14,030 13,987
Other current assets 5,913 3,022
------------------- ---------------
Total current assets 300,125 294,887
Property and equipment, net 40,713 39,888
Goodwill and other intangible assets, net 13,549 12,695
Deferred income taxes 15,005 14,899
Other assets 5,540 5,443
------------------- ---------------
Total assets $374,932 $367,812
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 295 $ 232
Accounts payable 5,345 26,296
Deferred revenue 110,012 93,577
Other current liabilities 58,561 57,572
------------------- ---------------
Total current liabilities 174,213 177,677
Other liabilities 10,039 9,745
------------------- ---------------
Total liabilities 184,252 187,422
------------------- ---------------
Minority interest in subsidiary 2,500 2,568
Stockholders' equity:
Preferred stock - $0.01 par value; shares
authorized: 5,000,000; none issued and outstanding - -
Common stock - $0.01 par value; shares authorized:
50,000,000; shares issued:25,881,249 and 25,636,220 at March 31, 2002 and
June 30, 2001, respectively; shares outstanding:25,020,249 and 24,775,220 at
March 31, 2002 and June 30, 2001, respectively 259 257
Additional paid-in capital 166,140 164,141
Retained earnings 48,455 39,220
Treasury stock, at cost (8,165) (8,165)
Accumulated other comprehensive income (18,509) (17,631)
------------------- ---------------
Total stockholders' equity 188,180 177,822
------------------- ---------------
Total liabilities and stockholders' equity $374,932 $367,812
=================== ===============
See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
For the three months ended For the nine months ended
March 31, March 31,
----------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- -------------- --------------- --------------
Service revenue $112,027 $ 98,322 $320,741 $280,861
Reimbursement revenue 32,863 23,643 81,821 62,408
---------------- -------------- --------------- --------------
Total revenue 144,890 121,965 402,562 343,269
Costs and expenses:
Direct costs 77,500 71,346 223,120 201,654
Reimbursable out-of-pocket expenses 32,863 23,643 81,821 62,408
Selling, general and administrative 25,761 21,362 73,191 64,486
Depreciation 4,198 4,676 13,111 15,142
Amortization 12 254 45 582
Restructuring and other charges - - - (768)
---------------- -------------- --------------- --------------
140,334 121,281 391,288 343,504
---------------- -------------- --------------- --------------
Income (loss) from operations 4,556 684 11,274 (235)
Other income, net 1,521 2,708 4,562 5,688
---------------- -------------- --------------- --------------
Income before provision for income taxes 6,077 3,392 15,836 5,453
Provision for income taxes 2,301 1,240 6,033 2,345
Minority interest 65 253 568 353
---------------- -------------- --------------- --------------
Net income $ 3,711 $ 1,899 $ 9,235 $ 2,755
================ ============== =============== ==============
Earnings per share:
Basic $ 0.15 $ 0.08 $ 0.37 $ 0.11
Diluted $ 0.14 $ 0.08 $ 0.36 $ 0.11
Shares used in computing earnings per share:
Basic 24,984 24,610 24,880 24,557
Diluted 25,729 25,247 25,547 24,838
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the nine months ended
March 31,
---------------------------
2002 2001
---------------------------
Cash flows from operating activities:
Net income $ 9,235 $ 2,755
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 13,156 15,724
Changes in operating assets/liabilities (305) (27,489)
--------- ---------
Net cash provided (used) by operating activities 22,086 (9,010)
--------- ---------
Cash flows from investing activities:
Purchase of marketable securities (233,830) (52,866)
Proceeds from sale of marketable securities 194,568 69,584
Acquisition, net of cash acquired (1,793) (2,994)
Proceeds from sale of fixed assets 1,887 167
Purchase of property and equipment (14,702) (11,901)
--------- ---------
Net cash (used) provided by investing activities (53,870) 1,990
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,000 803
Repurchase of common stock - (1,759)
Borrowings (repayments) under credit arrangements 268 (96)
Proceeds from issuance of subsidiary's common stock - 387
--------- ---------
Net cash provided (used) by financing activities 2,268 (665)
--------- ---------
Elimination of net loss of a subsidiary for change in fiscal year - (126)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (643) (1,353)
--------- ---------
Net decrease in cash for the period (30,159) (9,164)
Cash and cash equivalents at beginning of period 57,590 53,508
--------- ---------
Cash and cash equivalents at end of period $ 27,431 $ 44,344
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes $ 7,712 $ 2,727
Interest $ 660 $ 41
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 2,928 $ 5,550
Liabilities and minority interest assumed (1,135) (2,556)
--------- ---------
Cash paid for acquisition $ 1,793 $ 2,994
========= =========
See notes to condensed consolidated financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions of Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(primarily consisting of normal recurring adjustments) considered necessary for
a fair presentation have been included. Operating results for the three months
and nine months ended March 31, 2002, are not necessarily indicative of the
results that may be expected for other quarters or the entire fiscal year.
Certain prior year balances have been reclassified in order to conform to
current year presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2001.
Note 2 -- Earnings per Share
The following table outlines the basic and diluted earnings per common share
computations (in thousands, except per share data):
For the three months For the nine months
ended March 31, ended March 31,
2002 2001 2002 2001
---------- --------- ---------- ----------
Net income attributable to common shares $ 3,711 $ 1,899 $ 9,235 $ 2,755
========== ========= ========== ==========
Basic Earnings Per Common Share Computation:
Weighted average common shares outstanding 24,984 24,610 24,880 24,557
========== ========= ========== =========
Basic earnings per common share $ 0.15 $ 0.08 $ 0.37 $ 0.11
========== ========= ========== =========
Diluted Earnings Per Common Share Computation:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 24,984 24,610 24,880 24,557
Shares attributable to common stock options 745 637 667 281
---------- --------- ---------- ------=--
25,729 25,247 25,547 24,838
========== ========= ========== =========
Diluted earnings per common share $ 0.14 $ 0.08 $ 0.36 $ 0.11
========== ========= ========== =========
Note 3 - Comprehensive Income
Comprehensive income (loss) has been calculated by the Company in accordance
with Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss), which is comprised primarily of net income (loss)
and foreign currency translation adjustments, totaled $1.4 million and $(1.9)
million for the three months ended March 31, 2002 and 2001, respectively, and
$8.4 million and $(2.1) million for the nine months ended March 31, 2002 and
2001, respectively.
