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 December 31, 2001
Commission File Number: 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-2776269
(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 February 11, 2002, there
were 24,978,038 shares of PAREXEL International Corporation common tock
outstanding, excluding 861,000 shares in treasury.
PAREXEL INTERNATIONAL CORPORATION
INDEX
Page
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Part I. Financial Information
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - December 31, 2001 and June 30, 3
2001
Condensed Consolidated Statements of Operations - 4
Three months ended 4 December 31, 2001 and 2000;
Six months ended December 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows - Six months ended 5
December 31, 2001 and 2000
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 14
Part II. Other Information
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports of Form 8-K 20
Signatures 21
2
Part I. Financial Information
Item 1 - Financial Statements
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
December 31, June 30,
2001 2001
-------------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $42,119 $57,590
Marketable securities 26,423 3,359
Accounts receivable, net 210,161 206,904
Prepaid expenses 5,762 10,025
Deferred tax assets 14,139 13,987
Other current assets 6,721 3,022
-------------------- ----------------
Total current assets 305,325 294,887
Property and equipment, net 40,774 39,888
Goodwill and other intangible assets, net 13,718 12,695
Deferred income taxes 14,899 14,899
Other assets 5,911 5,443
-------------------- ----------------
Total assets $380,627 $367,812
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $302 $232
Accounts payable 15,089 26,296
Advance billings 111,954 93,577
Other current liabilities 56,387 57,572
-------------------- ----------------
Total current liabilities 183,732 177,677
Other liabilities 8,372 9,745
-------------------- ----------------
Total liabilities 192,104 187,422
-------------------- ----------------
Minority interest in subsidiary 2,252 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:25,814,368 and 25,636,220 at December 31, 2001 and
June 30, 2001, respectively; shares outstanding:24,953,368 and 24,775,220 at
December 31, 2001 and June 30, 2001, respectively 258 257
Additional paid-in capital 165,673 164,141
Retained earnings 44,744 39,220
Treasury stock, at cost (8,165) (8,165)
Accumulated other comprehensive income (16,239) (17,631)
-------------------- ----------------
Total stockholders' equity 186,271 177,822
-------------------- ----------------
Total liabilities and stockholders' equity $380,627 $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 six months ended
December 31, December 31,
------------------------------------ ------------------------------------
2001 2000 2001 2000
----------------- --------------- ---------------- ---------------
Net revenue $106,874 $94,324 $208,714 $182,539
----------------- --------------- ---------------- ---------------
Costs and expenses:
Direct costs 73,725 67,044 145,620 130,308
Selling, general and administrative 24,520 21,927 47,430 43,124
Depreciation 4,406 4,938 8,913 10,466
Amortization 22 221 33 328
Restructuring and other charges - - - (768)
----------------- --------------- ---------------- ---------------
102,673 94,130 201,996 183,458
----------------- --------------- ---------------- ---------------
Income (loss) from operations 4,201 194 6,718 (919)
Other income, net 1,491 1,660 3,041 2,980
----------------- --------------- ---------------- ---------------
Income before provision for income taxes 5,692 1,854 9,759 2,061
Provision for income taxes 2,183 815 3,732 1,105
Minority interest 441 82 503 100
----------------- --------------- ---------------- ---------------
Net income $3,068 $957 $5,524 $856
================= =============== ================ ===============
Earnings per share:
Basic $0.12 $0.04 $0.22 $0.03
Diluted $0.12 $0.04 $0.22 $0.03
Shares used in computing earnings per share:
Basic 24,861 24,549 24,892 24,764
Diluted 25,478 24,650 25,530 24,893
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the six months ended
December 31,
--------------------------------------
2001 2000
--------------------------------------
Cash flows from operating activities:
Net income $5,524 $856
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 8,946 10,796
Changes in operating assets/liabilities 1,132 (7,464)
---------------- ------------------
Net cash provided by operating activities 15,602 4,188
---------------- ------------------
Cash flows from investing activities:
Purchase of marketable securities (129,268) (43,110)
Proceeds from sale of marketable securities 105,920 51,102
Acquisition, net of cash acquired (1,505) (2,994)
Proceeds from sale of fixed assets 1,481 117
Purchase of property and equipment (9,958) (7,292)
---------------- ------------------
Net cash used in investing activities (33,330) (2,177)
---------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,533 621
Repurchase of common stock - (1,759)
Borrowings (repayments) under credit arrangements 285 (51)
Proceeds from issuance of subsidiary's common stock - 364
---------------- ------------------
Net cash provided (used) by financing activities 1,818 (825)
---------------- ------------------
Elimination of net loss of a subsidiary for change in fiscal year - (126)
---------------- ------------------
Effect of exchange rate changes on cash and cash equivalents 439 (1,601)
