-----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, LChA0MCLbQBwQieHfSI3SgMzWa3nk1gKYIVd2IHFrINkdmsAN7035dxs8DeArkgu wh4u9Ud/2ltLasFPLtnVZA== 0000927016-01-503713.txt : 20020410 0000927016-01-503713.hdr.sgml : 20020410 ACCESSION NUMBER: 0000927016-01-503713 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-27058 FILM NUMBER: 1783799 BUSINESS ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02151 BUSINESS PHONE: 7814879900 MAIL ADDRESS: STREET 1: 195 WEST ST CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 d10q.txt FORM 10-Q FOR 09/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 Commission File Number: 0-27058 PAREXEL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its Charter) Massachusetts 04-2776269 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 195 West Street Waltham, Massachusetts 02451 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 2, 2001, there were 24,814,363 shares of PAREXEL International Corporation common stock outstanding, excluding 861,000 shares in treasury. PAREXEL INTERNATIONAL CORPORATION INDEX ----- Page ---- Part I. FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited): Condensed Consolidated Balance Sheets - September 30, 2001 3 and June 30, 2001 Condensed Consolidated Statements of Operations - Three 4 months ended September 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flows - Three 5 months ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition 9 and Results of Operations Item 3 Quantitative and Qualitative Disclosure About Market Risk 13 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share data) SEPTEMBER 30, JUNE 30, 2001 2001 ---------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 50,934 $ 57,590 Marketable securities 11,511 3,359 Accounts receivable, net 202,761 206,904 Prepaid expenses 6,522 10,025 Deferred tax assets 14,007 13,987 Other current assets 5,217 3,022 ---------------------- ------------------- Total current assets 290,952 294,887 Property and equipment, net 40,347 39,888 Goodwill and other intangible assets, net 14,403 12,695 Deferred income taxes 14,899 14,899 Other assets 6,687 5,443 ---------------------- ------------------- Total assets $367,288 $367,812 ====================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 309 $ 232 Accounts payable 15,159 26,296 Advance billings 98,905 93,577 Other current liabilities 57,509 57,572 ---------------------- ------------------- Total current liabilities 171,882 177,677 Other liabilities 8,553 9,745 ---------------------- ------------------- Total liabilities 180,435 187,422 ---------------------- ------------------- Minority interest in subsidiary 2,384 2,568 Stockholders' equity: Preferred stock - $0.01 par value; shares authorized: 5,000,000; none issued and outstanding - - Common stock - $0.01 par value; shares authorized: 50,000,000; shares issued:25,671,763 and 25,636,220 at September 30, 2001 and June 30, 2001, respectively; shares outstanding:24,810,763 and 24,775,220 at September 30, 2001 and June 30, 2001, respectively 257 257 Additional paid-in capital 164,561 164,141 Retained earnings 41,676 39,220 Treasury stock, at cost (8,165) (8,165) Accumulated other comprehensive income (13,860) (17,631) ---------------------- ------------------- Total stockholders' equity 184,469 177,822 ---------------------- ------------------- Total liabilities and stockholders' equity $367,288 $367,812 ====================== ===================
See notes to condensed consolidated financial statements. 3 PAREXEL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 2001 2000 ------------------- ----------------- Net revenue $101,840 $88,215 ------------------- ------------------ Costs and expenses: Direct costs 71,895 63,264 Selling, general and administrative 22,910 21,197 Depreciation 4,507 5,528 Amortization 11 107 Restructuring and other charges - (768) ------------------- ------------------ 99,323 89,328 ------------------- ------------------ Income (loss) from operations 2,517 (1,113) Other income, net 1,550 1,302 ------------------- ------------------ Income before provision for income tax 4,067 189 Provision for income taxes 1,549 290 Minority interest 62 - ------------------- ------------------ Net income (loss) $ 2,456 $ (101) =================== ================== Earnings (loss) per share: Basic $0.10 $(0.00) Diluted $0.10 $(0.00) Shares used in computing earnings per share: Basic 24,797 24,721 Diluted 25,451 24,721
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, 2001 2000 -------------------------------------------- Cash flows from operating activities: Net income (loss) $ 2,456 $ (101) Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 4,518 5,684 Changes in operating assets/liabilities (3,328) (1,446) -------------------------------------------- Net cash provided by operating activities 3,646 4,137 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (93,988) (28,145) Proceeds from sale of marketable securities 85,780 36,051 Acquisition of business (1,505) (2,994) Proceeds from sale of fixed assets 1,451 - Purchase of property and equipment (4,459) (2,407) -------------------------------------------- Net cash provided (used) in investing activities (12,721) 2,505 -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 420 7 Borrowings and (repayments) under credit arrangements 364 (33) -------------------------------------------- Net cash (used) provided by financing activities 784 (26) -------------------------------------------- Elimination of net loss of a subsidiary for change in fiscal year - (126) -------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 1,635 (1,125) -------------------------------------------- Net increase (decrease) in cash for the period (6,656) 5,365 Cash and cash equivalents at beginning of period 57,590 53,508 -------------------------------------------- Cash and cash equivalents at end of period $ 50,934 $ 58,873 ==================== ===================
See notes to condensed consolidated financial statements. 5 PAREXEL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2001, are not necessarily indicative of the results that may be expected for other quarters or the entire fiscal year. Certain prior year balances have been reclassified in order to conform to current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. NOTE 2 -- EARNINGS PER SHARE The following table outlines the basic and diluted earnings per common share computations (in thousands, except per share data):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 --------------- --------------- Net income (loss) attributable to common shares $ 2,456 $ (101) =============== =============== BASIC EARNINGS PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding 24,797 24,721 =============== =============== Basic earnings per common share $ 0.10 $ 0.00 =============== =============== DILUTED EARNINGS PER COMMON SHARE COMPUTATION: Weighted average common shares outstanding: Shares attributable to common stock outstanding 24,797 24,721 Shares attributable to common stock options 654 - --------------- --------------- 25,451 24,721 =============== =============== Diluted earnings per common share $ 0.10 $ (0.00) =============== ===============
