-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0RKohnWg8QRvZ84diXluWZAVCURH2Ro/ThX+5KOsX0kHnDbc6URXYMyBrfbHxqL pzgwjwCgQvk6aDGzAYLMdA== 0000950135-04-002613.txt : 20040513 0000950135-04-002613.hdr.sgml : 20040513 20040513153511 ACCESSION NUMBER: 0000950135-04-002613 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAREXEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000799729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 042776269 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21244 FILM NUMBER: 04802789 BUSINESS ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7814879900 MAIL ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02451 10-Q/A 1 b50345q3e10vqza.txt PAREXEL INTERNATIONAL CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-Q/A AMENDMENT NO. 1 ------------------------------- (Mark One): [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number: 0-27058 PAREXEL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its Charter) MASSACHUSETTS 04-2776269 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 195 WEST STREET WALTHAM, MASSACHUSETTS 02451 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 487-9900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 6, 2004 there were 26,105,870 shares of PAREXEL International Corporation common stock outstanding, excluding 258,600 shares in treasury. EXPLANATORY NOTE PAREXEL International Corporation ("the Company") is filing this Amendment No. 1 on Form 10-Q/A to reclassify certain reimbursable expenses of the PAREXEL Consulting Group from "Reimbursement Revenue" into "Service Revenue", and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs". The reclassification had no impact to the Company's total revenue, expenses, operating income, net income, or balance sheet. Accordingly, the Company hereby amends its quarterly report on Form 10-Q for the period ended September 30, 2003 (the "Original Filing") by amending and restating the following: (1) Item 1. Financial Information: (i) "Service Revenue", "Reimbursement Revenue", "Direct Costs", and "Reimbursable Out-of-Pocket Expenses" for the three months ended September 30, 2003 and 2002 as set forth in the Condensed Consolidated Statements of Operations. (ii) Service revenue of "PAREXEL Consulting Group" and "Total Service Revenue" for the three months ended September 30, 2003 and 2002 as set forth in the table contained in Note 5 to the Condensed Consolidated Financial Statements. (2) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: All amounts and percentages affected by this reclassification. (3) Item 3. Quantitative and Qualitative Disclosure About Market Risk: (i) All percentages affected by this reclassification as set forth in the paragraph entitled "Foreign Currency Exchange Rates". (ii) All percentages affected by this reclassification as set forth in the risk factor entitled "The Company's Business is Subject to International Economic, Political and other Risks that Could Negatively Affect its Results of Operations or Financial Position". (iii) All percentages affected by this reclassification as set forth in the risk factor entitled "The Company's Revenue and Earnings are Exposed to Exchange Rate Fluctuations". Except as set forth above, no other items of the Original Filing are amended or restated by this Amendment No. 1. This Amendment No. 1 also contains new Certifications from the Chief Executive Officer and Chief Financial Officer as set forth in the Exhibit Index to this filing. 2 PART I. FINANCIAL INFORMATION PAREXEL INTERNATIONAL CORPORATION ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, JUNE 30, 2003 2003 ------------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 70,048 $ 69,734 Marketable securities 10,098 12,990 Billed and unbilled accounts receivable, net 210,794 222,726 Prepaid expenses 11,160 12,087 Current deferred tax assets 27,390 27,604 Other current assets 4,407 4,936 --------- --------- Total current assets 333,897 350,077 Property and equipment, net 61,625 61,924 Goodwill 30,452 29,803 Other intangible assets, net 5,534 5,763 Non-current deferred tax assets 10,109 10,043 Other assets 6,604 6,627 --------- --------- Total assets $ 448,221 $ 464,237 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 358 $ 118 Accounts payable 9,091 14,462 Deferred revenue 118,584 130,650 Accrued expenses 13,239 13,766 Accrued restructuring charges 7,953 8,750 Accrued employee benefits and withholdings 32,444 37,849 Current deferred tax liabilities 2,557 2,557 Income taxes payable 4,563 1,801 Other current liabilities 4,115 5,778 --------- --------- Total current liabilities 192,904 215,731 Long-term debt 625 644 Non-current deferred tax liabilities 10,674 10,674 Other liabilities 5,958 6,092 --------- --------- Total liabilities 210,161 233,141 --------- --------- Minority interest in subsidiary 3,428 3,996 Stockholders' equity: Preferred stock--$.01 par value; shares authorized: 5,000,000 at September 30, 2003 and June 30, 2003; Series A Junior Participating Preferred Stock - 50,000 shares designated; none issued and outstanding Common stock--$.01 par value; shares authorized: 50,000,000 at September 30, 2003 and June 30, 2003; shares issued: 26,841,981 at September 30, 2003 and 26,683,055 at June 30, 2003; shares outstanding 25,911,152 at September 30, 2003 and 25,822,055 at June 30, 2003 269 267 Additional paid-in capital 176,143 174,734 Treasury stock, at cost; 930,829 shares at September 30,2003 and 861,000 shares at June 30, 2003 (8,792) (8,165) Retained earnings 67,849 63,117 Accumulated other comprehensive loss (837) (2,853) --------- --------- Total stockholders' equity 234,632 227,100 --------- --------- Total liabilities and stockholders' equity $ 448,221 $ 464,237 ========= =========
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 SEPTEMBER 30, -------------------------- 2003 2002 --------- --------- (RESTATED) (RESTATED) Service revenue $ 132,123 $ 121,417 Reimbursement revenue 21,468 24,769 --------- --------- Total revenue 153,591 146,186 Costs and expenses: Direct costs 85,848 82,044 Reimbursable out-of-pocket expenses 21,468 24,769 Selling, general and administrative expenses 32,468 27,564 Depreciation and amortization 5,987 4,806 --------- --------- Total costs 145,771 139,183 --------- --------- Income from operations 7,820 7,003 Other income (loss), net 294 (1,103) --------- --------- Income before provision for income taxes and minority interest 8,114 5,900 Provision for income taxes 3,124 2,478 Minority interest 258 159 --------- --------- Net income $ 4,732 $ 3,263 ========= ========= Earnings per share: Basic and diluted $ 0.18 $ 0.13 Shares used in computing earnings per share: Basic 25,860 25,173 Diluted 26,592 25,315
See notes to condensed consolidated financial statements. 4 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------- 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,732 $ 3,263 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 5,987 4,806 Minority interest in net income of consolidated subsidiary 258 159 Changes in operating assets/liabilities (10,332) 1,131 -------- -------- Net cash provided by operating activities 645 9,359 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (42,634) (60,714) Proceeds from sale of marketable securities 45,526 68,952 Acquisition of business - (497) Proceeds from sale of fixed assets 30 31 Purchase of property and equipment (4,944) (6,552) -------- -------- Net cash provided by (used) in investing activities (2,022) 1,220 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,411 19 Borrowings and (repayments) under credit arrangements 221 (44) Payments to repurchase common stock (627) - -------- -------- Net cash provided by (used) in financing activities 1,005 (25) -------- -------- Effect of exchange rate changes on cash and cash equivalents 686 715 -------- -------- Net increase in cash for the period 314 11,269 Cash and cash equivalents at beginning of period 69,734 22,479 -------- -------- Cash and cash equivalents at end of period $ 70,048 $ 33,748 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Taxes $ 214 $ 6,055 Interest $ 943 $ 645 Acquisitions, net of cash acquired: Fair value of assets acquired and goodwill - $ 497 Liabilities and minority interest assumed - - -------- -------- Cash paid for acquisition - $ 497 ======== ========
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 PAREXEL International Corporation ("PAREXEL" or "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 ended September 30, 2003, are not necessarily indicative of the results that may be expected for other quarters or the entire fiscal year. 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, 2003. Certain prior year balances have been reclassified in order to conform to current year presentation. Specifically, effective July 1, 2003, the Company decided to merge the Conferences and Publishing business of PAREXEL Consulting Group ("PCG") with the Meetings and Events business of Medical Marketing Services ("MMS") in order to eliminate duplication and improve synergies. As a result, revenue and direct costs were moved from PCG to MMS. In addition, the Company combined certain Clinical Research Services ("CRS") and Corporate Information Technology groups into one organization led by the Company's Corporate Information Systems group in order to capitalize on various synergies in those areas. As a result, ongoing and historical expenses related to these activities were shifted from direct costs to selling, general and administrative expenses. The financials reflect a restatement of the Company's financial results for the three months ended September 30, 2003 and 2002. The restatement relates to reclassifications of certain reimbursable expenses of PCG from "Reimbursement Revenue" into "Service Revenue", and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs". The restatement had no impact to the Company's total revenue, expenses, operating income, net income, or balance sheet. THE EFFECT ON CONSOLIDATED RESULTS WAS AS FOLLOWS:
FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, CONSOLIDATED 2003 2002 ------------ ------------ Service revenue - as reported $ 129,788 $ 119,353 Effect of adjustments 2,335 2,064 ------------ ------------ Service revenue - restated $ 132,123 $ 121,417 ============ ============ Gross profit - as reported $ 46,275 $ 39,373 Effect of adjustments - - ------------ ------------ Gross profit - restated $ 46,275 $ 39,373 ============ ============ Gross margin as % of service revenue - as reported 35.7% 33.0% Gross margin as % of service revenue - restated 35.0% 32.4%