---------------- ------------------
Net decrease in cash for the period (15,471) (541)
Cash and cash equivalents at beginning of period 57,590 53,508
---------------- ------------------
Cash and cash equivalents at end of period $42,119 $52,967
================ ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes $8,730 $3,218
Non-cash investing and financing activities:
Acquisitions:
Fair value of assets acquired and goodwill $2,870 $5,550
Liabilities and minority interest assumed (1,135) (2,556)
---------------- ------------------
Value of shares exchanged $1,735 $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 six months
ended December 31, 2001, 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 ended For the six months ended
December 31, December 31,
2001 2000 2001 2000
--------- --------------- ------------- --------------
Net income attributable to common shares $3,068 $957 $5,524 $856
========== ============== ============= ==============
Basic Earnings Per Common Share Computation:
Weighted average common shares outstanding 24,861 24,549 24,892 24,764
========== ============== ============= ==============
Basic earnings per common share $0.12 $0.04 $0.22 $0.03
========== ============== ============= ==============
Diluted Earnings Per Common Share Computation:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 24,861 24,549 24,892 24,764
Shares attributable to common stock options 617 101 638 129
---------- -------------- ------------- --------------
25,478 24,650 25,530 24,893
========== ============== ============= ==============
Diluted earnings per common share $0.12 $0.04 $0.22 $0.03
========== ============== ============= ==============
6
Note 3 - Comprehensive Income
Comprehensive income (loss) has been calculated by the Company in accordance
with Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss), which is comprised primarily of net income (loss)
and foreign currency translation adjustments, totaled $0.7 million and $3.2
million for the three months ended December 31, 2001 and 2000, respectively, and
$6.9 million and $(0.2) million for the six months ended December 31, 2001 and
2000, respectively.
Note 4 - Segment Information
The Company is managed through four reportable segments, namely, Clinical
Research Services ("CRS"), PAREXEL Consulting Group ("PCG"), Medical Marketing
Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS
constitutes the Company's core business and includes clinical trials management,
biostatistics and data management, as well as related medical advisory and
investigator site services. PCG provides technical expertise in such disciplines
as clinical pharmacology, regulatory affairs, industry training, publishing, and
management consulting. These consultants identify options and propose solutions
to address clients' product development, registration, and commercialization
issues. MMS provides a full spectrum of market development, product development,
targeted communications, and strategic reimbursement services in support of
product launch. Perceptive provides a variety of web-based portal solutions
designed to accelerate and enhance the clinical development and product launch
processes, as well as a range of voice and data systems. It also offers a
medical imaging service supporting the use of advanced imaging techniques in
clinical development.
The Company evaluates its segment performance and allocates resources based on
revenue and gross profit (net revenue less direct costs), while other operating
costs are evaluated on a geographical basis. Accordingly, the Company does not
include selling, general and administrative expenses; depreciation and
amortization expense; restructuring and other charges; other income (expense);
and income tax expense in segment profitability.
For the three months ended For the six months ended
December 31, December 31,
--------------------------------------------------------------------------------------------------------------------------
($ in thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net revenue:
Clinical Research Services $63,361 $60,020 $124,139 $115,562
PAREXEL Consulting Group 23,726 19,103 45,429 36,364
Medical Marketing Services 14,868 12,557 29,979 25,540
Perceptive Informatics, Inc. 4,919 2,644 9,167 5,073
-------------- ------------- ------------- -------------
$106,874 $94,324 $208,714 $182,539
============== ============= ============= =============
Gross profit:
Clinical Research Services $21,044 $19,306 $40,270 $36,829
PAREXEL Consulting Group 6,414 4,075 11,604 7,268
Medical Marketing Services 4,962 4,038 9,779 8,252
Perceptive Informatics, Inc. 729 (139) 1,441 (118)
-------------- ------------- ------------- -------------
$33,149 $27,280 $63,094 $52,231
============== ============= ============= =============
7
Note 5 - Acquisition
Effective July 1, 2001, the Company acquired EDYABE, a contract research
organization in Latin America, with offices in Argentina and Brazil, for
approximately $1.5 million. 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 2nd Quarter Balance as of
September 30, Payments December 31,
2001 2001
Employee severance costs $2,174 $(319) $1,855
Facilities related charge 4,980 (1,054) 3,926
Other charges 120 (67) 53
---------------- ---------------- -----------------
$7,274 $(1,440) $5,834
================ ================ =================
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 six months ended December 31, 2001, the Company did not
repurchase any of its common stock.