6
Note 4 - Segment Information
The Company is managed through four reportable segments, namely, Clinical
Research Services ("CRS"), PAREXEL Consulting Group ("PCG"), Medical Marketing
Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS
constitutes the Company's core business and includes clinical trials management,
biostatistics and data management, as well as related medical advisory and
investigator site services. PCG provides technical expertise in such disciplines
as clinical pharmacology, regulatory affairs, industry training, publishing, and
management consulting. These consultants identify options and propose solutions
to address clients' product development, registration, and commercialization
issues. MMS provides a full spectrum of market development, product development,
targeted communications, and strategic reimbursement services in support of
product launch. Perceptive provides a variety of web-based portal solutions
designed to accelerate and enhance the clinical development and product launch
processes, as well as a range of voice and data systems. It also offers a
medical imaging service supporting the use of advanced imaging techniques in
clinical development.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit on service revenue (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; restructuring and other
charges; other income (expense); and income tax expense in segment
profitability.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of and reimbursable by our clients, and therefore, does not yield any
gross profit.
For the three months ended For the nine months ended
March 31, March 31,
- ----------------------------------------------------------------------------------------
($ in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------
Service revenue:
Clinical Research Services $ 64,786 $ 60,440 $ 188,925 $ 176,002
PAREXEL Consulting Group 25,776 21,225 71,205 57,589
Medical Marketing Services 16,211 13,480 46,190 39,020
Perceptive Informatics, Inc. 5,254 3,177 14,421 8,250
--------- --------- --------- ---------
$ 112,027 $ 98,322 $ 320,741 $ 280,861
========= ========= ========= =========
Reimbursement revenue:
Clinical Research Services $ 12,185 $ 7,727 $ 32,038 $ 23,691
PAREXEL Consulting Group 3,461 3,693 10,245 9,655
Medical Marketing Services 16,969 12,037 38,671 28,450
Perceptive Informatics, Inc. 248 186 867 612
--------- --------- --------- ---------
$ 32,863 $ 23,643 $ 81,821 $ 62,408
========= ========= ========= =========
Gross profit on service revenue:
Clinical Research Services $ 20,656 $ 17,880 $ 60,926 $ 54,709
PAREXEL Consulting Group 7,378 4,666 18,982 11,934
Medical Marketing Services 5,260 4,316 15,039 12,568
Perceptive Informatics, Inc. 1,233 114 2,674 (4)
--------- --------- --------- ---------
$ 34,527 $ 26,976 $ 97,621 $ 79,207
========= ========= ========= =========
7
Note 5 - Acquisition
Effective February 28, 2002, the Company acquired the assets of a small
consulting firm for approximately $0.2 million. Excess cost over the fair value
of the interest in the net assets acquired is classified as goodwill on the
Company's balance sheet. The purchase price allocation is still subject to
finalization.
Effective July 1, 2001, the Company acquired EDYABE, a contract research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.6 million. . Excess cost over the fair value of the interest in
the net assets acquired is classified as goodwill on the Company's balance
sheet. The purchase price allocation is still subject to finalization.
Note 6 - Restructuring and Other Charges
During the year ended June 30, 2001, the Company recorded restructuring and
other charges in the fourth quarter totaling $7.2 million. These charges
included $3.9 million related to consolidation and abandonment of certain
facilities (40% in the U.S. and 60% in Europe), $3.1 million for employee
severance and related costs for eliminating approximately 125 managerial and
staff positions worldwide (44% in the U.S. and 56% in Europe), and approximately
$0.3 million primarily related to other costs associated with the Company's
fourth quarter restructuring plan. Additionally, the Company recorded net
restructuring and other charges of $0.7 million during the first quarter of
fiscal 2001 consisting 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.
Current quarter activity charged against the restructuring accrual (which is
included in "Other current liabilities" in the Condensed Consolidated Balance
Sheet) was as follows (in thousands):
Balance as of 3rd Quarter Balance as of
December 31, Payments/ March 31,
2001 Adjustments 2002
Employee severance costs $ 1,855 $ (617) $ 1,238
Facilities related charge 3,926 (857) 3,069
Other charges 53 - 53
------------- ----------- -------------
$ 5,834 $ (1,474) $ 4,360
============= =========== =============
Note 7 - Stock Repurchase Program
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20 million of the Company's common stock.
Repurchases made in the open market are subject to market conditions. During the
three months and nine months ended March 31, 2002, the Company did not
repurchase any of its common stock.
Note 8 - Recently Issued Accounting Standards
In November 2001, the Emerging Issues Task Force (EITF) of the FASB issued EITF
01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred". EITF 01-14 requires reimbursable
out-of-pocket expenses incurred to be characterized as revenue in the income
statement. The guidance became effective for periods beginning after December
15, 2001 and required comparative financial statements for prior periods to be
reclassified. EITF 01-14 was adopted by PAREXEL in the third quarter of fiscal
year 2002 and did not have any impact on either the Company's financial position
or its results of operations because the amount included in revenue was offset
by a like amount in expenses. The Company excludes investigator fees from its
out-of-pocket expenses because these fees are reimbursed by customers on a "pass
through basis", without risk or reward to the Company. The amount of the
investigator fees excluded for the three months and nine months ended
8
March 31, 2002 were $18.5 million and $57.3 million, respectively, and for the
three months and nine months ended March 31, 2001 were $15.8 million and $39.8
million, respectively.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") which supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 requires, among other things, that long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
144 is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Accordingly, SFAS 144 will be effective for
the Company beginning July 1, 2002. The Company is currently evaluating the
potential impact, if any, the adoption of SFAS 144 will have on its financial
position and results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires, among other things, the cessation of goodwill
amortization. In addition, the standard includes provisions for the
reclassification to goodwill of certain existing intangible assets, reassessment
of the useful lives of existing intangible assets, reclassification of certain
intangible assets out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. SFAS No. 142 was adopted by the
Company in the first quarter of fiscal year 2002 and resulted in the elimination
of goodwill amortization of approximately $0.2 million and $0.6 million in the
three months and nine months ended March 31, 2002, respectively. Had SFAS No.