6 THE EFFECT ON SEGMENT INFORMATION WAS AS FOLLOWS:
FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, THE PAREXEL CONSULTING GROUP 2003 2002 ------------- ------------- Service revenue - as reported $21,790 $22,373 Effect of adjustments 2,335 2,064 ------- ------- Service Revenue - restated $24,125 $24,437 ======= ======= Gross profit - as reported $ 4,854 $ 6,061 Effect of adjustments - - ------- ------- Gross profit - restated $ 4,854 $ 6,061 ======= ======= Gross margin as % of service revenue - as reported 22.3% 27.1% Gross margin as % of service revenue - restated 20.1% 24.8%
NOTE 2 -- EARNINGS PER SHARE Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares plus the dilutive effect of outstanding stock options and shares issuable under the employee stock purchase plan. Approximately 1.0 million and 2.7 million outstanding stock options were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2003 and 2002, respectively, because they were anti-dilutive. The following table outlines the basic and diluted earnings per common share computations:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ($ in thousands, except per share data) 2003 2002 ------- ------- Net income attributable to common shares $ 4,732 $ 3,263 ======= ======= BASIC EARNINGS PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding 25,860 25,173 ======= ======= Basic earnings per common share $ 0.18 $ 0.13 ======= ======= DILUTED EARNINGS PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding: Shares attributable to common stock outstanding 25,860 25,173 Shares attributable to common stock options 732 142 ------- ------- 26,592 25,315 ======= ======= Diluted earnings per common share $ 0.18 $ 0.13 ======= =======
7 NOTE 3 - COMPREHENSIVE INCOME Comprehensive income 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 for the three months ended September 30, 2003 and 2002 were as follows:
THREE MONTHS ENDED SEPTEMBER 30, ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 ------ ------ Net income $4,732 $3,263 Add foreign currency translation adjustments 2,016 799 ------ ------ Comprehensive income $6,748 $4,062 ====== ======
NOTE 4 - STOCK-BASED COMPENSATION The Company accounts for employee stock awards using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", as described by FASB Interpretation No. 44. Accordingly, no compensation expense is recognized because the exercise price of the Company's stock options was equal to the market price of the underlying stock on the date of grant. The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for disclosure purposes only. If the compensation cost for the Company's stock options and the Company's employee stock purchase plan had been determined based on the fair value at the date of grant, as prescribed in SFAS No. 123, the Company's net income and net income per share would have been as follows:
THREE MONTHS ENDED SEPTEMBER 30, ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 ------ ------ Net income, as reported $4,732 $3,263 Deduct total stock-based compensation, net of tax 353 711 ------ ------ Pro forma net income $4,379 $2,552 ====== ====== Pro forma net income per share: Basic $ 0.17 $ 0.10 Diluted $ 0.16 $ 0.10
As stock options vest over several years and additional stock option grants are expected to be made each year, the above pro forma disclosures are not necessarily representative of pro forma effects on results of operations for future periods. NOTE 5 - SEGMENT INFORMATION The Company is managed through four business segments: CRS, the PCG, 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, and management consulting. PCG consultants identify alternatives and propose solutions to address clients' product development, registration, and commercialization issues. MMS provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Perceptive provides technology solutions to improve clients' product development and commercialization processes. Perceptive offers a portfolio of services that include design of web-based portals, interactive voice response systems ("IVRS"), clinical trial management systems ("CTMS"), electronic data capture solutions, and medical imaging. Perceptive is a majority-owned subsidiary of the Company. As of September 30, 2003, the Company owned 98.2% of Perceptive, based on the outstanding shares. 8 The Company evaluates its segment performance and allocates resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are evaluated on a geographic basis. Accordingly, the Company does not include selling, general, and administrative expenses, depreciation and amortization expense, interest income (expense), other income (expense), and income tax expense in segment profitability. Furthermore, the Company attributes revenue to individual countries based upon the number of hours of services performed in the respective countries and inter-segment transactions are not included in service revenue.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------- ($ IN THOUSANDS) 2003 2002 -------- -------- (RESTATED) (RESTATED) Service revenue: Clinical Research Services $ 79,662 $ 71,897 PAREXEL Consulting Group 24,125 24,437 Medical Marketing Services 20,193 19,499 Perceptive Informatics, Inc. 8,143 5,584 -------- -------- $132,123 $121,417 ======== ======== Gross profit on service revenue: Clinical Research Services $ 32,604 $ 24,923 PAREXEL Consulting Group 4,854 6,061 Medical Marketing Services 5,117 6,700 Perceptive Informatics, Inc. 3,700 1,689 -------- -------- $ 46,275 $ 39,373 ======== ========
The financials reflect a restatement of the Company's financial results for the three months ended September 30, 2003 and 2002. The restatement relates to reclassifications of certain reimbursable expenses of PCG from "Reimbursement Revenue" into "Service Revenue", and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs". The restatement had no impact to the Company's total revenue, expenses, operating income, net income, or balance sheet. See Note 1 for further discussion and analysis. NOTE 6 - RESTRUCTURING CHARGES During the three months ended September 30, 2003, the Company did not record any new restructuring provisions. During the three-month periods ended June 30, 2003 and December 31, 2002 the Company recorded facilities-related restructuring charges totaling $3.5 million and $5.9 million, respectively, as a result of changes in prior assumptions regarding certain leased facilities which were abandoned as part of the Company's June 2001 restructuring. The changes in prior assumptions were caused by a further deterioration in challenging real estate market conditions, which made it difficult to sub-lease the abandoned facilities at previously estimated rental rates. In June 2001, the Company made certain reasonable assumptions based upon market conditions, which indicated that sub-lease payments for these abandoned facilities were probable. The June 2001 restructuring charge involved fourteen properties. The Company has been successful in exiting or subleasing eleven of those properties. After expending significant effort attempting to sub-lease the remaining properties during a declining commercial real estate market, it became apparent to the Company during fiscal year 2003 that the original assumptions for the remaining three properties were no longer valid under current market conditions. Current quarter activity charged against the restructuring accrual (which is included in "Other current liabilities" in the Condensed Consolidated Balance Sheet) was as follows:
BALANCE AS OF BALANCE AS OF 1st QUARTER SEPTEMBER 30, ($ IN THOUSANDS) JUNE 30, 2003 PAYMENTS 2003 ------------- ----------- ------------- Employee severance costs $ 244 $ (6) $ 238 Facilities related charges 8,506 (791) 7,715 ------- -------- -------- $ 8,750 $ (797) $ 7,953 ======= ======== ========
9 NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Except for those provisions related to mandatory redeemable financial instruments, which have been deferred indefinitely by the FASB, SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS 150 effective July 1, 2003. Adoption of this standard did not have a material impact on the Company's results of operations or financial position. In April 2003, the FASB issued SFAS No 149, "Derivatives and Hedging, an Amendment of FASB Statement 133" ("SFAS 149"). This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133, Accounting for Derivative Instruments and Hedging Activities. The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative under Statement 133, clarifies when a derivative contains a financing component, amends the definition of "underlying" to conform it to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted SFAS 149 effective July 1, 2003. Adoption of this standard did not have a material impact on the Company's results of operations or financial position. In January 2003, the EITF, published EITF Issue 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables", which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Consideration under an arrangement should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company's adoption of EITF 00-21 did not have a material impact on the Company's results of operations or financial position. In January 2003, the FASB issued Interpretation No 46 ("FIN 46"), "Consolidation of Variable Interest Entities", to expand upon and strengthen existing accounting guidance that addresses when a company's financial statements should include the assets, liabilities and activities of another entity. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is reviewing the provisions of FIN 46 but does not expect the adoption to have a material impact, if any, on the Company's results of operations or financial position. 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. 