Note 8 - Recently Issued Accounting Standards
In November 2001, the FASB issued Topic No. D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". This staff announcement requires reimbursement for out-of-pocket
expenses incurred to be characterized as revenue in the income statement. The
announcement is effective for periods beginning after December 15, 2001 and will
require comparative financial statements for prior periods to be reclassified.
The Company is currently in the process of evaluating the impact that this
announcement will have on its consolidated financial position or results of
operations.
In October 2001, The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") which supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 requires, among other things, that long-lived assts 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.
8
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 eliminated goodwill
amortization of approximately $0.2 million in the three-month period ended
December 31, 2001. Had SFAS No. 142 been implemented in fiscal year 2001,
approximately $0.2 million and $0.3 million of amortization expense would have
been eliminated in the three months and six months ended December 31, 2000,
respectively.
Also 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
the Company's financial results of operations.
Note 9 - Credit Arrangements
On September 14, 2001, the Company entered into 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 December 31, 2001, the Company had approximately $6.0 million in
available credit under this arrangement.
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 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. 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 are 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,
9
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.
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 fees are not reflected in net revenue or expenses since such
fees are reimbursed by customers on a "pass through basis," without risk or
reward to the Company. As described in Note 8 to the Condensed Consolidated
Financial Statements under "FASB issued Topic No. D-103", the Company is
currently in the process of evaluating announcement No. D-103 to see if this
will or will not change the way the Company currently reports pass through
expenses.
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. 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 to facilities and
information systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
Results of Operations
Three Months Ended December 31, 2001 Compared with the Three Months Ended
December 31, 2000:
10
Net revenue increased by $12.6 million, or 13.3%, to $106.9 million for the
three months ended December 31, 2001 from $94.3 million for the same period in
the last fiscal year. On a segment basis, CRS net revenue increased by $3.3
million, or 5.6%, to $63.4 million primarily due to an increase in the volume of
projects serviced by the Company. PCG net revenue increased by $4.6 million, or
24.2%, to $23.7 million primarily due to increased demand across all PCG
business lines. MMS net revenue increased by $2.3 million, or 18.4%, to $14.9
million as a result of continued strong demand for the group's pre and post
launch services. Perceptive net revenue increased by $2.3 million, or 86.0%, to
$4.9 million primarily due to higher demand in the marketplace for the group's
e-business products and medical diagnostic services.
Direct costs for the three months ended December 31, 2001 increased $6.7
million, or 10.0%, to $73.7 from $67.0 million for the three months ended
December 31, 2000. On a segment basis, CRS direct costs increased $1.6 million,
or 3.9%, to $42.3 million primarily due to higher labor costs in support of
increased business volume. As a percentage of net revenue, CRS direct costs
improved one percentage point to 66.8% as a result of increased efficiency and
the success of ongoing cost containment efforts. Direct costs for PCG increased
$2.3 million, or 15.2%, to $17.3 million in direct support of strong revenue
growth during the quarter. As a percentage of net revenue, PCG direct costs
improved six percentage points to 73.0% primarily due to greater leveraging of
the group's expense base. MMS direct costs increased $1.4 million, or 16.3%, to
$9.9 million due principally to increased labor and related costs associated
with increased business activities. As a percentage of net revenue, MMS direct
costs improved one percentage point, to 66.6% primarily due to a mix of higher
margin business. Direct costs for Perceptive increased $1.4 million, or 50.6%,
to $4.2 million primarily due to costs associated with business growth. As a
percentage of net revenue, Perceptive direct costs decreased to 85.2% from
105.3% primarily due to improved operating leverage.
Selling, general and administrative ("SG&A") expenses increased $2.6 million, or
11.8%, to $24.5 million for the three months ended December 31, 2001 from $21.9
million in the same period last fiscal year. As a percentage of net revenue,
SG&A decreased to 22.9%, as compared to 23.2% in the same period one year ago
primarily due to better operating leverage and continued benefits of efficiency
improvements.
Depreciation and amortization ("D&A") expense decreased $0.7 million, or 14.2%,
to $4.4 million for the three months ended December 31, 2001 from $5.2 million
for the same period last fiscal year primarily due to 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 net revenue, D&A decreased to 4.1% for the three months ended
December 31, 2001 from 5.5% in the same period last fiscal year.