The effect of options outstanding for the three months ended September 30, 2000 is not included in the calculation of diluted net earnings per share because their effect on loss from operations would have been antidilutive. 6 NOTE 3 - COMPREHENSIVE INCOME Comprehensive income (loss) has been calculated by the Company in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income (loss), which is comprised primarily of net income (loss) and foreign currency translation adjustments, totaled $6.4 million and $(3.4) million for the three months ended September 30, 2001 and 2000, respectively. NOTE 4 - SEGMENT INFORMATION The Company is managed through four reportable segments, namely, Clinical Research Services ("CRS"), PAREXEL Consulting Group ("PCG"), Medical Marketing Services ("MMS"), and Perceptive Informatics, Inc. ("Perceptive"). CRS constitutes the Company's core business and includes clinical trials management, biostatistics and data management, as well as related medical advisory and investigator site services. PCG provides technical expertise in such disciplines as clinical pharmacology, regulatory affairs, industry training, publishing, and management consulting. These consultants identify options and propose solutions to address clients' product development, registration, and commercialization issues. MMS provides a full spectrum of market development, product development, targeted communications, and strategic reimbursement services in support of product launch. Perceptive provides a variety of web-based portal solutions designed to accelerate and enhance the clinical development and product launch processes, as well as a range of voice and data systems. It also offers a medical imaging service supporting the use of advanced imaging techniques in clinical development. The Company evaluates its segment performance and allocates resources based on revenue and gross profit (net revenue less direct costs), while other operating costs are evaluated on a geographical basis. Accordingly, the Company does not include selling, general and administrative expenses; depreciation and amortization expense; restructuring and other charges; interest income (expense); other income (expense); and income tax expense in segment profitability. FOR THE THREE MONTHS ENDED SEPTEMBER 30, ($ in thousands) 2001 2000 ----------------------------------- Net revenue: Clinical Research Services $ 60,778 $55,542 PAREXEL Consulting Group 21,703 17,261 Medical Marketing Services 15,111 12,983 Perceptive Informatics, Inc. 4,248 2,429 --------------- ---------------- $101,840 $88,215 =============== ================ Gross profit: Clinical Research Services $ 19,226 $17,523 PAREXEL Consulting Group 5,190 3,193 Medical Marketing Services 4,817 4,214 Perceptive Informatics, Inc. 712 21 --------------- ---------------- $ 29,945 $24,951 =============== ================ 7 NOTE 5 - ACQUISITION Effective July 1, 2001, the Company acquired EDYABE, a contract research organization in Latin America, with offices in Argentina and Brazil, for approximately $1.5 million. The purchase price allocation is still subject to finalization. NOTE 6 - RESTRUCTURING AND OTHER CHARGES During the year ended June 30, 2001, the Company recorded restructuring and other charges in the fourth quarter totaling $7.2 million. These charges included $3.9 million related to consolidation and abandonment of certain facilities (40% in the U.S. and 60% in Europe) $3.1 million for employee severance and related costs for eliminating approximately 125 managerial and staff positions worldwide (44% in the U.S. and 56% in Europe), and approximately $0.3 million primarily related to other costs associated with the Company's fourth quarter restructuring plan. Additionally, the Company recorded net restructuring and other charges of $0.7 million during the first quarter of fiscal 2001. This consisted of a $1.5 million reduction in previously accrued restructuring charges due to changes in estimates related to the third quarter 2000 restructuring, offset by $0.8 million for exiting a consulting business location in the U.S. Of the total facilities related charge balance at June 30, 2001, approximately $2.0 million is associated with prior restructuring plans. Current quarter activity charged against the restructuring accrual (which is included in "Other current liabilities" in the Condensed Consolidated Balance Sheet) was as follows (in thousands):
Balance as of 1st Quarter Balance as of June 30, 2001 Payments September 30, 2001 Employee severance costs $2,785 $ (611) $2,174 Facilities related charge 5,709 (729) 4,980 Other charges 242 (122) 120 ------------------- ------------------- ------------------- $8,736 $(1,462) $7,274 =================== =================== ===================
NOTE 7 - STOCK REPURCHASE PROGRAM In September 1999, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $20 million of the Company's common stock. Repurchases made in the open market are subject to market conditions. During the three months ended September 30, 2001, the Company did not repurchase any of its common stock. NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires, among other things, the cessation of goodwill amortization. In addition, the standard includes provisions for the reclassification to goodwill of certain existing intangible assets, reassessment of the useful lives of existing intangible assets, reclassification of certain intangible assets out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. SFAS No. 142 was adopted by the Company in the first quarter of fiscal year 2002 and eliminated goodwill amortization of approximately $0.2 million in the quarter to the Company's financial results of operations. Had SFAS No. 142 been implemented in the first quarter of fiscal year 2001, approximately $0.1 million of amortization expense would have been eliminated in the first quarter of fiscal year 2001. 8 Also in June 2001, the FASB issued SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the Company in the first quarter of fiscal year 2002 and did not have a significant impact on the Company's financial results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The financial information discussed below is derived from the Condensed Consolidated Financial Statements included herein. The financial information set forth and discussed below is unaudited but, in the opinion of management, reflects all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation of such information. The Company's results of operations for a particular quarter may not be indicative of results expected during subsequent fiscal quarters or for the entire year. The statements included in this quarterly report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations", may contain "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding the adequacy of the Company's existing capital resources and future cash flows from operations, and statements regarding expected financial results, future growth and customer demand. For this purpose, any statements that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "intends", "appears", "will" and similar expressions are intended to identify forward-looking statements. The Company's actual operating performance, actual expense savings and other operating improvements resulting from recent restructurings, and actual future results may differ significantly from the results indicated by the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, risks