142 been implemented in fiscal year 2001, approximately $0.2 million and $0.6
million of amortization expense would have been eliminated in the three months
and nine months ended March 31, 2001, respectively.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the
Company in the first quarter of fiscal year 2002 and did not have any impact on
either the Company's financial position or its results of operations.
Note 9 - Credit Arrangements
The Company has a foreign line of credit with a major bank in the amount of
approximately $6.0 million. The line is not collateralized, is payable on
demand, and bears interest at a rate in the 4% to 5% range. At March 31, 2002,
the Company had approximately $6.0 million in available credit under this
arrangement.
The Company has other foreign lines of credit with banks totaling approximately
$3.0 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 7%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At March 31, 2002, the Company
had approximately $3.0 million in available credit under these arrangements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial information discussed below is derived from the Condensed
Consolidated Financial Statements included herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation of such information. The Company's
results of operations for a particular quarter may not be indicative of results
expected during subsequent fiscal quarters or for the entire year.
The statements included in this quarterly report on Form 10-Q, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", may contain "forward-looking statements", within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve
9
risks and uncertainties, such as 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. The Company's actual operating performance, actual expense savings
and other operating improvements resulting from recent restructurings, and
actual future results may differ significantly from the results indicated by the
forward-looking statements. Important factors that might cause such a difference
include the factors discussed under "RISK FACTORS" below under Item 3. In
addition, the forward-looking statements included in this quarterly report
represent the Company's estimates as of the date of this quarterly report. While
the Company may elect to update these forward-looking statements at some point
in the future, the Company specifically disclaims any obligation to do so. These
forward-looking statements should not be relied upon as representing the
Company's estimates or views as of any date subsequent to the date of this
quarterly report.
Overview
The Company is a leading contract biopharmaceutical outsourcing company,
providing a broad range of knowledge-based contract research, medical marketing,
consulting and technology services to the worldwide pharmaceutical,
biotechnology and medical device industries. The Company's primary objective is
to help clients rapidly obtain the necessary regulatory approvals for their
products and quickly reach peak sales. Over the past nineteen years, PAREXEL has
developed expertise in processes and technologies supporting this strategy. The
Company's 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; voice; data and imaging systems; and
other drug development consulting services. The Company believes that its
integrated services, depth of therapeutic area expertise, and sophisticated
information technology, along with its experience in global drug development and
product launch services, represent key competitive strengths.
The Company is managed through four reportable segments, namely, CRS, PCG, MMS
and Perceptive. CRS constitutes the Company's core business and includes
clinical trials management, biostatistics and data management, as well as
related medical advisory and investigator site services. PCG provides technical
expertise in such disciplines as clinical pharmacology, regulatory affairs,
industry training, publishing, and management consulting. These consultants
identify options and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive provides a variety of web-based portal
solutions designed to accelerate and enhance the clinical development and
product launch processes, as well as a range of voice and data systems. It also
offers a medical imaging service supporting the use of advanced imaging
techniques in clinical development.
Most of the Company's contracts are fixed price, with some variable components,
and range in duration from a few months to several years. Cash flow from these
contracts typically consists of a down payment required to be paid at the time
of contract execution with the balance due in installments over the contract's
duration, usually on a milestone achievement basis. Revenue from these contracts
is generally recognized on a percentage of completion basis as work is
performed. As a result, cash receipts do not necessarily correspond to costs
incurred and revenue recognized on contracts. Some of the Company's other
contracts are per diem or fee-for-service contracts, and revenue is recognized
upon completion of work performed.
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, 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.
10
As is customary in the industry, the Company routinely subcontracts with
independent physician investigators in connection with clinical trials and other
third party service providers for laboratory analysis and other specialized
services. 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 amount of these investigator
fees for the three months and nine months ended March 31, 2002 were $18.5
million and $57.3 million, respectively, and for the three months and nine
months ended March 31, 2001 were $15.8 million and $39.8 million, respectively.
As discussed in Note 8 to the Condensed Consolidated Financial Statements,
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 Condensed
Consolidated Statements of Operations under "Reimbursement Revenue" and
"Reimbursable Out-of-Pocket Expenses", and consisted of all client reimbursable
expenses, excluding investigator fees.
Direct Costs primarily consist of compensation and related fringe benefits for
project-related employees, other project-related costs not reimbursed, and
allocated facilities and information systems costs. Reimbursable Out-of-Pocket
Expenses are expenses, excluding investigator fees, incurred on behalf of and
reimbursable by our clients. Selling, General and Administrative expenses
primarily consist of compensation and related fringe benefits for selling and
administrative employees, professional services and advertising costs, as well
as allocated costs related for facilities and information systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
Critical Accounting Policies
The following critical accounting policies are used in the preparation of the
Company's financial statements.
Revenue
Service revenue on fixed price contracts is recognized using the
percentage-of-completion method based on the ratio that costs incurred to-date
bear to estimated total costs at completion, as estimated by the project
managers on a monthly basis. The percentage-of-completion method requires the
Company to estimate total expected revenue and total expected costs. Revenue
related to contract modifications is recognized when realization is assured and
the amounts are reasonably determinable. The assigned financial manager or
financial analyst reviews contract estimates on a monthly basis. Adjustments to
contract cost estimates are made in the periods in which the facts that require
the revisions become known. These adjustments could materially impact the
Company's financial position or its results of operations.
Fee-for-service revenue is recognized as services are performed.