Income from operations increased $4.0 million to $4.2 million for the three
months ended December 31, 2001 from $0.2 million in the same period one year
ago. Income from operations increased as a percentage of net revenue to 3.9% for
the three months ended December 31, 2001 from 0.2% for the same period of the
prior fiscal year for the reasons noted in the preceding paragraphs.
Other income, net totaled approximately $1.5 million for the three months ended
December 31, 2001 compared with $1.7 million for the comparable prior year
period. The $0.2 million decrease was caused principally by lower interest
income.
The Company had an effective income tax rate of 38.4% for the three months ended
December 31, 2001 compared with 44.0% for the same three-month period one year
ago. The decrease resulted from changes in the mix of taxable income in the
different jurisdictions where the Company operates.
Six Months Ended December 31, 2001 Compared with the Six Months Ended December
31, 2000:
Net revenue increased by $26.2 million, or 14.3% to $208.7 million for the six
months ended December 31, 2001 from $182.5 million for the comparable six-month
period in 2000. On a segment basis, CRS net revenue increased $8.6 million, or
7.4%, to $124.1 million primarily due to an increase in the volume of serviced
projects. Net revenue for PCG increased $9.1 million, or 24.9%, to $45.4 million
primarily due to increased demand for the group's services. MMS net revenue
increased $4.4 million, or 17.4%, to $30.0 million due to continued strong
demand for
11
pre and post launch services. Perceptive net revenue increased $4.1
million, or 80.7%, to $9.2 million primarily due to continued business growth.
Direct costs increased $15.3 million, or 11.8%, to $145.6 million for the six
months ended December 31, 2001 from $130.3 million for the same six-month period
one year ago. On a segment basis, CRS direct costs increased $5.1 million, or
6.5%, to $83.9 million primarily due to increased costs associated with higher
revenue levels. As a percentage of net revenue, CRS direct costs improved by
half a percentage point as a result of improved efficiency. PCG direct costs
increased $4.7 million, or 16.3%, to $33.8 million primarily due to increased
business volume. As a percentage of net revenue, PCG direct costs decreased to
74.5% from 80.0% primarily due to better leveraging of costs associate with
revenue growth. MMS direct costs increased $2.9 million, or 16.8%, to $20.2
million primarily due to expenses required to support increased revenue levels.
As a percentage of net revenue, MMS direct costs remained relatively flat at
67.0%. Perceptive direct costs increased $2.5 million, or 48.8%, to $7.7 million
primarily by increased costs needed to drive significantly higher revenue
levels. As a percentage of net revenue, Perceptive direct costs decreased 18
percentage points, to 84.3% primarily due to greater leveraging of the group's
expense base.
Selling, general and administrative ("SG&A") expenses increased $4.3 million, or
10.0%, to $47.4 million for the six months ended December 31, 2001 from $43.1
million in the same six-month period one year ago primarily due to costs
required to support higher revenue levels. As a percentage of net revenue, SG&A
improved one percentage point to 22.7% primarily due to better leveraging of
expenses and continued cost containment efforts.
Depreciation and amortization expense decreased $1.8 million, or 17.1%, to $8.9
million for the six months ended December 31, 2001 from $10.8 million. The
decrease was primarily due to 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 six-month period impact of past
restructuring activities, and the adoption of SFAS No. 142, under which the
Company eliminated approximately $0.4 million in amortization expense for the
six months ended December 31, 2001.
Income from operations increased $7.6 million to $6.7 million for the six months
ended December 31, 2001 from a loss of $0.9 million in the same six-month period
one year ago. For the reasons noted in the preceding paragraphs, income from
operations as a percentage of net revenue increased to 3.2% as compared with a
negative 0.5% in the same period during fiscal year 2001.
Other income, net remained relatively flat at approximately $3.0 million for the
six months ended December 31, 2001 when compared with the same period one year
ago with lower foreign exchange gains and reduced interest income essentially
offset by the gain on sale of a building.
The Company had an effective income tax rate of 38.2% for the six months ended
December 31, 2001 and 53.6% for the six-month period ended December 31, 2000.
The decrease was primarily due to changes in the mix of taxable income in the
different jurisdictions where the Company operates.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations and growth,
including acquisition costs, with cash flow from operations and proceeds from
the sale of equity securities. Investing activities primarily reflect
acquisition costs and capital expenditures for information systems enhancements
and leasehold improvements.