associated with: the cancellation, revision, or delay of contracts, including those contracts in backlog; the Company's dependence on certain industries and clients; the Company's ability to manage growth and its ability to attract and retain employees; the Company's ability to complete additional acquisitions and to integrate newly acquired businesses or enter into new lines of business; government regulation of certain industries and clients; competition and consolidation within the pharmaceutical industry; the potential for significant liability to clients and third parties; the potential adverse impact of health care reform; and the effects of exchange rate fluctuations. These factors and others are discussed under "RISK FACTORS" below. In addition, the forward- looking statements included in this quarterly report represent the Company's estimates as of the date of this quarterly report. While the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company's estimates or views as of any date subsequent to the date of this quarterly report. OVERVIEW The Company is a leading contract biopharmaceutical outsourcing company, providing a broad range of knowledge-based contract research, medical marketing, consulting and technology services to the worldwide pharmaceutical, biotechnology and medical device industries. The Company's primary objective is to help clients rapidly obtain the necessary regulatory approvals for their products and quickly reach peak sales. Over the past eighteen years, PAREXEL has developed significant expertise in processes and technologies supporting this strategy. The Company's service offerings include: clinical trials management, data management, biostatistical analysis, medical marketing, clinical pharmacology, regulatory and medical consulting, performance improvement, industry training and publishing, web-based portal solutions, voice, data and imaging systems, and other drug development consulting services. The Company believes that its integrated services, depth of therapeutic area expertise, and sophisticated information technology, along with its experience in global drug development and product launch services, represent key competitive strengths. The Company is managed through four reportable segments, namely, CRS, PCG, MMS and Perceptive. CRS constitutes the Company's core business and includes clinical trials management, biostatistics and data management, 9 as well as related medical advisory and investigator site services. PCG provides technical expertise in such disciplines as clinical pharmacology, regulatory affairs, industry training, publishing, and management consulting. These consultants identify options and propose solutions to address clients' product development, registration, and commercialization issues. MMS provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Perceptive provides a variety of web- based portal solutions designed to accelerate and enhance the clinical development and product launch processes, as well as a range of voice and data systems. It also offers a medical imaging service supporting the use of advanced imaging techniques in clinical development. Most of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flow from these contracts typically consists of a down payment required to be paid at the time of contract execution with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is generally recognized on a percentage of completion basis as work is performed. As a result, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. Some of the Company's other contracts are per diem or fee-for-service contracts, and revenue is recognized upon completion of work performed. Generally, the Company's clients can terminate their contracts with the Company upon thirty to sixty days' notice or can delay execution of services. Clients may terminate or delay contracts for a variety of reasons, including, among others: merger or potential merger related activities involving the client, the failure of products being tested to satisfy safety requirements, unexpected or undesired clinical results of the product, client cost reductions as a result of budgetary limits or changing priorities, the client's decision to forego a particular study, insufficient patient enrollment or investigator recruitment, or production problems resulting in shortages of the product. As is customary in the industry, the Company routinely subcontracts with independent physician investigators in connection with clinical trials and other third party service providers for laboratory analysis and other specialized services. These fees are not reflected in net revenue or expenses since such fees are guaranteed by customers on a "pass through basis," without risk or reward to the Company. Direct costs primarily consist of compensation and related fringe benefits for project-related employees, other project-related costs not reimbursed, and allocated facilities and information systems costs. Selling, general and administrative expenses primarily consist of compensation and related fringe benefits for selling and administrative employees, professional services and advertising costs, as well as allocated costs related to facilities and information systems. The Company's stock is quoted on the Nasdaq Stock Market under the symbol "PRXL." RESULTS OF OPERATIONS Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000: Net revenue increased by $13.6 million, or 15.4%, to $101.8 million for the three months ended September 30, 2001 from $88.2 million for the same period last fiscal year. On a segment basis, CRS net revenue increased by $5.2 million, or 9.4%, to $60.8 million primarily due to an increase in the volume of projects serviced by the Company. PCG net revenue increased by $4.4 million, or 25.7%, to $21.7 million. Of the total increase in PCG, $2.5 million was primarily due to increased demand for the group's services and $1.9 million was attributed to year-over-year growth from acquisitions completed in fiscal year 2001. MMS net revenue increased by $2.1 million, or 16.4%, to $15.1 million primarily due to internal growth. Net revenue in Perceptive increased by $1.8 million, or 74.9%, to $4.2 million primarily due to higher demand in the marketplace for the group's communications products. Direct costs increased $8.6 million, or 13.6%, to $71.9 million for the three months ended September 30, 2001 from $63.3 million for the same period last fiscal year. On a segment basis, CRS direct costs increased $3.5 million, or 9.3%, to $41.6 million primarily due to increased business volume. As a percentage of net revenue, CRS direct costs remained flat at 68.4% for the three months ended September 30, 2001, as compared with the same period last 10 fiscal year. Direct costs for PCG increased by $2.4 million, or 17.4%, to $16.5 million as a direct result of strong revenue growth during the quarter and the impact of prior year acquisition. As a percentage of net revenue, PCG direct costs decreased to 76.1% for the three months ended September 30, 2001 from 81.5% in the same period last fiscal year primarily due to higher margin business and greater leveraging of the group's expense base. MMS direct costs increased by $1.5 million, or 17.4%, to $10.3 million primarily due to labor and related costs in