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 advance payments from clients and unearned revenue. The Company
maintains accounts receivable reserves based on historical collectability and
specific identification of potential problems. In the event the Company is
unable to collect all or part of its outstanding receivables, there may be a
material impact to the Company's financial position or its results of
operations.
Income Taxes
The provision for corporate income taxes is calculated using the tax accounting
rules established by SFAS No. 109. Interim provisions are based on estimates of
the distribution of profit before tax amongst the taxing jurisdictions where the
Company operates and the adjustments made to profit before tax to calculate
taxable income in each taxing jurisdiction. Differences between these estimates
and the final results for the year could materially impact the Company's
effective tax rate and its consolidated financial results.
11
Results of Operations
Three Months Ended March 31, 2002 Compared with the Three Months Ended March 31,
2001:
Service revenue increased by $13.7 million, or 13.9%, to $112.0 million for the
three months ended March 31, 2002 from $98.3 million for the same period in the
last fiscal year. On a segment basis, CRS service revenue increased by $4.3
million, or 7.2%, to $64.8 million primarily due to an increase in the volume of
projects serviced by the Company. PCG service revenue increased by $4.6 million,
or 21.4%, to $25.8 million primarily due to increased demand across all PCG
business lines. MMS service revenue increased by $2.7 million, or 20.3%, to
$16.2 million as a result of continued strong demand for the group's pre and
post launch services. Perceptive service revenue increased by $2.1 million, or
65.4%, to $5.3 million primarily due to higher demand in the marketplace for the
group's e-business products and medical diagnostic services.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of and reimbursable by our clients. It does not yield any gross profit
to the Company, nor does it have an impact on net income.
Direct costs for the three months ended March 31, 2002 increased $6.2 million,
or 8.6%, to $77.5 from $71.3 million for the three months ended March 31, 2001.
On a segment basis, CRS direct costs increased $1.6 million, or 3.7%, to $44.1
million primarily due to higher labor costs in support of increased business
volume. As a percentage of service revenue, CRS direct costs decreased two
percentage points to 68.1% as a result of increased efficiency and the success
of ongoing cost containment efforts. Direct costs for PCG increased $1.8
million, or 11.1%, to $18.4 million in direct support of strong revenue growth
during the quarter. As a percentage of service revenue, PCG direct costs dropped
by seven percentage points to 71.4% primarily due to greater leveraging of the
group's expense base. MMS direct costs increased $1.8 million, or 19.5%, to
$11.0 million due principally to increased labor and related costs associated
with increased business activities. As a percentage of service revenue, MMS
direct costs remained flat at 68.0%. Direct costs for Perceptive increased $1.0
million, or 31.3%, to $4.0 million primarily due to costs associated with
business growth. As a percentage of service revenue, Perceptive direct costs
decreased to 76.5% from 96.4% primarily due to improved operating leverage.
Selling, general and administrative ("SG&A") expenses increased $4.4 million, or
20.6%, to $25.8 million for the three months ended March 31, 2002 from $21.4
million in the same period last fiscal year. As a percentage of service revenue,
SG&A expenses increased to 23.0% from 21.7% primarily due to higher facilities
costs, expenses needed to support substantially increased business volume, and
the impact of the EDYABE acquisition.
Depreciation and amortization ("D&A") expense decreased $0.7 million, or 14.6%,
to $4.2 million for the three months ended March 31, 2002 from $4.9 million for
the same period last fiscal year primarily due to year-over-year strengthening
of the U.S. currency, the current period impact of past restructuring
activities, and the adoption of SFAS No. 142, under which the Company eliminated
approximately $0.2 million in quarterly amortization expense. As a percentage of
service revenue, D&A expense decreased to 3.8% for the three months ended March
31, 2002 from 5.0% in the same period last fiscal year.
Income from operations increased $3.9 million to $4.6 million for the three
months ended March 31, 2002 from $0.7 million in the same period one year ago.
Income from operations increased as a percentage of service revenue to 4.1% for
the three months ended March 31, 2002 from 0.7% for the same period of the prior
fiscal year for the reasons noted in the preceding paragraphs.
Other income, net, decreased $1.2 million, or 43.8%, to $1.5 million for the
three months ended March 31, 2002 from $2.7 million in the same period one year
ago primarily due to lower foreign exchange gains and lower interest income.
The Company had an effective income tax rate of 37.9% for the three months ended
March 31, 2002 and 36.6% for the same three-month period one year ago. The
increase resulted from changes in the mix of taxable income in the different
jurisdictions where the Company operates.
12
Nine Months Ended March 31, 2002 Compared with the Nine Months Ended March 31,
2001:
Service revenue increased by $39.9 million, or 14.2% to $320.7 million for the
nine months ended March 31, 2002 from $280.9 million for the comparable
nine-month period in 2001. On a segment basis, CRS service revenue increased
$12.9 million, or 7.3%, to $188.9 million primarily due to an increase in the
volume of serviced projects. Service revenue for PCG increased by $13.6 million,
or 23.6%, to $71.2 million primarily due to increased demand for the group's
services. MMS service revenue increased by $7.2 million, or 18.4%, to $46.2
million due to continued strong demand for pre and post launch services.
Perceptive service revenue increased by $6.2 million, or 74.8%, to $14.4 million
primarily due to continued business growth.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of and reimbursable by our clients. It does not yield any gross profit
to the Company, nor does it have an impact on net income.
Direct costs increased $21.5 million, or 10.6%, to $223.1 million for the nine
months ended March 31, 2002 from $201.7 million for the same nine-month period
one year ago. On a segment basis, CRS direct costs increased $6.7 million, or
5.5%, to $128.0 million primarily due to increased costs associated with
increased business volume. As a percentage of service revenue, CRS direct costs
decreased by one percentage point as a result of improved efficiency. PCG direct
costs increased $6.6 million, or 14.4%, to $52.2 million primarily due to
increased business volume in all business lines. As a percentage of service
revenue, PCG direct cost dropped six percentage points as a result of better
leveraging of costs associated with revenue growth. MMS direct costs increased
$4.7 million, or 17.8%, to $31.2 million primarily due to higher expenses
required to support increased business volume. As a percentage of service
revenue, MMS direct costs remained relatively flat at 67.4%. Perceptive direct
costs increased $3.5 million, or 42.3%, to $11.7 million caused primarily by
increased costs needed to drive significantly increased business volume. As a
percentage of service revenue, Perceptive direct costs decreased nineteen
percentage points primarily due to greater leveraging of the group's expense
base.