Most of the Company's contracts are fixed price, with some variable components,
and range in duration from a few months to several years. Cash flow from these
contracts typically consists of a down payment required to be paid at the time
of contract execution with the balance due in installments over the contract's
duration, usually on a milestone achievement basis. Revenue from these contracts
is generally recognized 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.
12
The Company's operating cash flow is heavily influenced by changes in the levels
of billed and unbilled receivables and advance billings. These account balances
as well as days sales outstanding in accounts receivable, net of advance
billings, can vary based on contractual milestones and the timing and size of
cash receipts. Days sales outstanding in accounts receivable, net of advance
billings, was 59 days at December 31, 2001 and 67 days at June 30, 2001.
Accounts receivable, net of the allowance for doubtful accounts, increased to
$210.2 million at December 31, 2001 from $206.9 million at June 30, 2001.
Net cash provided by operating activities for the six months ended December 31,
2001 totaled $15.6 million and was generated by a $15.5 million decrease in
accounts receivable (net of advance billings), $8.9 million for non-cash charges
related to depreciation and amortization, $5.5 million of net income, and a $1.1
million decrease in prepaid expenses and other current assets partially offset
by a $11.5 million decrease in accounts payable, a $3.0 million decrease in
other liabilities, and $0.9 million gain on sale of a building. For the six
months ended December 31, 2000, net cash provided by operating activities was
$4.2 million, comprised of $10.8 million of depreciation and amortization, a
$7.0 million increase in accounts payable, a $4.9 million increase in other
liabilities, and $0.9 million of net income, offset by an $18.2 million increase
in accounts receivable (net of advance billing) and a $1.2 million increase in
prepaid expenses and other current assets.
Net cash used in investing activities for the six months ended December 31, 2001
totaled $33.3 million and consisted of $23.3 million related to net purchases of
marketable securities, $10.0 million used for equipment purchases, and $1.5
million used for the acquisition of EDYABE, offset by $1.5 million in proceeds
from the sale of a building. For the six months ended December 31, 2000, net
cash used in investing activities totaled $2.2 million and consisting of $7.2
million used to purchase property and equipment and $3.0 million used for the
acquisition of FARMOVS, which was offset by $8.0 million of net proceeds from
sale of marketable securities.
Net cash provided by financing activities totaled $1.8 million and consisted of
$1.5 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 six months ended December 31,
2000, net cash used by financing activities totaled $0.8 million and primarily
consisted of $1.8 million used to repurchase the Company's common stock, offset
by $0.6 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 December 31,
2001, 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
$3.4 million. These lines are used as overdraft protection and bear interest at
rates ranging from 5% to 8%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At December 31, 2001, the
Company had approximately $3.1 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 Standard
In November 2001, the FASB issued Topic No. D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred". This staff announcement requires reimbursement for out-of-pocket
expenses incurred to be characterized as revenue in the income statement. The
announcement is effective for
13
periods beginning after December 15, 2001 and will require comparative financial
statements for prior periods to be reclassified. The Company is currently in the
process of evaluating the impact that this announcement will have on its
consolidated financial position or results of operations.
In October 2001, The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 144 requires, among other things, that long-lived assts 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 eliminated goodwill
amortization of approximately $0.2 million in the three-month period ended
December 31, 2001. Had SFAS No. 142 been implemented in fiscal year 2001,
approximately $0.2 million and $0.3 million of amortization expense would have
been eliminated in the three months and six months ended December 31, 2000,
respectively.
Also 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
the Company's financial 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
The Company derived approximately 43% of its net revenue for the three months
and six months ended December 31, 2001 and 2000 from operations outside of the
United States. The Company does not have significant operations in countries in
which the economy is considered to be highly inflationary. The Company's
financial statements are denominated in U.S. dollars, and accordingly, changes
in the exchange rate between foreign currencies and the U.S. dollar will affect
the translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results.
The Company may be 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
14
clinical trial and a significant portion of the contract expenses
are in a currency other than the contract currency, the Company seeks to
contractually shift to its clients the effect of fluctuations in the relative
values of the contract currency and the currency in which the expenses are
incurred. For the three months ended December 31, 2001, the Company recorded
$1.1 million 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 could have
conducted 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 the member countries to the euro currency in fiscal 2001.
Conversion to the euro currency did not create a material effect on the
Company's financial results of operations in fiscal 2001. The Company has now
converted the remaining five member countries and does not anticipate the
conversion will have a material effect in the Company's financial condition in
fiscal 2002.