association with increased business activity. As a percentage of net revenue, MMS direct costs remained relatively flat at 68.1% for the three months ended September 30, 2001 and 67.5% in the same period last fiscal year. Direct costs for Perceptive increased $1.1 million, or 46.8%, to $3.5 million primarily due to overall business growth. As a percentage of net revenue, direct costs for Perceptive decreased to 83.2% for the three months ended September 30, 2001, as compared with 99.1% in the same period a year ago primarily due to improved operating leverage. Selling, general and administrative ("SG&A") expenses increased $1.7 million, or 8.1%, to $22.9 million for the three months ended September 30, 2001 from $21.2 million in the same period last fiscal year. As a percentage of net revenue, SG&A decreased to 22.5%, as compared to 24.0% in the same period one year ago primarily due to higher revenue levels, improved efficiency, and cost containment efforts. Depreciation and amortization ("D&A") expense decreased $1.1 million, or 19.8%, to $4.5 million for the three months ended September 30, 2001 from $5.6 million for the same period last fiscal year primarily due to adjustments made to the estimated useful life of assets the Company abandoned during the first quarter of the prior fiscal year as part of its restructuring plans, as well as the current period impact of past restructuring activities and the adoption of SFAS No. 142, under which the Company eliminated approximately $0.2 million in quarterly amortization expense. As a percentage of net revenue, D&A decreased to 4.4% for the three months ended September 30, 2001 from 6.4% in the same period last fiscal year. Income from operations increased $3.6 million to $2.5 million for the three months ended September 30, 2001 from a loss of $1.1 million in the same period one year ago. Income from operations increased as a percentage of net revenue to 2.5% for the three months ended September 30, 2001 from a negative 1.3% for the same period last fiscal year for the reasons noted in the preceding paragraphs. Other income, net totaled approximately $1.5 million for the three months ended September 30, 2001 compared with $1.3 million for the comparable prior year period. The $0.2 million increase was driven by a $0.9 million gain on a sale of a facility and a reduction in excess reserves of $0.5 million, offset by an $0.8 million swing from a foreign exchange gain of $0.5 million one year ago to a loss of $0.3 million in the current quarter and lower interest income (net) of approximately $0.4 million. The Company had an effective income tax rate of 38.1% for the three months ended September 30, 2001. For the three months ended September 30, 2000, the Company's effective income tax rate was not a meaningful measurement due to a relatively low level of profitability and the impact of losses in some of the Company's European affiliates. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations and growth, including acquisition costs, with cash flow from operations and proceeds from the sale of equity securities. Investing activities primarily reflect acquisition costs and capital expenditures for information systems enhancements and leasehold improvements. Most of the Company's contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flow from these contracts typically consists of a down payment required to be paid at the time of contract execution with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is generally recognized on a percentage of completion basis as work is performed. As a result, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. Some of the Company's other contracts are per diem or fee-for-service contracts, and revenue is recognized upon completion of work performed. 11 The Company's operating cash flow is heavily influenced by changes in the levels of billed and unbilled receivables and advance billings. These account balances as well as days sales outstanding in accounts receivable, net of advance billings, can vary based on contractual milestones and the timing and size of cash receipts. Days sales outstanding in accounts receivable, net of advance billings, remained at 67 days at September 30, 2001 as compared with June 30, 2001. Accounts receivable, net of the allowance for doubtful accounts, decreased to $202.8 million at September 30, 2001 from $206.9 million at June 30, 2000. Net cash provided by operating activities for the three months ended September 30, 2001 totaled $3.6 million and was generated by $2.5 million of net income, $4.5 million of depreciation and amortization, and a $9.4 million decrease in accounts receivable (net of advance billings), partially offset by an $11.1 million decrease in accounts payable, a $0.9 million gain on the sale of a building, and an $0.8 million decrease in other net liabilities. For the three months ended September 30, 2000, net cash provided by operating activities was $4.1 million and primarily consisted of depreciation and amortization of $5.7 million and an increase of $5.0 million in accounts payable, partly offset by an increase in accounts receivable, net of advanced billings of $6.5 million. Net cash used in investing activities for the three months ended September 30, 2001 totaled $12.7 million and consisted of $8.2 million related to net purchases of marketable securities, $4.5 million used for equipment purchases, and $1.5 million for the acquisition of EDYABE, offset by $1.5 million in proceeds from the sale of a building. For the three months ended September 30, 2000, net cash provided by investing activities totaled $2.5 million, driven by $7.9 million of cash from net proceeds related to marketable securities transactions, offset by $3.0 million used for the acquisition of FARMOVS and $2.4 million used for equipment purchases. Net cash provided by financing activities totaled $0.8 million for the three months ended September 30, 2001 and consisted of $0.4 million in proceeds from issuance of common stock associated with the Company's stock option plans and $0.4 million in net borrowings under credit arrangements. Net cash used by financing activities were minimal for the three months ended September 30, 2000. The Company's primary cash needs are for the payment of salaries and fringe benefits, hiring and recruiting expenses, business development costs, acquisition-related costs, capital expenditures, and facility-related expenses. The Company believes that its existing capital resources together with cash flow from operations and borrowing capacity under existing lines of credit will be sufficient to meet its foreseeable cash needs. In the future, the Company will consider acquiring businesses to enhance its service offerings, expand its therapeutic expertise, and/or increase its global presence. Any such acquisitions may require additional external financing, and the Company may from time to time seek to obtain funds from public or private issuances of equity or debt securities. There can be no assurance that such financing will be available on terms acceptable to the Company. RECENTLY ISSUED ACCOUNTING STANDARD In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires, among other things, the cessation of goodwill amortization. In addition, the standard includes provisions for the reclassification to goodwill