SG&A expenses increased $8.7 million, or 13.5%, to $73.2 million for the nine
months ended March 31, 2002 from $64.5 million in the same nine-month period one
year ago primarily due to costs required to support increased business volume.
As a percentage of service revenue, SG&A expenses remained flat at 23.0%.
D&A expense decreased $2.6 million, or 16.3%, to $13.2 million for the nine
months ended March 31, 2002 from $15.7 million. The decrease was primarily due
to year-over-year strengthening of the U.S. currency, adjustments made to the
estimated useful life of assets the Company abandoned during the first quarter
of fiscal 2001 as part of its restructuring plan, the current nine-month period
impact of past restructuring activities, and the adoption of SFAS No. 142, under
which the Company eliminated approximately $0.6 million in amortization expense
for the nine months ended March 31, 2002. As a percentage of service revenue,
D&A expense decreased to 4.1% for the three months ended March 31, 2002 from
5.6% in the same period last fiscal year.
Income from operations increased $11.5 million to $11.3 million for the nine
months ended March 31, 2002 from a loss of $0.2 million in the same nine-month
period one year ago. For the reasons noted in the preceding paragraphs, income
from operations as a percentage of service revenue increased to 3.5% as compared
with a negative 0.1% in the same period during fiscal year 2001.
Other income, net decreased $1.1 million, or 19.8%, to $4.6 million for the nine
months ended March 31, 2002 from $5.7 million in the comparable period one year
ago with decreased foreign exchange gains and reduced interest income , more
than offsetting the gain on sale of a building which was recorded during the
current fiscal year.
The Company had an effective income tax rate of 38.1% for the nine months ended
March 31, 2002 compared with 43.0% for the nine-month period ended March 31,
2001. The decrease was primarily due to changes in the mix of taxable income in
the different jurisdictions where the Company operates.
13
Liquidity and Capital Resources
Since its inception, the Company has financed its operations and growth,
including acquisition costs, with cash flow from operations, proceeds from the
sale of equity securities, and borrowings under credit facilities. Investing
activities primarily reflect investment in marketable securities, acquisition
costs, and capital expenditures for information systems enhancements and
leasehold improvements.
Most of the Company's contracts are fixed price, with some variable components,
and range in duration from one month 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 on a percentage of completion basis as work is
performed. As a result, cash receipts do not necessarily correspond to costs
incurred and revenue recognized on contracts. Some of the Company's other
contracts are per diem or fee-for-service contracts, and revenue is recognized
upon completion of work performed.
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 in accounts receivable, net of deferred
revenue, was 51 days at March 31, 2002 versus 67 days at June 30, 2001. Accounts
receivable, net of the allowance for doubtful accounts, decreased to $203.2
million at March 31, 2002 from $206.9 million at June 30, 2001.
Net cash provided by operating activities for the nine months ended March 31,
2002 totaled $22.1 million and was generated by a $20.5 million decrease in
accounts receivable (net of deferred revenue), $13.2 million in non-cash charges
related to depreciation and amortization, $9.2 million of net income, a $0.8
million increase in other liabilities, and a $0.6 million decrease in prepaid
expenses and other assets, offset by a $21.2 million decrease in accounts
payable and a $1.0 million gain on sale of a building and equipment. For the
nine months ended March 31, 2001, net cash used by operating activities totaled
$9.0 million and was driven by a $34.0 million increase in accounts receivable
(net of deferred revenue), a $1.3 million increase in prepaid and other current
assets, and a $1.2 million increase in other assets and gain on sale of
equipment, offset by $15.8 million for depreciation and amortization, a $7.2
million increase in accounts payable, $2.8 million of net income, and a $1.7
million increase in other current and long-term liabilities.
Net cash used in investing activities for the nine months ended March 31, 2002
totaled $53.9 million and consisted of $39.3 million related to net purchases of
marketable securities, $14.7 million used for equipment purchases, and $1.8
million used for the acquisition of EDYABE, offset by $1.9 million in proceeds
from the sale of fixed assets. For the nine months ended March 31, 2001, net
cash provided by investing activities totaled $2.0 million and consisted
principally of $16.7 million of net proceeds from sale of marketable securities
partially offset by $11.9 million used to purchase property and equipment and
$3.0 million used for the acquisition of FARMOVS.
Net cash provided by financing activities for the nine months ended March 31,
2002 totaled $2.3 million and consisted of $2.0 of proceeds from the issuance of
common stock in association with the Company's employee stock purchase and stock
option plans and $0.3 million from net borrowings under credit arrangements. For
the nine months ended March 31, 2001, net cash used by financing activities
totaled $0.7 million and primarily consisted of $1.8 million used to repurchase
the Company's common stock and a $0.1 million repayment under credit
arrangements, partly offset by $0.8 million of proceeds from the issuance of
common stock under the Company's employee stock purchase and stock option plans
and $0.4 million of proceeds from the issuance of a subsidiary's common stock.
The Company has a foreign line of credit with a major bank in the amount of
approximately $6.0 million. The line is not collateralized, is payable on
demand, and bears interest at a rate in the 4% to 5% range. At March 31, 2002,
the Company had approximately $6.0 million in available credit under this
arrangement.
14
The Company has other foreign lines of credit with banks totaling approximately
$3.0 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 7%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At March 31, 2002, the Company
had approximately $3.0 million in available credit under these arrangements.