10 Certain prior year balances have been reclassified in order to conform to current year presentation. Specifically, effective July 1, 2003, the Company decided to merge the Conferences and Publishing business of PCG with the Meetings and Events business of MMS in order to eliminate duplication and improve synergies. As a result, revenue and direct costs were moved from PCG to MMS. In addition, the Company combined certain CRS and Corporate Information Technology groups into one organization led by the Company's Corporate Information Systems group in order to capitalize on various synergies in those areas. As a result, ongoing and historical expenses related to these activities were shifted from direct costs to selling, general and administrative expenses. The statements included in this quarterly report on Form 10-Q, including the statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations", may contain "forward-looking statements", within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the adequacy of the Company's existing capital resources and future cash flows from operations, and statements regarding expected financial results, future growth and customer demand. For this purpose, any statements that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends", "appears", "will" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results, including the Company's actual operating performance, actual expense savings and other operating improvements resulting from restructurings and other corporate actions, to differ significantly from the results indicated by the forward-looking statements. These important factors are discussed in greater detail under "RISK FACTORS" below and elsewhere in this quarterly report. The forward-looking statements included in this quarterly report represent the Company's estimates as of the date of this quarterly report. The Company specifically disclaims any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing the Company's estimates or views as of any date subsequent to the date of this quarterly report. OVERVIEW The Company is a leading biopharmaceutical services company, providing a broad range of expertise in clinical research, medical marketing, consulting and informatics and advanced technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. The Company's primary objective is to provide solutions for managing the biopharmaceutical product lifecycle with the goal of reducing the time, risk and cost associated with the development and commercialization of new therapies. Since its founding in 1983, PAREXEL has developed significant expertise in processes and technologies supporting this strategy. The Company's product and service offerings include: clinical trials management, data management, biostatistical analysis, medical marketing, clinical pharmacology, regulatory and medical consulting, performance improvement, industry training and publishing, web-based portal solutions, interactive voice response systems ("IVRS"), clinical trial management systems ("CTMS"), electronic data capture solutions, medical imaging services, and other drug development consulting services. The Company believes that its integrated services, depth of therapeutic area expertise, access to patients, and sophisticated information technology, along with its experience in global drug development and product launch services, represent key competitive strengths. The Company is managed through four business 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 and biostatistics and data management, as well as related medical advisory and investigator site services. PCG provides technical expertise in such disciplines as clinical pharmacology, regulatory affairs, industry training, and management consulting. PCG consultants identify alternatives and propose solutions to address clients' product development, registration, and commercialization issues. MMS provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Perceptive provides technology solutions to improve clients' product development and commercialization processes. Perceptive offers a portfolio of services that include the design of web-based portals, IVRS, CTMS, electronic data capture solutions, and medical diagnostics. Perceptive is a majority-owned subsidiary of the Company. As of September 30, 2003, the Company owned 98.2% interest in Perceptive, based on the outstanding shares. 11 The Company conducts a significant portion of its operations in foreign countries. Approximately 53.4% of the Company's service revenue for the three months ended September 30, 2003 and 47.3% of the Company's service revenue for the three months ended September 30, 2002, were from non-U.S. operations. Because the Company's financial statements are denominated in United States ("U.S"). dollars, changes in foreign currency exchange rates can have a significant effect on its operating results. For the three months ended September 30, 2003, approximately 19.5% of total service revenue was denominated in British pounds and 25.6% of total service revenue was denominated in Euros. For the three months ended September 30, 2002, approximately 21.1% of total service revenue was denominated in British pounds and approximately 19.8% of total service revenue was denominated in Euros. As a result of a weakening of the U.S. dollar against the British Pound and the Euro in the first quarter of fiscal year 2004, the Company's revenue and direct costs increased significantly in the three months ended September 30, 2003 versus the comparable 2002 period. Approximately 90% of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flow from these contracts typically consists of a down payment required to be paid at the time of contract execution with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is generally recognized as work is performed. As a result, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. Generally, the Company's clients can terminate their contracts with the Company upon thirty to sixty days' notice or can delay execution of services. Clients may terminate or delay contracts for a variety of reasons, including, among others: merger or potential merger related activities involving the client, the failure of products being tested to satisfy safety requirements or efficacy criteria, unexpected or undesired clinical results of the product, client cost reductions as a result of budgetary limits or changing priorities, the client's decision to forego a particular study, insufficient patient enrollment or investigator recruitment, or production problems resulting in shortages of the product. CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and other financial information. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to revenue recognition. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While the Company's significant accounting policies are more fully described in Note 2 to the consolidated financial statements included in Item 8 of Form 10-K for the year ended June 30, 2003, the Company believes that the following accounting policies are most critical to aid in fully understanding and evaluating its reported financial results. REVENUE Service revenue on fixed price contracts is recognized as services are performed. The Company measures progress on fixed price contracts using the concept of proportional performance based upon a direct labor cost-to-cost methodology or by the unit based output method. These methods require the Company to estimate total expected revenue and total expected costs. Generally, the assigned financial manager or financial analyst reviews contract estimates on a monthly basis. Adjustments to contract estimates are made in the periods in which the facts that require the revisions become known. Historically, there have not been any significant variations between contract estimates and the actual costs incurred, which were not recovered from clients. In the event that future estimates are incorrect, they could materially impact the Company's consolidated results of operations or financial position. BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE Billed accounts receivable represents amounts for which invoices have been sent to clients. Unbilled accounts receivable represent amounts recognized as revenue for which invoices have not yet been sent to clients. Deferred revenue represents amounts billed or payments received for which revenue has not yet been earned. The Company maintains an allowance for doubtful accounts based on historical collectability and specific identification of potential problems. In the event the Company is unable to collect portions of its outstanding billed or unbilled receivables, there may be a material impact to the Company's consolidated results of operations and financial position. 12 INCOME TAXES The Company's global provision for corporate income taxes is calculated using the tax accounting rules established by SFAS No. 109 "Accounting for Income Taxes". Income tax expense is based on the distribution of profit before tax amongst the various taxing jurisdictions in which the Company operates, adjusted as required by the tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses between taxing jurisdictions may have a significant impact on the Company's effective tax rate. The provision is a combination of current-year tax liability and future tax liability/benefit that results from differences between book and taxable income that will reverse in future periods. Deferred tax assets and liabilities for these future tax effects are established on the Company's balance sheet. A valuation allowance is established if it is more likely than not that future tax benefits will not be realized. Monthly interim tax provision calculations are prepared during the year. Differences between these interim estimates and the final results for the year could materially impact the Company's effective tax rate and its consolidated financial results and financial position. EMPLOYEE STOCK COMPENSATION The Company elected to follow Accounting Principal Board Opinion No. 25, "Accounting for Stock Options Issued to Employees" ("APB 25"), and related interpretations in accounting for the Company's employee stock options because the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use of option valuation models that were not developed for valuing employee stock options. Under APB 25, no compensation expense is recognized if the exercise price equals the market price of the underlying stock on the date of the grant. If PAREXEL accounted for stock options under SFAS 123, the Company would have recorded additional compensation expense for stock option grants to employees. If PAREXEL were unable to account for stock options under APB 25, the Company's financial results would be materially affected to the extent the additional compensation expense would have to be recognized. The additional compensation expense could vary