of certain existing intangible assets, reassessment of the useful lives of existing intangible assets, reclassification of certain intangible assets out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. SFAS No. 142 was adopted by the Company in the first quarter of fiscal year 2002 and eliminated goodwill amortization of approximately $0.2 million in the quarter to the Company's financial results of operations. Had SFAS No. 142 been implemented in the first quarter of fiscal year 2001, approximately $0.1 million of amortization expense would have been eliminated in the first quarter of fiscal year 2001. Also in June 2001, the FASB issued SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method 12 for which the date of acquisition is after June 30, 2001. SFAS No. 141 was adopted by the Company in the first quarter of fiscal year 2002 and did not have a significant impact on the Company's financial results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates, and the Company regularly evaluates its exposure to such changes. The Company's overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments. FOREIGN CURRENCY EXCHANGE RATES The Company derived approximately 43% and 42% of its net revenue for the three month periods ended September 30, 2001 and 2000, respectively, from operations outside of the United States. The Company does not have significant operations in countries in which the economy is considered to be highly inflationary. The Company's financial statements are denominated in U.S. dollars, and accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of such subsidiaries' financial results into U.S. dollars for purposes of reporting the Company's consolidated financial results. The Company may be subject to foreign currency transaction risk when the Company's foreign subsidiaries enter into contracts denominated in a currency other than the foreign subsidiaries' functional currency. Because expenses of the foreign subsidiaries are generally paid in the local currency, such foreign subsidiaries' local currency earnings are not materially affected by fluctuations in exchange rates. In cases where the Company contracts for a multi-country clinical trial and a significant portion of the contract expenses are in a currency other than the contract currency, the Company seeks to contractually shift to its clients the effect of fluctuations in the relative values of the contract currency and the currency in which the expenses are incurred. For the three months ended September 30, 2001, the Company recorded $0.3 million of foreign exchange losses. To the extent the Company is unable to shift the effects of currency fluctuations to its clients, these fluctuations could have a material effect on the Company's results of operations. The Company occasionally enters into foreign exchange forward contracts to offset the impact of currency fluctuations. These foreign exchange forward contracts generally have maturity dates ranging from one to six months. CONVERSION TO THE EURO CURRENCY On January 1, 1999, a new currency, the euro, became the legal currency for 11 of the 15 member countries of the European Economic Community. Between January 1, 1999 and January 1, 2002, governments, companies and individuals may conduct business in the member countries in both the euro and existing national currencies. On January 1, 2002, the euro will become the sole currency in the member countries. PAREXEL conducts business in seven of the member countries and converted two of the member countries to the euro currency in fiscal 2001. Conversion to the euro currency did not create a material effect on the Company's financial results of operations in fiscal 2001. The Company is planning on converting the remaining five member countries in fiscal 2002, the result of which may or may not have a material effect in the Company's financial condition in fiscal 2002. INFLATION The Company believes the effects of inflation generally do not have a material adverse impact on its operations or financial condition. 13 RISK FACTORS In addition to other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business, including forward-looking statements made in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other forward-looking statements that the Company may make from time to time. If any of the following risks occur, our business, financial condition, or results of operations could be materially adversely affected. THE LOSS, MODIFICATION, OR DELAY OF LARGE CONTRACTS MAY NEGATIVELY IMPACT THE COMPANY'S FINANCIAL PERFORMANCE Generally, the Company's clients can terminate their contracts with the Company upon thirty to sixty days' notice or can delay execution of services. Clients terminate or delay their contracts for a variety of reasons, including, but not limited to: . merger or potential merger related activities; . failure of products being tested to satisfy safety requirements; . products having unexpected or undesired clinical results; . client decisions to forego a particular study, perhaps for economic reasons; . insufficient patient enrollment in a study; . insufficient investigator recruitment; or . production problems which cause shortages of the product. In addition, the Company believes that FDA-regulated companies may proceed with fewer clinical trials or conduct them without the assistance of contract research organizations if they are trying to reduce costs as a result of budgetary limits or changing priorities. These factors may cause such companies to cancel contracts with contract research organizations. The loss or delay of a large contract or the loss or delay of multiple contracts could have a material adverse effect on the Company's financial performance. The Company has in the past experienced contract cancellations, which have had a material adverse effect on the Company's financial results. THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE The Company's quarterly and annual operating results have varied, and will continue to vary. Factors that cause these variations include: . the level of new business authorizations in a particular quarter or year; . the timing of the initiation, progress, or cancellation of significant projects; . exchange rate fluctuations between quarters or years; . the mix of services offered in a particular quarter or year; . the timing of the opening of new offices; . the timing of other internal expansion costs; . restructuring charges; . the timing and amount of costs associated with integrating acquisitions; and . the timing and amount of startup costs incurred in connection with the introduction of new products, services or subsidiaries. A high percentage of the Company's operating costs are fixed. Therefore, the timing of the completion, delay or loss of contracts, or the progress of client projects, can cause the Company's operating results to vary substantially between reporting periods. 