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company 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 will
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 issuances of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
Recently Issued Accounting Standards
In November 2001, the Emerging Issues Task Force (EITF) of the FASB issued EITF
01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred". EITF 01-14 requires reimbursable
out-of-pocket expenses incurred to be characterized as revenue in the income
statement. The guidance became effective for periods beginning after December
15, 2001 and required comparative financial statements for prior periods to be
reclassified. EITF 01-14 was adopted by PAREXEL in the third quarter of fiscal
year 2002 and did not have any impact on either the Company's financial position
or its results of operations because the amount included in revenue was offset
by a like amount in expenses. The Company excludes investigator fees from its
out-of-pocket expenses because these fees are reimbursed by customers on a "pass
through basis", without risk or reward to the Company. The amount of the
investigator fees excluded for the three months and nine months ended March 31,
2002 were $18.5 million and $57.3 million, respectively, and for the three
months and nine months ended March 31, 2001 were $15.8 million and $39.8
million, respectively.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") which supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 requires, among other things, that long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
144 is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Accordingly, SFAS 144 will be effective for
the Company beginning July 1, 2002. The Company is currently evaluating the
potential impact, if any, the adoption of SFAS 144 will have on its financial
position and results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires, among other things, the cessation of goodwill
amortization. In addition, the standard includes provisions for the
reclassification to goodwill of certain existing intangible assets, reassessment
of the useful lives of existing intangible assets, reclassification of certain
intangible assets out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. SFAS No. 142 was adopted by the
Company in the first quarter of fiscal year 2002 and resulted in the elimination
of goodwill amortization of approximately $0.2 million and $0.6 million in the
three months and nine months ended March 31, 2002, respectively. Had SFAS No.
142 been implemented in fiscal year 2001, approximately $0.2 million and $0.6
million of amortization expense would have been eliminated in the three months
and nine months ended March 31, 2001, respectively.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the
Company in the first
15
quarter of fiscal year 2002 and did not have any impact on either the Company's
financial position or its results of operations.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency rates, interest rates, and other relevant
market rate or price changes. In the ordinary course of business, the Company is
exposed to various market risks, including changes in foreign currency exchange
rates and interest 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
Operations outside of the United States contributed approximately 40% and 42% of
the Company's service revenue for the three months and nine months ended March
31, 2002, respectively, and 42% for both the three months and nine months ended
March 31, 2001. The Company does not have significant operations in countries in
which the economy is considered to be highly inflationary. The Company's
financial statements are denominated in U.S. dollars, and accordingly, changes
in the exchange rate between foreign currencies and the U.S. dollar will affect
the translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results.
The Company may be subject to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in a currency
other than the foreign subsidiaries' functional currency. Because expenses of
the foreign subsidiaries are generally paid in the local currency, such foreign
subsidiaries' local currency earnings are not materially affected by
fluctuations in exchange rates. In cases where the Company contracts for a
multi-country clinical trial and a significant portion of the contract expenses
are in a currency other than the contract currency, the Company seeks to
contractually shift to its clients the effect of fluctuations in the relative
values of the contract currency and the currency in which the expenses are
incurred. For the three months and nine months ended March 31, 2002, the Company
recorded $1.1 million and $2.4 million, respectively, of foreign exchange gains.
To the extent the Company is unable to shift the effects of currency
fluctuations to its clients, these fluctuations could have a material effect on
the Company's results of operations. The Company occasionally enters into
foreign exchange forward contracts to offset the impact of currency
fluctuations. These foreign exchange forward contracts generally have maturity
dates ranging from one to six months.
Conversion to the Euro Currency
On January 1, 1999, a new currency, the euro, became the legal currency for 11
of the 15 member countries of the European Economic Community. Between January
1, 1999 and January 1, 2002, governments, companies and individuals were
permitted to conduct business in the member countries in both the euro and
existing national currencies. On January 1, 2002, the euro became the sole
currency in the member countries. PAREXEL conducts business in seven of the
member countries and converted two of those countries to the euro currency in
fiscal 2001 and the remaining five in fiscal 2002. Conversion to the euro
currency did not create a material effect on either the Company's financial
position or its results of operations in either fiscal year 2001 or fiscal year
2002.
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
16
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, PAREXEL's business, financial
condition, or results of operations could be materially adversely affected.
THE LOSS, MODIFICATION, OR DELAY OF LARGE CONTRACTS MAY NEGATIVELY IMPACT THE
COMPANY'S FINANCIAL PERFORMANCE
Generally, the Company's clients can terminate their contracts with the Company
upon thirty to sixty days' notice or can delay execution of services. Clients
terminate or delay their contracts for a variety of reasons, including, but not
limited to:
. merger or potential merger related activities;
. failure of products being tested to satisfy safety requirements;
. 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; or
. production problems which cause shortages of the product.
In addition, the Company believes that FDA-regulated companies may proceed with
fewer clinical trials or conduct them without the assistance of contract
research organizations 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 contract research organizations. The loss or delay of a
large contract or the loss or delay of multiple contracts could have a material
adverse effect on the Company's financial performance. The Company has in the
past experienced contract cancellations, which have had a material adverse
effect on the Company's financial results.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE
The Company's quarterly and annual operating results have varied, and will
continue to vary. Factors that cause these variations include:
. the level of new business authorizations in a particular quarter or
year;
. the timing of the initiation, progress, or cancellation of significant
projects;
. exchange rate fluctuations between quarters or years;
. the mix of services offered in a particular quarter or year;
. the timing of the opening of new offices;
. the timing of other internal expansion costs;
. restructuring charges;
. the timing and amount of costs associated with integrating acquisitions;
and
. the timing and amount of startup costs incurred in connection with the
introduction of new products, services or subsidiaries.
A high percentage of the Company's operating costs are fixed. Therefore, the
timing of the completion, delay or loss of contracts, or the progress of client
projects, can cause the Company's operating results to vary substantially
between reporting periods.
THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR MOST OF
17
ITS BUSINESS
The Company depends on research and development expenditures by pharmaceutical
and biotechnology companies to sustain a large part of its business. The
Company's operations could be materially and adversely affected if:
. its clients' businesses experience financial problems or are affected by
a general economic downturn;
. consolidation in the pharmaceutical or biotechnology industries leads to
a smaller client base for the Company; or
. its clients reduce their research and development expenditures.
Furthermore, the Company has benefited in the past from the tendency of
pharmaceutical companies to outsource large clinical research projects. If this
tendency slows or reverses, the Company's operations would be materially and
adversely affected. For the three months ended March 31, 2002, the Company's
five largest clients accounted for 30% of its consolidated service revenue, and
one client accounted for 12% of consolidated service revenue. For the three
months ended March 31, 2001, the Company's five largest clients accounted for
47% of its consolidated service revenue, and one client accounted for 16% of
consolidated service revenue. The Company could suffer a material adverse effect
if it lost or experienced a material reduction in the business of a significant
client. In the past, the Company has experienced contract cancellations with a
significant client, which have had a material adverse effect on the Company's
financial results.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND THE
COMPANY MUST PROPERLY MANAGE THAT EXPANSION
The Company's business has expanded substantially in the past. Rapid expansion
could strain the Company's operational, human and financial resources. In order
to manage expansion, the Company must:
. continue to improve its operating, administrative and information
systems;
. accurately predict its future personnel and resource needs to meet
client contract commitments;
. track the progress of ongoing client projects; and
. attract and retain qualified management, sales, professional, scientific
and technical operating personnel.
The Company will 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.
If an acquired business does 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. If the Company fails to
properly manage its expansion, the Company could experience a material adverse
effect on its business and operations.
THE COMPANY MAY NOT BE ABLE TO MAKE STRATEGIC ACQUISITIONS IN THE FUTURE
The Company's growth may depend, in part, on its ability to make strategic
acquisitions. The Company has made a number of acquisitions and will continue to
review future acquisition opportunities. The Company may not be able to acquire
companies on acceptable terms and conditions. Additionally, the Company faces
several obstacles in connection with the acquisitions it consummates, including:
18
. difficulties and expenses associated with assimilation of the operations
and services or products of the acquired companies;
. diversion of management's attention from other business concerns; and
. the loss of some or all of the key employees of the acquired company.
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 RELIES ON HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL WHO
MAY NOT REMAIN WITH THE COMPANY
The Company relies on a number of key executives, including Josef H. von
Rickenbach, its Chairman and Chief Executive Officer. The Company only has
employment agreements with certain of its key executives and, if any of these
key executives leave the Company, it could have a material adverse effect on the
Company. In addition, in order to compete effectively, the Company must attract
and maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees is intense. The Company may not be
successful in attracting or retaining key personnel.
THE COMPANY MAY NOT HAVE ADEQUATE INSURANCE AND MAY HAVE SUBSTANTIAL EXPOSURE TO
PAYMENT OF PERSONAL INJURY CLAIMS
Clinical research services primarily involve the testing of experimental drugs
or other regulated FDA products on consenting human volunteers pursuant to a
study protocol. Such services involve a risk of liability for personal injury or
death to patients who participate in the study or who use a product approved by
regulatory authorities after the clinical research has concluded, due to, among
other reasons, possible unforeseen adverse side effects or improper
administration of the new product by physicians. In certain cases, these
patients are already seriously ill and are at risk of further illness or death.
Although many of the Company's CRS contracts with clients include indemnity
provisions and the Company has loss insurance, the Company's financial stability
could be materially and adversely affected if the Company had to pay damages or
incur defense costs in connection with a claim that is outside the scope of an
indemnity or insurance coverage. The Company's financial stability could also be
materially and adversely affected in cases where the indemnity, although
applicable, is not performed in accordance with its terms. Additionally, the
Company could be materially and adversely affected if its liability exceeds the
amount of its insurance. The Company may not be able to continue to secure
insurance on acceptable terms.
THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD DECLINE
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future in response to quarter-to-quarter
variations in:
. operating results;
. earnings estimates by analysts;
. market conditions in the industry;
. prospects of health care reform;
. changes in government regulations; and
. general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a
19
change in, analysts' expectations. Investors in the Company's common stock must
be willing to bear the risk of such fluctuations in earnings and stock price.
THE COMPANY'S BUSINESS DEPENDS ON CONTINUED COMPREHENSIVE GOVERNMENTAL
REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY PRODUCT DEVELOPMENT
PROCESS
In the United States, governmental regulation of the drug, medical device and
biotechnology product development process continues to be complicated, extensive
and demanding. While the FDA and the Congress have attempted to streamline this
process by providing for industry user fees that fund additional reviewer hires
and better management of the regulatory review process, the FDA still requires
extensive clinical studies and other documentation to demonstrate the efficacy
and safety of these products before they can be approved for marketing. The
United States, Europe and Japan have collaborated in the 12-year-long
International Conference on Harmonization ("ICH"), the purpose of which is to
eliminate duplicative or conflicting regulations in the three regions. The ICH
process has resulted in over 50 harmonized technical guidelines that have been
accepted in all three regions and have led to a clarification of the regulatory
requirements for approval. However there has been no meaningful reduction of the
amount of evidence required by these governments for granting marketing
approval. The ICH partners have agreed on a common format for marketing
applications (the Common Technical Document) that is accepted in the three
regions as of July 1, 2001 and as of July 1, 2003 will become mandatory in
Europe and Japan and "highly recommended" by the FDA. The new format does not
affect the amount of data to be collected and submitted, but does eliminate the
need to tailor the format to each region, although there remain some
region-specific sections. This may reduce the demand for the Company's services
that tailor the marketing applications to local requirements.
The withdrawal of several drugs from the market in recent years due to adverse
events has caused the FDA to become more cautious and to require more clinical
studies to demonstrate the safety of drugs either before they are approved for
marketing or as part of a post-approval obligation. This may delay the approval
of new drugs and therefore have a materially adverse impact on the revenue of
the Company's clients, with a consequent materially adverse impact on the
Company's revenue that is derived from outsourced clinical trials.