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business,
including forward-looking statements made in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other forward-looking statements that the Company may make from
time to time. If any of the following risks occur, 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:
o merger or potential merger related activities;
o failure of products being tested to satisfy safety requirements;
o products having unexpected or undesired clinical results;
o client decisions to forego a particular study, perhaps for economic
reasons;
o insufficient patient enrollment in a study;
o insufficient investigator recruitment; or
o production problems which cause shortages of the product.
15
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:
o the level of new business authorizations in a particular quarter or year;
o the timing of the initiation, progress, or cancellation of significant
projects;
o exchange rate fluctuations between quarters or years;
o the mix of services offered in a particular quarter or year;
o the timing of the opening of new offices;
o the timing of other internal expansion costs;
o restructuring charges;
o the timing and amount of costs associated with integrating acquisitions;
and
o 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 ALL OF 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:
o its clients' businesses experience financial problems or are affected by
a general economic downturn;
o consolidation in the pharmaceutical or biotechnology industries leads to
a smaller client base for the Company; or
o 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 December 31, 2001, the Company's
five largest clients accounted for 39% of its consolidated net revenue, and one
client accounted for 11% of consolidated net revenue. For the three months ended
December 31, 2000, the Company's five largest clients accounted for 35% of its
consolidated net revenue, and one client accounted for 11% of consolidated net
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 an 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:
16
o continue to improve its operating, administrative and information
systems;
o accurately predict its future personnel and resource needs to meet client
contract commitments;
o track the progress of ongoing client projects; and
o 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:
o assimilate differences in foreign business practices, exchange rates and
regulatory requirements;
o operate amid political and economic instability;
o hire and retain qualified personnel; and
o 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:
o difficulties and expenses associated with assimilation of the operations
and services or products of the acquired companies;
o diversion of management's attention from other business concerns; and
o 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
17
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 adversely and materially affected if its liability exceeds the
amount of its insurance. The Company may not be able to continue to secure
insurance on acceptable terms.
THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD DECLINE
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future in response to quarter-to-quarter
variations in:
o operating results;
o earnings estimates by analysts;
o market conditions in the industry;
o prospects of health care reform;
o changes in government regulations; and
o general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations. Investors in the
Company's common stock must be willing to bear the risk of such fluctuations in
earnings and stock price.
THE COMPANY'S BUSINESS 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 11-year-long
International Conference on Harmonization ("ICH"), the purpose of which is to
eliminate duplicative or conflicting regulations in the three regions. The ICH
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 2001. 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.
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 would eliminate much of
the demand
18
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:
o previous experience;
o medical and scientific expertise in specific therapeutic areas;
o quality of services;
o the ability to organize and manage large-scale clinical trials on a
global basis;
o the ability to manage large and complex medical databases;
o the ability to provide statistical and regulatory services;
o the ability to recruit investigators and patients;
o the ability to integrate information technology with systems to improve
the efficiency of contract research;
o an international presence with strategically located facilities;
o financial strength and stability; and
o 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 PPDI 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 43% of its net revenue for the three months
ended December 31, 2001 and 2000 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.
19
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 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 4. Submission of Matters to a Vote of Security Holders
On November 13, 2001, the Company held its 2001 Annual meeting of Stockholders.
At the meeting, the stockholders of the Company voted:
(1) to elect the following persons to serve as Class III directors, to
serve for a three-year term (until the 2004 Annual Meeting). The votes
cast were as follows:
For Withheld
--- --------
Josef H. von Rickenbach 18,442,266 3,519,583
A. Dana Callow, Jr. 20,942,242 1,019,607
(2) to approve the Company's 2001 Stock Incentive Plan. The votes cast
were as follows:
For Against Abstain
--- ------- -------
16,674,374 5,267,689 19,786
(3) to ratify the selection of Arthur Andersen LLP as independent auditors
for the fiscal year ending June 30, 2002. The votes cast were as
follows:
For Against Abstain
--- ------- -------
21,937,058 19,398 5,393
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K on October 4, 2001, which was
amended on October 15, 2001, reporting a change in the Registrant's certifying
accountant.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 14th day of February 2002.
PAREXEL International Corporation
Date: February 14, 2001 By: /s/ Josef H. von Rickenbach
---------------------------------------
Josef H. von Rickenbach
Chairman of the Board and
Chief Executive Officer
Date: February 14, 2001 By: /s/ James F. Winschel, Jr.
---------------------------------------
James F. Winschel, Jr.
Senior Vice President and
Chief Financial Officer
21