14 THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL OF ITS BUSINESS The Company depends on research and development expenditures by pharmaceutical and biotechnology companies to sustain a large part of its business. The Company's operations could be materially and adversely affected if: . its clients' businesses experience financial problems or are affected by a general economic downturn; . consolidation in the pharmaceutical or biotechnology industries leads to a smaller client base for the Company; or . its clients reduce their research and development expenditures. Furthermore, the Company has benefited in the past from the tendency of pharmaceutical companies to outsource large clinical research projects. If this tendency slows or reverses, the Company's operations would be materially and adversely affected. For the three months ended September 30, 2001, the Company's five largest clients accounted for 36% of its consolidated net revenue, and one client accounted for 11% of consolidated net revenue. For the three months ended September 30, 2000, the Company's five largest clients accounted for 39% of its consolidated net revenue, and one client accounted for 14% of consolidated net revenue. The Company could suffer a material adverse effect if it lost or experienced a material reduction in the business of a significant client. In the past, the Company has experienced contract cancellations with a significant client, which have had an adverse effect on the Company's financial results. THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND THE COMPANY MUST PROPERLY MANAGE THAT EXPANSION The Company's business has expanded substantially in the past. Rapid expansion could strain the Company's operational, human and financial resources. In order to manage expansion, the Company must: . continue to improve its operating, administrative and information systems; . accurately predict its future personnel and resource needs to meet client contract commitments; . track the progress of ongoing client projects; and . attract and retain qualified management, sales, professional, scientific and technical operating personnel. The Company will face additional risks in expanding its foreign operations. Specifically, the Company may find it difficult to: . assimilate differences in foreign business practices, exchange rates and regulatory requirements; . operate amid political and economic instability; . hire and retain qualified personnel; and . overcome language, tariff and other barriers. If an acquired business does not meet the Company's performance expectations, the Company may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business. If the Company fails to properly manage its expansion, the Company could experience a material adverse effect on its business and operations. THE COMPANY MAY NOT BE ABLE TO MAKE STRATEGIC ACQUISITIONS IN THE FUTURE The Company's growth depends in part on its ability to make strategic acquisitions. The Company has made a number of acquisitions and will continue to review future acquisition opportunities. The Company may not be able to acquire companies on acceptable terms and conditions. Additionally, the Company faces several obstacles in connection with the acquisitions it consummates, including: . difficulties and expenses associated with assimilation of the operations and services or products of the acquired companies; . diversion of management's attention from other business concerns; and 15 . the loss of some or all of the key employees of the acquired company. In the event that the operations of an acquired business do not meet the Company's performance expectations, the Company may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business. THE COMPANY RELIES ON HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL WHO MAY NOT REMAIN WITH THE COMPANY The Company relies on a number of key executives, including Josef H. von Rickenbach, its Chairman and Chief Executive Officer. The Company only has employment agreements with certain of its key executives and, if any of these key executives leave the Company, it could have a material adverse effect on the Company. In addition, in order to compete effectively, the Company must attract and maintain qualified sales, professional, scientific and technical operating personnel. Competition for these skilled personnel, particularly those with a medical degree, a Ph.D. or equivalent degrees is intense. The Company may not be successful in attracting or retaining key personnel. THE COMPANY MAY NOT HAVE ADEQUATE INSURANCE AND MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS Clinical research services primarily involve the testing of experimental drugs or other regulated FDA products on consenting human volunteers pursuant to a study protocol. Such services involve a risk of liability for personal injury or death to patients who participate in the study or who use a product approved by regulatory authorities after the clinical research has concluded, due to, among other reasons, possible unforeseen adverse side effects or improper administration of the new product by physicians. In certain cases, these patients are already seriously ill and are at risk of further illness or death. Although many of the Company's CRS contracts with clients include indemnity provisions and the Company has loss insurance, the Company's financial stability could be materially and adversely affected if the Company had to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnity or insurance coverage. The Company's financial stability could also be materially and adversely affected in cases where the indemnity, although applicable, is not performed in accordance with its terms. Additionally, the Company could be adversely and materially affected if its liability exceeds the amount of its insurance. The Company may not be able to continue to secure insurance on acceptable terms. THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD DECLINE The market price of the Company's common stock has fluctuated widely in the past and may continue to do so in the future in response to quarter-to-quarter variations in: . 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. Investors in the Company's common stock must be willing to bear the risk of such fluctuations in earnings and stock price. 16 THE COMPANY'S BUSINESS DEPENDS ON CONTINUED COMPREHENSIVE GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY PRODUCT DEVELOPMENT PROCESS In the United States, governmental regulation of the drug, medical device and biotechnology product development process continues to be complicated, extensive and demanding. While the FDA and the Congress have attempted to streamline this process by providing for industry user fees that fund additional reviewer hires and better management of the regulatory review process, the FDA still requires extensive clinical studies and other documentation to demonstrate the efficacy and safety of these products before they can be approved for marketing. The United States, Europe and Japan have collaborated in the 11-year-long International Conference on Harmonization ("ICH"), the purpose of which is to eliminate duplicative or conflicting regulations in the three regions. The ICH process has resulted in over 50 harmonized technical guidelines that have been accepted in all three regions and have led to a clarification of the regulatory requirements for approval. However there has been no meaningful reduction of the amount of evidence required by these governments for granting marketing approval. The ICH partners have agreed on a common format for marketing applications (the Common Technical Document) that is accepted in the three regions as of July 2001. The new format does not