Public concern in the U.S. for the protection of participants in clinical trials
has increased in recent years, in the wake of several well-publicized adverse
events and even deaths associated with clinical trials conducted at major
academic medical centers. The U.S. Congress and the FDA are considering
legislation and regulations that would strengthen the safeguards for research
participant protection. Those potential actions might make it more onerous for
the Company and its clients to find clinical investigators, to recruit research
participants and to complete clinical trials on schedule. As a result, the
Company's revenue and overall business could be materially adversely affected.
In Europe, governmental authorities have approved common standards for clinical
testing of new drugs throughout the European Union by adopting GCP standards and
by promulgating the European Union Clinical Trials Directive; this Directive
will eliminate by 2004 inter-country differences in the process that authorizes
clinical trials and will make it more uniform and streamlined, though increasing
the safeguards for patient protection. In the past several years, Japan also has
adopted GCP through legislation and has legitimatized the use of CROs. The
Company's business could be materially and adversely affected by relaxed
government regulatory requirements or simplified drug, medical device or
biotechnology approval procedures, since such actions may eliminate much of the
demand for the Company's services. In addition, if the Company was unable to
comply with significant applicable regulation, the relevant governmental
agencies could terminate the Company's ongoing research or disqualify its
research data.
THE COMPANY FACES INTENSE COMPETITION
The Company primarily competes against in-house departments of drug companies,
other full service contract research organizations, healthcare-related software
companies, and to a lesser extent, universities, teaching hospitals and other
site organizations. Some of these competitors have greater capital, technical
and other resources than the Company. Contract research organizations generally
compete on the basis of:
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. previous experience;
. medical and scientific expertise in specific therapeutic areas;
. quality of services;
. the ability to organize and manage large-scale clinical trials on a
global basis;
. the ability to manage large and complex medical databases;
. the ability to provide statistical and regulatory services;
. the ability to recruit investigators and patients;
. the ability to integrate information technology with systems to improve
the efficiency of contract research;
. an international presence with strategically located facilities;
. financial strength and stability; and
. price.
The contract research organization industry is fragmented, with several hundred
small, limited-service providers and several large, full-service contract
research organizations with global operations. The Company competes against
large contract research organizations, including Quintiles Transnational
Corporation, Covance, Inc., and Pharmaceutical Product Development, Inc. for
both clients and acquisition candidates. In addition, the Company competes for
research contracts arising out of the consolidation within the drug industry and
the growing tendency of drug companies to outsource to a smaller number of
preferred contract research organizations.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
Numerous governments have undertaken efforts to control growing health care
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the past, the U.S. Congress has entertained
several comprehensive health care reform proposals. The proposals were generally
intended to expand health care coverage for the uninsured and reduce the growth
of total health care expenditures. While the U.S. Congress did not adopt any
comprehensive reform proposals, members of Congress may raise similar proposals
in the future. If any of these proposals are approved by the U.S. Congress,
pharmaceutical, medical device and biotechnology companies may react by spending
less on research and development. If this were to occur, the Company would have
fewer business opportunities. The Company is unable to predict the likelihood
that health care reform proposals will be enacted into law or the effect such
laws would have on the Company's business.
Many governments outside the U.S. have also reviewed or undertaken health care
reform. The Company cannot predict the impact that any pending or future foreign
health care reform proposals may have on its business in other countries.
THE COMPANY IS SUBJECT TO CURRENCY TRANSLATION RISKS
The Company derived approximately 40% and 42% of its service revenue for the
three months ended March 31, 2002 and 2001, respectively, from operations
outside of the United States. Since the Company's revenue and expenses from
foreign operations are usually denominated in local currencies, the Company is
subject to exchange rate fluctuations between local currencies and the United
States dollar. To the extent that the Company cannot shift this currency
translation risk to other parties, the Company's operating results could be
materially and adversely affected. The Company occasionally enters into foreign
exchange forward contracts to offset the impact of currency fluctuations.
THE COMPANY'S DEVELOPMENT OF ITS PERCEPTIVE INFORMATICS BUSINESS MAY NEGATIVELY
IMPACT RESULTS IN THE SHORT TERM
The Company is currently making investments in its technology subsidiary,
Perceptive Informatics, Inc., but does
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not expect such subsidiary to become profitable in the immediate future. The
Company may need to make additional investments in this subsidiary in the future
in order to achieve its objectives. The profitability of this subsidiary
depends, in part, on customer acceptance and use of its products and services
and its ability to compete against rival products and services. There can be no
assurance that this subsidiary will be profitable in the future or that any
revenue resulting from it will be sufficient to offset the Company's investments
in this division.
THE COMPANY FACES THE RISKS OF LIABILITY, INCREASED COSTS OR LIMITATION OF
SERVICE OFFERINGS AS A RESULT OF PROPOSED AND FINAL LAWS AND REGULATIONS
The confidentiality and release of patient-specific information are subject to
government regulation. Additional legislation governing the possession, use and
dissemination of medical record information and other personal health
information has been proposed or adopted at both the state and federal levels.
Proposed and final federal regulations governing patient-specific information
may require the Company to implement new security measures that may result in
substantial expenditures or limit its ability to offer some of its products and
services. Additionally, states may adopt health information legislation or
regulations that contain privacy and security provisions that are more
burdensome than the federal regulations. There is also a risk of civil or
criminal liability if the Company is found to be responsible for any violations
of applicable laws, regulations or duties relating to the use, privacy or
security of health information.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Schedule of Revenue Recast Under EITF 01-14.
(b) Reports on Form 8-K.
The Company did not file any current Reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 14/th/ day of May 2002.
PAREXEL International Corporation
Date: May 14, 2002 By: /s/ Josef H. von Rickenbach
----------------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
Date: May 14, 2002 By: /s/ James F. Winschel, Jr.
----------------------------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief Financial Officer
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