significantly from period to period based on several factors including the number of stock options granted and stock price fluctuations. FOREIGN CURRENCIES The Company derives a large portion of its service revenue from operations in foreign countries. The Company's financial statements are denominated in U.S. dollars. As a result, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect the Company's results of operations. Gains and losses on transactions denominated in currencies other than an entity's functional currency are reported in other income (expense). Adjustments from the translation of the subsidiary entities' foreign functional currencies to U.S. dollars are reported in accumulated other comprehensive income/(loss) within stockholder's equity. GOODWILL Goodwill represents the excess of the cost of an acquired business over the fair value of the related net assets at the date of acquisition. Prior to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142"), goodwill was amortized using the straight-line method over its expected useful life. Subsequent to the adoption of SFAS No. 142, goodwill is subject to annual impairment testing. The Company has assessed the impairment of goodwill under SFAS No. 142 in fiscal year 2003. Based on this assessment, there was no impairment identified. The Company tests for impairment at least annually (generally in the fourth quarter) and more often if events or circumstances warrant. Any future impairment of goodwill could have a material impact to the Company's financial position or its results of operations. RESULTS OF OPERATIONS ANALYSIS BY SEGMENT The Company evaluates its segment performance and allocates resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are evaluated on a geographic basis. Accordingly, the Company does not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income taxes in segment profitability. Service revenue, direct costs and gross profit on service revenue for the three months ended September 30, 2003 and 2002 were as follows: 13
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2003 2002 ($ IN THOUSANDS) (RESTATED) (RESTATED) INCREASE % ---------- ---------- -------- ----- Service revenue: CRS $ 79,662 $ 71,897 $ 7,765 10.8% PCG 24,125 24,437 (312) -1.3% MMS 20,193 19,499 694 3.6% Perceptive 8,143 5,584 2,559 45.8% -------- -------- -------- $132,123 $121,417 $ 10,706 8.8% ======== ======== ======== Direct costs: CRS $ 47,058 $ 46,974 $ 84 0.2% PCG 19,271 18,376 895 4.9% MMS 15,076 12,799 2,277 17.8% Perceptive 4,443 3,895 548 14.1% -------- -------- -------- $ 85,848 $ 82,044 $ 3,804 4.6% ======== ======== ======== Gross profit on service revenue: CRS $ 32,604 $ 24,923 $ 7,681 30.8% PCG 4,854 6,061 (1,207) -19.9% MMS 5,117 6,700 (1,583) -23.6% Perceptive 3,700 1,689 2,011 119.1% -------- -------- -------- $ 46,275 $ 39,373 $ 6,902 17.5% ======== ======== ========
The financials reflect a restatement of the Company's financial results for the three months ended September 30, 2003 and 2002. The restatement relates to reclassifications of certain reimbursable expenses of PCG from "Reimbursement Revenue" into "Service Revenue", and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs". The restatement had no impact to the Company's total revenue, expenses, operating income, net income, or balance sheet. See Note 1 to the Condensed Consolidated Financial Statements for further discussion and analysis. THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002: Service revenue increased by $10.7 million, or 8.8%, to $132.1 million for the three months ended September 30, 2003 from $121.4 million in the three months ended September 30, 2002. On a geographic basis, service revenue for the three months ended September 30, 2003 was distributed as follows: The Americas $62.4 million (47.3%), Europe $63.2 million (47.8%) and Asia/Pacific $6.5 million (4.9%). For the three months ended September 30, 2002, service revenue was distributed as follows: The Americas $64.7 million (53.4%), Europe $51.9 million (42.7%), and Asia/Pacific $4.8 million (3.9%). On a segment basis, CRS service revenue increased by $7.8 million, or 10.8%, to $79.7 million for the three months ended September 30, 2003 from $71.9 million in the three months ended September 30, 2002. Of the total 10.8% increase, approximately 5.0% was attributed to the positive impact of foreign currency fluctuations, with the remaining 5.8% primarily due to higher business volume in Europe and in Japan. PCG service revenue decreased by $0.3 million, or 1.3%, to $24.1 million for the three months ended September 30, 2003 from $24.4 million in the three months ended September 30, 2002. This decrease was offset by the positive impact of foreign exchange fluctuations, which accounted for approximately 8.8% of the increase in PCG service revenue for the three-month period ended September 30, 2003. PCG experienced a decrease in revenue resulting from a reduction in FDA enforcement activity and reduced levels of discretionary spending by biopharmaceutical companies, which impacted the regulatory and consulting segments of the PCG business. MMS service revenue increased by $0.7 million, or 3.6%, to $20.2 million for the three months ended September 30, 2003 from $19.5 million in the same period one year ago. This increase was attributed to incremental revenue from the Pracon and HealthIQ business, which was acquired by the Company during the second quarter of fiscal year 2003. Perceptive service revenue increased by $2.6 million, or 45.8%, to $8.1 million for the three months ended September 30, 2003, as compared with $5.6 million in the same period a year ago. Of the total 45.8% increase, 14 approximately 42.2% was attributed to incremental revenue associated with the FW Pharma business, which was acquired by the Company during the third quarter of fiscal year 2003, and the remaining 3.6% was primarily attributed to an increase in the group's e-Services business. Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred on behalf of, and reimbursable by, clients. It does not yield any gross profit to the Company, nor does it have an impact on net income. Direct costs increased by $3.8 million, or 4.6%, to $85.8 million for the three months ended September 30, 2003 from $82.0 million in the three months ended September 30, 2002. On a segment basis, CRS's direct costs for the three months ended September 30, 2003 remained relatively consistent at $47.0 million as compared with the same period one year ago. As a percentage of service revenue, CRS direct costs for the three months ended September 30, 2003 decreased by 6.2 percentage points, declining to 59.1% from 65.3% over the three months ended September 30, 2002 primarily due to ongoing productivity improvements, improved performance in Japan, and continued strength in Europe. The improvement in Japan was a result of the positive effect of the management changes and operational improvements implemented during the fourth quarter of fiscal year 2003, and a contract closeout. PCG direct costs increased by $0.9 million, or 4.9%, to $19.3 million for the three months ended September 30, 2003 from $18.4 in the same period in 2002 primarily due to the unfavorable impact of foreign exchange fluctuations, which were partly offset by lower personnel costs. As a percentage of service revenue, PCG direct costs for the three months ended September 30, 2003 increased by 4.8 percentage points to 79.9% for the three months ended September 30, 2003 from 75.2% in the three months ended September 30, 2002 primarily reflecting the period-over-period decline in revenue levels. MMS direct costs increased $2.3 million, or 17.8%, to $15.1 million for the three months ended September 30, 2003 from $12.8 million in the three months ended September 30, 2002. Of the total 17.8% increase, approximately 2.0% was attributed to increased costs as a result of foreign currency fluctuations with the remaining 15.8% attributed to one-time catch-up adjustments, incremental hiring costs related to recent staff additions, and the impact of investing ahead of the revenue curve. As a percentage of service revenue, MMS direct costs were 74.7% for three months ended September 30, 2003 and 65.6% for the same period one year ago primarily reflecting the increased costs described above, coupled with a less favorable revenue mix. Perceptive direct costs increased by $0.5 million, or 14.1%, to $4.4 million for the three months ended September 30, 2003 from $3.9 million in the three months ended September 30, 2002. Of the total 14.1% increase, approximately 9.2% was due to incremental costs associated with the FW Pharma acquisition with the remaining 4.9% primarily due to increased labor costs associated with headcount additions made between the second and fourth quarters of fiscal year 2003. As a percentage of service revenue, Perceptive's direct costs for the three months ended September 30, 2003 decreased by 15.2 percentage points to 54.6% for the three months ended September 30, 2003 from 69.8% in the same period one year ago, primarily reflecting increased revenue in the period and continued improvements in productivity. Selling, general and administrative ("SG&A") expenses increased by $4.9 million, or 17.8%, to $32.5 million for the three months ended September 30, 2003 from $27.6 million in the same period in the last fiscal year. Of the total 17.8% increase, approximately 4.5% was caused by foreign currency fluctuations, approximately 2.3% was attributed to incremental expenses associated with the businesses acquired during fiscal year 2003 and the remaining 11.0% was driven primarily by increased selling and promotions expenses and higher facilities costs. As a percentage of service revenue, SG&A increased by 1.9 percentage points to 24.6% in the three-month period ended September 30, 2003, as compared with 22.7% in the same period of the last fiscal year. This increase was driven by higher research and development costs in the businesses acquired in fiscal year 2003, higher spending on selling and promotions, and higher facilities costs. Depreciation and amortization ("D&A") expense increased by $1.2 million, or 24.6 %, to $6.0 million for the three months ended September 30, 2003 from $4.8 million in the three months ended September 30, 2002. Of the total 24.6% increase, approximately 9.2% was attributed to higher depreciation expense as a result of computer software placed in service during