affect the amount of data to be collected and submitted, but does eliminate the need to tailor the format to each region, although there remain some region-specific sections. This may reduce the demand for the Company's services that tailor the marketing applications to local requirements. In Europe, governmental authorities have approved common standards for clinical testing of new drugs throughout the European Union by adopting GCP standards and by promulgating the European Union Clinical Trials Directive; this Directive will eliminate by 2004 inter-country differences in the process that authorizes clinical trials and will make it more uniform and streamlined, though increasing the safeguards for patient protection. In the past several years, Japan also has adopted GCP through legislation and has legitimatized the use of CROs. The Company's business could be materially and adversely affected by relaxed government regulatory requirements or simplified drug, medical device or biotechnology approval procedures, since such actions would eliminate much of the demand for the Company's services. In addition, if the Company was unable to comply with significant applicable regulation, the relevant governmental agencies could terminate the Company's ongoing research or disqualify its research data. THE COMPANY FACES INTENSE COMPETITION The Company primarily competes against in-house departments of drug companies, other full service contract research organizations, healthcare-related software companies, and to a lesser extent, universities, teaching hospitals and other site organizations. Some of these competitors have greater capital, technical and other resources than the Company. Contract research organizations generally compete on the basis of: . previous experience; . medical and scientific expertise in specific therapeutic areas; . quality of services; . the ability to organize and manage large-scale clinical trials on a global basis; . the ability to manage large and complex medical databases; . the ability to provide statistical and regulatory services; . the ability to recruit investigators and patients; . the ability to integrate information technology with systems to improve the efficiency of contract research; . an international presence with strategically located facilities; . financial strength and stability; and . price. The contract research organization industry is fragmented, with several hundred small, limited-service providers and several large, full-service contract research organizations with global operations. The Company competes against 17 large contract research organizations, including Quintiles Transnational Corporation, Covance Inc., and PPDI for both clients and acquisition candidates. In addition, the Company competes for research contracts arising out of the consolidation within the drug industry and the growing tendency of drug companies to outsource to a smaller number of preferred contract research organizations. THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM Numerous governments have undertaken efforts to control growing health care costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. In the past, the U.S. Congress has entertained several comprehensive health care reform proposals. The proposals were generally intended to expand health care coverage for the uninsured and reduce the growth of total health care expenditures. While the U.S. Congress did not adopt any comprehensive reform proposals, members of Congress may raise similar proposals in the future. If any of these proposals are approved by the U.S. Congress, pharmaceutical, medical device and biotechnology companies may react by spending less on research and development. If this were to occur, the Company would have fewer business opportunities. The Company is unable to predict the likelihood that health care reform proposals will be enacted into law or the effect such laws would have on the Company's business. Many governments outside the U.S. have also reviewed or undertaken health care reform. The Company cannot predict the impact that any pending or future foreign health care reform proposals may have on its business in other countries. THE COMPANY IS SUBJECT TO CURRENCY TRANSLATION RISKS The Company derived approximately 43% of its net revenue for the three months ended September 30, 2001 from operations outside of the United States, compared with 42% for the same period in the prior fiscal year. Since the Company's revenue and expenses from foreign operations are usually denominated in local currencies, the Company is subject to exchange rate fluctuations between local currencies and the United States dollar. To the extent that the Company cannot shift this currency translation risk to other parties, the Company's operating results could be materially and adversely affected. The Company occasionally enters into foreign exchange forward contracts to offset the impact of currency fluctuations. THE COMPANY'S DEVELOPMENT OF ITS PERCEPTIVE INFORMATICS BUSINESS MAY NEGATIVELY IMPACT RESULTS IN THE SHORT TERM The Company is currently making investments in its technology subsidiary, Perceptive Informatics, Inc., but does not expect such subsidiary to become profitable in the immediate future. The Company may need to make additional investments in this subsidiary in the future in order to achieve its objectives. The profitability of this subsidiary depends, in part, on customer acceptance and use of its products and services and its ability to compete against rival products and services. There can be no assurance that this subsidiary will be profitable in the future or that any revenue resulting from it will be sufficient to offset the Company's investments in this division. THE COMPANY FACES THE RISKS OF LIABILITY, INCREASED COSTS OR LIMITATION OF SERVICE OFFERINGS AS A RESULT OF PROPOSED AND FINAL LAWS AND REGULATIONS The confidentiality and release of patient-specific information are subject to government regulation. Additional legislation governing the possession, use and dissemination of medical record information and other personal health information has been proposed or adopted at both the state and federal levels. Proposed and final federal regulations governing patient-specific information may require the Company to implement new security measures that may result in substantial expenditures or limit its ability to offer some of its products and services. Additionally, states may adopt health information legislation or regulations that contain privacy and security provisions that are more burdensome than the federal regulations. There is also a risk of civil or criminal liability if the Company is found to be responsible for any violations of applicable laws, regulations or duties relating to the use, privacy or security of health information. 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 PAREXEL International Corporation 2001 Stock Incentive Plan. (b) Reports on Form 8-K. The Company did not file any Current Reports on Form 8-K with the Securities and Exchange Commission during the quarter ended September 30, 2001. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 13th day of November 2001. PAREXEL International Corporation Date: November 13, 2001 By: /s/ Josef H. von Rickenbach ------------------------------------------- Josef H. von Rickenbach Chairman of the Board and Chief Executive Officer Date: November 13, 2001 By: /s/ James F. Winschel, Jr. ------------------------------------------- James F. Winschel, Jr. Senior Vice President and Chief Financial Officer 20 EX-10.1 3 dex101.txt 2001 STOCK INCENTIVE PLAN Exhibit 10.1 ------------ PAREXEL INTERNATIONAL CORPORATION 2001 STOCK INCENTIVE PLAN ------------------------- 1. Purpose The purpose of this 2001 Stock Incentive Plan (the "Plan") of PAREXEL International Corporation, a Massachusetts corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any of the Company's present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code") and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Board of Directors of the Company (the "Board"). 2. Eligibility All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options (each, an "Award") under the Plan. Each person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration and Delegation (a) Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. (b) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean the Board or a Committee of the Board to the extent that the Board's powers or authority under the Plan have been delegated to such Committee. While the common stock, $0.01 par value per share, of the Company (the "Common Stock") is registered under the Securities Exchange Act of 1934, as amended or replaced from time to time (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code ("Section 162(m)") and a "non-employee director" as defined in Rule 16b-3 promulgated under the Exchange Act. 4. Stock Available for Awards (a) Number of Shares. Subject to adjustment under Section 6, Awards may be made under the Plan for up to 1,000,000 shares of Common Stock. If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitations under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 6 the maximum number of shares of Common Stock with respect to which Awards may be granted to any Participant under the Plan shall be 500,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m). 5. Stock Options (a) General. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (b) Incentive Stock Options. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (c) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement, provided, however, that the exercise price shall not be less than 100% of the fair market value of the Common Stock, as determined by (or in a manner approved by) the Board in good faith ("Fair Market Value") at the time the Option is granted. (d) Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement, provided, however, that no Option shall be granted for a term in excess of 10 years. (e) Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding; (3) by delivery of shares of Common Stock owned by the Participant valued at their Fair Market Value, provided (i) such method of payment is then permitted under applicable law and (ii) such Common Stock, if acquired directly from the Company was owned by the Participant at least six months prior to such delivery; (4) to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or (5) by any combination of the above permitted forms of payment. -2- (g) Substitute Options. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Options in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Substitute Options may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Options contained in the other sections of this Section 5 or in Section 2. 6. Adjustments for Changes in Common Stock and Certain Other Events (a) Changes in Capitalization. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limit set forth in Section 4(b), and (iii) the number and class of securities and exercise price per share subject to each outstanding Option shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine in good faith that such an adjustment or substitution is necessary and appropriate. If this Section 6(a) applies and Section 6(c) also applies to any event, Section 6(c) shall be applicable to such event, and this Section 6(a) shall not be applicable. (b) Liquidation or Dissolution. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date. (c) Reorganization Events (1) Definition. A "Reorganization Event" shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of all of the Common Stock of the Company for cash, securities or other property pursuant to a share exchange transaction. (2) Consequences of a Reorganization Event on Options. Upon the occurrence of a Reorganization Event, or the execution by the Company of any agreement with respect to a Reorganization Event, the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Reorganization Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event. Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Participants before the consummation of such Reorganization Event; provided, however, that in the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Reorganization Event (the "Acquisition Price"), then the Board may instead provide that all outstanding -3- Options shall terminate upon consummation of such Reorganization Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock then exercisable under such outstanding Options, exceeds (B) the aggregate exercise price of such Options. 7. General Provisions Applicable to Awards (a) Transferability of Awards. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Award shall be evidenced in such form (written, electronic or otherwise) as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. (e) Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company's minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (f) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (g) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (h) Acceleration. The Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. (i) Limitations on Option Repricings. Except for adjustments pursuant to Section 6, the exercise price for any outstanding Option granted under the Plan may not be decreased after the date of grant, nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new security with a lower exercise price, without the prior approval of the Company's stockholders. -4- 8. Miscellaneous (a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. (c) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board, but no Award granted to a Participant that is intended to comply with Section 162(m) shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders to the extent stockholder approval is required by Section 162(m) in the manner required under Section 162(m) (including the vote required under Section 162(m)). No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that to the extent required by Section 162(m), no Award granted to a Participant that is intended to comply with Section 162(m) after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award, unless and until such amendment shall have been approved by the Company's stockholders if required by Section 162(m) (including the vote required under Section 162(m)), and further provided that the provisions of Section 7(i) (relating to Option repricing) cannot be amended unless the amendment is approved by the Company's stockholders. (e) Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to any applicable conflicts of law. -5- -----END PRIVACY-ENHANCED MESSAGE-----