the three-month period ended September 30, 2003, 4.8% in incremental amortization expense associated with intangible assets acquired with the fiscal year 2003 acquisitions, 4.5% resulted from foreign exchange fluctuations and the remaining 6.1% was due to higher depreciation expenses associated with increased capital spending during fiscal year 2003. As a percentage of service revenue, D&A was 4.5% for the three months ended September 30, 2003 and 4.0% in the same period in the last fiscal year. Income from operations increased by $0.8 million, or 11.7%, to $7.8 million for the three months ended September 30, 2003 from $7.0 million in the same period one year ago primarily due to the reasons noted in the preceding paragraphs. Income from operations increased as a percentage of service revenue to 6.0% for the three months ended September 30, 2003 from 5.9% for the same period in the last fiscal year. 15 Total other income/(loss) increased by $1.4 million in the three months ended September 30, 2003 to $0.3 million of income from a loss of $1.1 million in the three months ended September 30, 2002. The improvement was primarily due to lower foreign exchange losses in the current period. The Company had an effective income tax rate of 38.5% for the three months ended September 30, 2003 and 42.0% for the three months ended September 30, 2002 as a result of a more favorable projected mix of pre-tax income and/or losses in the jurisdictions in which the Company does business. Any future unfavorable changes in the mix of taxable income in the various jurisdictions in which the Company operates could materially impact the Company's effective tax rate. 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. Approximately 90% of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flow from these contracts typically consists of a down payment required to be paid at the time of contract execution with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is generally recognized as work is performed. As a result, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. The Company's operating cash flow is heavily influenced by changes in the levels of billed and unbilled receivables and deferred revenue. These account balances, as well as days sales outstanding in accounts receivable, net of deferred revenue, can vary based on contractual milestones and the timing and size of cash receipts. Days sales outstanding ("DSO") in accounts receivable, net of deferred revenue, was 48 days at September 30, 2003 compared with 59 days at September 30, 2002. The decrease in DSO at September 30, 2003 as compared with September 30, 2002 was primarily due to improved billing practices and increased collection activities. Accounts receivable, net of the allowance for doubtful accounts was $210.8 million ($124.7 million in billed accounts receivable and $86.1 million in unbilled accounts receivable) at September 30, 2003 and $223.8 million ($132.4 million in billed accounts receivable and $91.4 million in unbilled accounts receivable) at September 30, 2002. Deferred revenue was $118.6 million at September 30, 2003 and $118.5 million at September 30, 2002. Days sales outstanding is calculated by adding the end-of-period balances for billed and unbilled account receivables, net of deferred revenue and the allowance for doubtful accounts, then dividing the resulting amount by gross revenue (service revenue, reimbursement revenue, and investigator fees) for the most recent quarter, and multiplying the resulting fraction by the number of days in the quarter. Net cash provided by operating activities for the three months ended September 30, 2003 totaled $0.6 million and was generated from $6.0 million of depreciation and amortization expense, $4.7 million of net income, a $1.5 million decrease in prepaid and other current assets and $0.3 million in minority interest included in the net income of the consolidated subsidiaries, offset by a $5.7 million decrease in current and non-current liabilities, a $5.3 million decrease in accounts payable, a $0.7 million increase in other assets, and a $0.2 million increase in accounts receivable (net of deferred revenue and the allowance for doubtful accounts). Net cash provided by operating activities for the three months ended September 30, 2002 totaled $9.4 million and was generated from $3.3 million of net income, $4.8 million related to depreciation and amortization expense, a $4.8 million decrease in accounts receivable (net of deferred revenue and the allowance for doubtful accounts), a $1.4 million decrease in prepaids and other current assets, and a $0.4 million decrease in deferred taxes and other assets, partially offset by a $4.0 million decrease in other current liabilities and a $1.3 million decrease in accounts payable. The period-over-period decrease in net cash provided by operating activities of $8.7 million was primarily due to fiscal year 2003 bonus payment made in September 2003 versus fiscal year 2002 bonus payment made in October 2002, partly offset by higher net income and depreciation and amortization expense in the three months ended September 30, 2003 versus the same period in the last fiscal year. Net cash used in investing activities for the three months ended September 30, 2003 totaled $2.0 million and consisted of $4.9 million used for capital expenditures (primarily software and hardware), offset by $2.9 million of net proceeds from the sale of marketable securities. Net cash provided by investing activities for the three months ended September 30, 2002 totaled $1.2 million and consisted of $8.2 million of net proceeds from the sale of marketable securities, offset by $6.5 million used for equipment purchases and $0.5 million used for the acquisition of Invantage. 16 Net cash provided by financing activities for the three months ended September 30, 2003 totaled $1.0 million and consisted primarily of the proceeds generated from the issuance of common stock in conjunction with the Company's stock option plans. For the three months ended September 30, 2002, net cash provided by financing activities was de minimis. The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro 12.0 million. This line-of-credit is not collateralized, is payable on demand, and bears interest at a rate ranging between 3% and 5%. The Company entered into this line-of-credit primarily to facilitate business transactions with the bank. At September 30, 2003 the Company had approximately Euro 12.0 million available under this line of credit. The Company has other foreign lines-of-credit with banks totaling approximately $1.7 million. These lines are used as overdraft protection and bear interest at rates ranging from 4% to 6%. The lines of credit are payable on demand and are supported by PAREXEL International Corporation. At September 30, 2003, the Company had approximately $1.7 million available credit under these arrangements. The Company has a cash pooling arrangement with ABN AMRO Bank. Pooling occurs when debit balances are offset against credit balances and the net position is used as a basis by the bank for interest calculations. Each legal entity owned by the Company and party to this arrangement remains the owner of either a credit or debit balance. Therefore, interest income is earned in legal entities with credit balances, while interest expense is charged in legal entities with debit balances. Based on the pool's overall balance, the bank than recalculates the overall interest to be charged or earned, compares this amount with the sum of interest amounts already charged/earned per account and pays/charges the difference to the entities. Interest income and interest expense are included in "other income (loss), net" of the Company's condensed consolidated statements of operations. The Company's primary cash needs are for the payment of salaries and fringe benefits, hiring and recruiting expenses, business development costs, acquisition-related costs, capital expenditures, and facility-related expenses. The Company's principal source of cash is from contracts with clients. If the Company were unable to generate new contracts with existing and new clients or the level of contract cancellations increased, the Company's revenue and cash flow would be adversely affected (see "Risk Factors" for further detail). Absent a material adverse change in the level of the Company's new business bookings or contract cancellations, PAREXEL believes that its existing capital resources together with cash flow from operations and borrowing capacity under existing lines of credit will be sufficient to meet its foreseeable cash needs over the next five years. In the future, the Company expects to consider acquiring businesses to enhance its service offerings, expand its therapeutic expertise, and/or increase its global presence. Any such acquisitions may require additional external financing, and the Company may from time to time seek to obtain funds from public or private issuances of equity or debt securities. The Company may be unable to secure such financing on terms acceptable to the Company. GUARANTEES The Company has letter-of-credit agreements with banks totaling approximately $1.0 million guaranteeing performance under various operating leases and vendor agreements. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company. RELATED PARTY TRANSACTIONS The Company contributed the shares of stock of FWPS Group Limited, a company organized under the laws of the United Kingdom, which it acquired in January 2003, to its indirect majority owned subsidiary, Perceptive Informatics, Inc., in July 2003. Perceptive issued shares of common stock to PAREXEL International Trust, a wholly owned subsidiary of the Company, as consideration for this contribution. As a result of the transaction, the Company's ownership (based on the outstanding shares) in Perceptive increased from 97.4% to 98.2%. Certain officers and Directors of the Company own less than 2% of the issued and outstanding common stock of Perceptive. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to market risk resulting from changes in foreign currency exchange rates, and the Company regularly evaluates its exposure to such changes. The Company's overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments. FOREIGN CURRENCY EXCHANGE RATES The Company may be subjected to foreign currency transaction risk when the Company's foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiary's functional currency. For the three months ended September 30, 2003, approximately 19.5% of total service revenue was denominated in British pounds and approximately 25.6% of total service revenue was denominated in Euros. The Company enters into foreign currency exchange contracts to offset the impact of currency fluctuations. Such contracts are not treated as hedges for accounting purposes. The notional contract amount of outstanding currency exchange contracts was approximately $22.1 million as of September 30, 2003. The potential loss in the fair value of these currency exchange contracts that would result from a hypothetical change of 10% in exchange rates would be approximately $2.3 million. 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 actually occur, the Company's business, financial condition, or results of operations would likely suffer. LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY IMPACT THE COMPANY'S FINANCIAL PERFORMANCE The Company's clients generally can terminate their contracts with the Company upon thirty to sixty days notice or can delay execution of services. The loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect its operating results, possibly materially. The Company has in the past experienced contract cancellations, which have adversely affected its operating results. In both fiscal years 2003 and 2002, AstraZeneca accounted for 11% of the Company's consolidated service revenue. If AstraZeneca terminated all of its contracts with the Company, it would adversely affect the Company's operating results, possibly materially. Clients terminate or delay their contracts for a variety of reasons, including, but not limited to: - merger or potential merger related activities; - failure of products being tested to satisfy safety requirements; - failure of products being tested to prove effective; - products having unexpected or undesired clinical results; - client decisions to forego a particular study, perhaps for economic reasons; - insufficient patient enrollment in a study; - insufficient investigator recruitment; - production problems which cause shortages of the product; - product withdrawal following market launch; and - manufacturing facility shut down. 18 In addition, the Company believes that companies regulated by the FDA may proceed with fewer clinical trials or conduct them without the assistance of biopharmaceutical services companies if they are trying to reduce costs as a result of budgetary limits or changing priorities. These factors may cause such companies to cancel contracts with biopharmaceutical services companies. THE COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED The biopharmaceutical services industry is highly competitive, and the Company faces numerous competitors in many areas of its business. If the Company fails to compete effectively, the Company may lose clients, which would cause its business to suffer. The Company primarily competes against in-house departments of pharmaceutical companies, other full service biopharmaceutical services companies, Contract Research Organizations ("CROs"), small specialty CROs, and to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which the Company competes include Quintiles Transnational Corporation, Covance, Inc. and Pharmaceutical Product Development Inc. In addition, PAREXEL's PCG and MMS businesses also compete with a large and fragmented group of specialty service providers, including advertising/promotional companies, major consulting firms with pharmaceutical industry groups and smaller companies with pharmaceutical industry focus. Perceptive, a majority owned subsidiary of the Company, competes primarily with biopharmaceutical services companies, information technology companies and other software companies. Some of these competitors, including the in-house departments of pharmaceutical companies, have greater capital, technical and other resources than the Company. In addition, those of the Company's competitors that are smaller specialized companies may compete effectively against the Company because of their concentrated size and focus. THE FIXED PRICE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING RESULTS Approximately 90% of the Company's contracts are at fixed prices. As a result, the Company bears the risk of cost overruns. If the Company fails to adequately price its contracts or if the Company experiences significant cost overruns, its gross margins on the contract would be reduced and the Company could lose money on contracts. In the past, the Company has had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. The Company might experience similar situations in the future. IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY INDUSTRY WERE STREAMLINED OR RELAXED, THE NEED FOR THE COMPANY'S SERVICES COULD DECREASE Governmental regulation of the drug, medical device and biotechnology product development process is complicated, extensive, and demanding. A large part of the Company's business involves assisting pharmaceutical and biotechnology companies through the regulatory approval process. Changes in regulations, that, for example, streamline procedures or relax approval standards, could eliminate or reduce the need for the Company's services. If companies needed fewer of PAREXEL's services, the Company would have fewer business opportunities and its revenues would decrease, possibly materially. In the U.S., the FDA and the Congress have attempted to streamline the regulatory process by providing for industry user fees that fund additional reviewer hires and better management of the regulatory review process. In Europe, governmental authorities have approved common standards for clinical testing of new drugs throughout the European Union by adopting standards for Good Clinical Practice ("GCP") and by making the clinical trial application and approval process more uniform across member states starting in May 2004. In the past several years, Japan also has adopted GCP. The FDA has had GCP in place as a regulatory standard and requirement for new drug approval for many years. The U.S., Europe and Japan have also collaborated in the 11-year-long International Conference on Harmonization ("ICH"), the purpose of which is to eliminate duplicative or conflicting regulations in the three regions. The ICH partners have agreed upon a common format for marketing applications that eliminates the need to tailor the format to each region. Such efforts and similar efforts in the future that streamline the regulatory process may reduce the demand for the Company's services. 19 For example, parts of PAREXEL's PCG business advise clients on how to satisfy regulatory standards for manufacturing processes and on other matters related to the enforcement of government regulations by the FDA and other regulatory bodies. Any reduction in levels of review of manufacturing processes or levels of regulatory enforcement, generally, would result in fewer business opportunities for the PCG business in this area. IF THE COMPANY FAILS TO COMPLY WITH EXISTING REGULATIONS, ITS REPUTATION AND OPERATING RESULTS WOULD BE HARMED The Company's business is subject to numerous governmental regulations, primarily relating to pharmaceutical product development and the conduct of clinical trials. If the Company fails to comply with these governmental regulations, it could result in the termination of the Company's ongoing research, development or sales and marketing projects, or the disqualification of data for submission to regulatory authorities. The Company also could be barred from providing clinical trial services in the future or be subjected to fines. Any of these consequences would harm the Company's reputation, its prospects for future work and its operating results. In addition, the Company may have to repeat research or redo trials. The Company may be contractually required to take such action at no further cost to the customer, but at substantial cost to the Company. THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS Numerous governments, including the U.S. government and governments outside of the U.S., have undertaken efforts to control growing health care costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. If these efforts are successful, pharmaceutical, medical device and biotechnology companies may react by spending less on research and development. If this were to occur, the Company would have fewer business opportunities and its revenues could decrease, possibly materially. For instance, in the past, the U.S. Congress has entertained several comprehensive health care reform proposals. The proposals were generally intended to expand health care coverage for the uninsured and reduce the growth of total health care expenditures. While the U.S. Congress has not yet adopted any comprehensive reform proposals, members of Congress may raise similar proposals in the future. The Company is unable to predict the likelihood that health care reform proposals will be enacted into law. In addition to health care reform proposals, the expansion of managed care organizations in the healthcare market may result in reduced spending on research and development. Managed care organizations' efforts to cut costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, the Company would have fewer business opportunities and its revenues could decrease, possibly materially. NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY OR INCREASED COSTS TO THE COMPANY, OR COULD LIMIT THE COMPANY'S SERVICE OFFERINGS The confidentiality and release of patient-specific information are subject to government regulation. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human Services has issued regulations mandating heightened privacy and confidentiality protections. The federal government and state governments have proposed or adopted additional legislation governing the possession, use and dissemination of medical record information and other personal health information. Proposals being considered by state governments may contain privacy and security provisions that are more burdensome than the federal regulations. In order to comply with these regulations, the Company may need to implement new security measures, which may require the Company to make substantial expenditures or cause the Company to limit the products and services it offers. In addition, if the Company violates applicable laws, regulations or duties relating to the use, privacy or security of health information, it could be subject to civil or criminal liability. 20 IF THE COMPANY DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS The biotechnology, pharmaceutical and medical device industries generally, and clinical research specifically, are subject to increasingly rapid technological changes. The Company's competitors or others might develop technologies, products or services that are more effective or commercially attractive than the Company's current or future technologies, products or services, or render its technologies, products or services less competitive or obsolete. If competitors introduce superior technologies, products or services and the Company cannot make enhancements to its technologies, products and services necessary to remain competitive, its competitive position will be harmed. If the Company is unable to compete successfully, it may lose customers or be unable to attract new customers, which could lead to a decrease in revenue. BECAUSE THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL OF ITS BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM ITS BUSINESS, REVENUE, AND FINANCIAL CONDITION The loss of, or a material reduction in the business of, a significant client could cause a substantial decrease in the Company's revenue and adversely affect its business and financial condition, possibly materially. In the fiscal year ended June 30, 2003, the Company's five largest clients accounted for 33% of its consolidated service revenue, and one client, AstraZeneca, accounted for 11% of consolidated service revenue. In the fiscal year ended June 30, 2002, the Company's five largest clients accounted for 34% of its consolidated service revenue, and one client, AstraZeneca, accounted for 11% of its consolidated service revenue. The Company expects that a small number of clients will continue to represent a significant part of its revenue. The Company's contracts with these clients generally can be terminated on short notice. The Company has in the past experienced contract cancellations with significant clients. IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE, SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS WILL BE HARMED The Company's Perceptive Informatics business involves collecting, managing, manipulating and analyzing large amounts of data, and communicating data via the Internet. Perceptive depends on the continuous, effective, reliable and secure operation of its computer hardware, software, networks, telecommunication networks, Internet servers and related infrastructure. If Perceptive's hardware or software malfunctions or access to Perceptive's data by internal research personnel or customers through the Internet is interrupted, its business could suffer. In addition, any sustained disruption in Internet access provided by third parties could adversely impact Perceptive's business. Although Perceptive's computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, Perceptive's software products are complex and sophisticated, and could contain data, design or software errors that could be difficult to detect and correct. If Perceptive fails to maintain and further develop the necessary computer capacity and data to support its customers' needs, it could result in loss of or delay in revenue and market acceptance. IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MAY SUFFER One of the factors on which the Company's CRS business competes is the ability to recruit patients for the clinical studies the Company is managing. These clinical trials rely upon the ready accessibility and willing participation of volunteer subjects. These subjects generally include volunteers from the communities in which the studies are conducted. Although to date these communities have provided a substantial pool of potential subjects for research studies, there may not be enough patients available with the traits necessary to conduct the studies. For example, if the Company manages a study for a treatment of a particular type of cancer, its ability to conduct the study may be limited by the number of patients that it can recruit that have that form of cancer. If multiple organizations are conducting similar studies and competing for patients, it could also make the Company's recruitment efforts more difficult. If the Company is unable to attract suitable and willing volunteers on a consistent basis, it would have an adverse effect on the trials being managed by its CRS business, which could have a material adverse effect on its CRS business. 21 IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS BUSINESS WOULD BE HARMED The Company relies on the expertise of its Chairman and Chief Executive Officer, Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and expensive to find a qualified replacement with the level of specialized knowledge of the Company's products and services and the biopharmaceutical services industry. The Company is a party to an employment agreement with Mr. von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach upon notice to the other party. In addition, in order to compete effectively, the Company must attract and maintain qualified sales, professional, scientific and technical operating personnel. Competition for these skilled personnel, particularly those with a medical degree, a Ph.D. or equivalent degrees, is intense. The Company may not be successful in attracting or retaining key personnel. THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS The Company's Clinical Research Services business primarily involves the testing of experimental drugs or other regulated FDA products on consenting human volunteers pursuant to a study protocol. These services involve a risk of liability for personal injury or death to patients who participate in the study or who use a product approved by regulatory authorities after the clinical research has concluded, due to, among other reasons, possible unforeseen adverse side effects or improper administration of the new product by physicians. In some cases, these patients are already seriously ill and are at risk of further illness or death. In order to mitigate the risk of liability, the Company seeks to include indemnity provisions in its Clinical Research Services contracts with clients. However, the Company is not able to include indemnity provisions in all of its contracts. The indemnity provisions the Company includes in these contracts would not cover its exposure if: - the Company had to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnity; or - a client failed to indemnify the Company in accordance with the terms of an indemnity agreement because it did not have the financial ability to fulfill its indemnification obligation or for any other reason. The Company also carries product liability insurance to cover its risk of liability. However, the Company's insurance is subject to deductibles and coverage limits and may not be adequate to cover product liability claims. In addition, product liability coverage is expensive. In the future, the Company may not be able to maintain or obtain product liability insurance on reasonable terms, at a reasonable cost or in sufficient amounts to protect it against losses due to product liability claims. THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER RISKS THAT COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS OR FINANCIAL POSITION The Company provides most of its services worldwide. The Company's service revenue from non-U.S. operations represented approximately 53.4% of total service revenue for the three months ended September 30, 2003 and approximately 47.3% of total service revenue for the three month period a year ago. In addition, the Company's service revenue from operations in the United Kingdom represented approximately 19.5% of total service revenue for the three months ended September 30, 2003 and approximately 21.1% of total service revenue for the three months ended September 30, 2002. The Company anticipates that service revenue from international operations may grow in the future. Accordingly, the Company's business is subject to risks associated with doing business internationally, including: - changes in a specific country's or region's political or economic conditions, including Western Europe, in particular; - potential negative consequences from changes in tax laws affecting its ability to repatriate profits; - difficulty in staffing and managing widespread operations; - unfavorable labor regulations applicable to its European operations; - changes in foreign currency exchange rates; and - longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions. 22 THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF ITS COMMON STOCK The Company's quarterly and annual operating results have varied and will continue to vary in the future as a result of a variety of factors. For example, the Company's income from operations was $8.3 million for the quarter ended March 31, 2003, $3.6 million for the quarter ended June 30, 2003 and $7.8 million for the quarter ended September 30, 2003. Factors that cause these variations include: - the timing of the initiation, progress, or cancellation of significant project; - exchange rate fluctuations between quarters or years; - restructuring charges; - the mix of services offered in a particular quarter or year; - the timing of the opening of new offices; - costs and the related financial impact of acquisitions; - the level of new business authorizations in a particular quarter or year; - the timing of internal expansion; - the timing and amount of costs associated with integrating acquisitions; and - the timing and amount of startup costs incurred in connection with the introduction of new products, services or subsidiaries. Many of these factors, such as the timing of cancellations of significant projects and exchange rate fluctuations between quarters or years, are beyond the Company's control. Approximately 80-85% of the Company's operating costs are fixed in the short term. In particular, a significant portion of the Company's operating costs relate to personnel, which are estimated to have accounted for 80-85% of the Company's total operating costs in the three months ended September 30, 2003. As a result, the effect on the Company's revenues of the timing of the completion, delay or loss of contracts, or the progress of client projects, could cause its operating results to vary substantially between reporting periods. If the Company's operating results do not match the expectations of securities analysts and investors as a result of these factors, the trading price of its common stock will likely decrease. THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS Approximately 53.4% of the Company's service revenue for the three months ended September 30, 2003 and approximately 47.3% of the Company's service revenue for the three months ended September 30, 2002 were from non-U.S. operations. The Company's financial statements are denominated in U.S. dollars; thus, factors associated with international operations, including changes in foreign currency exchange rates, could have a significant effect on its operating results. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including: - Foreign Currency Translation Risk. The revenue and expenses of the Company's foreign operations are generally denominated in local currencies, primarily the British pound and the Euro, and then are translated into U.S. dollars for financial reporting purposes. For the three months ended September 30, 2003, approximately 19.5% of total service revenue was denominated in British pounds and approximately 25.6% of total service revenue was denominated in Euros. For the three months ended September 30, 2002, approximately 21.1% of total service revenue was denominated in British pounds and approximately 19.8% of total service revenue was denominated in Euros. - Foreign Currency Transaction Risk. The Company's service contracts may be denominated in a currency other than the functional currency in which it performs the service related to such contracts. Although the Company tries to limit these risks through exchange rate fluctuation provisions stated in its service contracts, or by hedging transaction risk with foreign currency exchange contracts, it may still experience fluctuations in financial results from its operations outside of the U.S., and may not be able to favorably reduce the currency transaction risk associated with its service contracts. 23 THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN ITS RESOURCES IF NOT PROPERLY MANAGED The Company has expanded its business substantially in the past. Future rapid expansion could strain the Company's operational, human and financial resources. In order to manage expansion, the Company must: - continue to improve operating, administrative and information systems; - accurately predict future personnel and resource needs to meet client contract commitments; - track the progress of ongoing client projects; and - attract and retain qualified management, sales, professional, scientific and technical operating personnel. If the Company does not take these actions and is not able to manage the expanded business, the expanded business may be less successful than anticipated, and the Company may be required to allocate additional resources to the expanded business, which it would have otherwise allocated to another part of its business. The Company may face additional risks in expanding its foreign operations. Specifically, the Company may find it difficult to: - assimilate differences in foreign business practices, exchange rates and regulatory requirements; - operate amid political and economic instability; - hire and retain qualified personnel; and - overcome language, tariff and other barriers. THE COMPANY MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS TO ITS ONGOING BUSINESS The Company has made a number of acquisitions and will continue to review new acquisition opportunities. If the Company is unable to successfully integrate an acquired company, the acquisition could lead to disruptions to the business. The success of an acquisition will depend upon, among other things, the Company's ability to: - assimilate the operations and services or products of the acquired company; - integrate acquired personnel; - retain and motivate key employees; - retain customers; and - minimize the diversion of management's attention from other business concerns. Acquisitions of foreign companies may also involve additional risks, including assimilating differences in foreign business practices and overcoming language and cultural barriers. In the event that the operations of an acquired business do not meet the Company's performance expectations, the Company may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business. THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT STOCKHOLDERS MAY CONSIDER DESIRABLE Provisions of the Company's articles of organization, by-laws and its shareholder rights plan, as well as provisions of Massachusetts law, may enable the Company's management to resist acquisition of the Company by a third party, or may discourage a third party from acquiring the Company. These provisions include the following: 24 - the Company has divided its Board of Directors into three classes that serve staggered three-year terms; - the Company is subject to Section 50A of the Massachusetts Business Corporation Law which provides that directors may only be removed by stockholders for cause, vacancies in the Company's Board of Directors may only be filled by a vote of the Company's Board of Directors and the number of directors may be fixed only by the Company's Board of Directors; - the Company is subject to Chapter 110F of the Massachusetts General Laws which limits its ability to engage in business combinations with certain interested stockholders; - the Company's stockholders are limited in their ability to call or introduce proposals at stockholder meetings; and - the Company's shareholder rights plan would cause a proposed acquirer of 20% or more of the Company's outstanding shares of common stock to suffer significant dilution. These provisions could have the effect of delaying, deferring, or preventing a change in control of the Company or a change in the Company's management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's stock. In addition, the Company's Board of Directors may issue preferred stock in the future without stockholder approval. If the Company's Board of Directors issues preferred stock, the holders of common stock would be subordinate to the rights of the holders of preferred stock. The Company's Board of Directors' ability to issue the preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of the Company's stock. THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS The market price of the Company's common stock has fluctuated widely in the past and may continue to do so in the future. On October 28, 2003, the closing sale price of the Company's common stock on the NASDAQ National Market was $16.50 per share. During the period from October 1, 2001 to September 30, 2003, the closing sale price of the Company's common stock ranged from a high of $17.65 per share to a low of $8.05 per share. Investors in the Company's common stock must be willing to bear the risk of such fluctuations in stock price and the risk that the value of an investment in the Company's stock could decline. The Company's stock price can be affected by quarter-to-quarter variations in: - operating results; - earnings estimates by analysts; - market conditions in the industry; - prospects of health care reform; - changes in government regulations; and - general economic conditions. In addition, the stock market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may adversely affect the market price of the Company's common stock. Since the Company's common stock has traded in the past at a relatively high price-earnings multiple, due in part to analysts' expectations of earnings growth, the price of the stock could quickly and substantially decline as a result of even a relatively small shortfall in earnings from, or a change in, analysts' expectations. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAREXEL International Corporation Date: May 13, 2004 By: /s/ Josef H. von Rickenbach --------------------------------------------- Josef H. von Rickenbach Chairman of the Board and Chief Executive Officer Date: May 13, 2004 By: /s/ James F. Winschel, Jr. --------------------------------------------- James F. Winschel, Jr. Senior Vice President and Chief Financial Officer 26 EXHIBIT INDEX
Exhibit Number Description - -------------- ----------- 31.1 CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 CEO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
27 EX-31.1 2 b50345q3exv31w1.txt SECT. 302 CERTIFICATION OF C.E.O. EXHIBIT 31.1 CERTIFICATIONS I, Josef H. von Rickenbach, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of PAREXEL International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 /s/ Josef H. von Rickenbach --------------------------- Josef H. von Rickenbach Chairman of the Board and Chief Executive Officer (principal executive officer) EX-31.2 3 b50345q3exv31w2.txt SECT. 302 CERTIFICATION OF C.F.O. EXHIBIT 31.2 CERTIFICATIONS I, James F. Winschel, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of PAREXEL International Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: c) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; d) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): c) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and d) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2004 /s/ James F. Winschel, Jr. -------------------------- James F. Winschel, Jr. Senior Vice President and Chief Financial Officer (principal financial officer) EX-32.1 4 b50345q3exv32w1.txt SECT. 906 CERTIFICATION OF C.E.O. EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Amendment No. 1 to the Quarterly Report on Form 10-Q of PAREXEL International Corporation (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Josef H. von Rickenbach, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2004 /s/ Josef H. von Rickenbach --------------------------- Josef H. von Rickenbach Chairman of the Board and Chief Executive Officer EX-32.2 5 b50345q3exv32w2.txt SECT. 906 CERTIFICATION OF C.F.O EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Amendment No. 1 to the Quarterly Report on Form 10-Q of PAREXEL International Corporation (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, James F. Winschel, Jr., Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2004 /s/ James F. Winschel, Jr. -------------------------- James F. Winschel, Jr. Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----