FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 under
the Securities Exchange Act of 1934
Supplement for the quarterly period ended February 28, 2003
ICON plc
(Registrant's name)
0-29714
(Commission file number)
South County Business Park, Leopardstown, Dublin 18, Ireland.
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Yes___X___ No_______
Indicate by check mark whether the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):
Yes______ No___X___
Indicate by check mark whether the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):
Yes______ No___X___
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes_______ No___X___
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):82 N/A
ICON plc
Quarterly Period Ended February 28, 2003
CONTENTS Page
General.................................................................. 1
Condensed Consolidated Balance sheets -
February 28, 2003 and May 31, 2002....................................... 2
Condensed Consolidated Statements of Operations for the
Three and Nine months ended February 28, 2003 and 2002................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2003 and 2002............................. 4
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income................................................. 5
Notes to the Condensed Consolidated Financial
Statements............................................................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 12
Signature Page........................................................... 19
ICON plc
GENERAL
As used herein, "ICON", the "Company" and "we" refer to ICON plc and its
consolidated subsidiaries, unless the context requires otherwise.
Business
We are a contract research organization, or "CRO", providing clinical research
and development services on a global basis to the pharmaceutical and
biotechnology industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase II - IV
clinical trials management, study design, laboratory services and drug
development support. Through our recent acquisition we have continued to expand
our service offerings to include Phase I clinical trials. We believe that we are
one of a select group of CROs with the capability and expertise to conduct
clinical trials in most major therapeutic areas on a global basis. We have
approximately 2,300 employees and operations in 28 locations in 16 countries.
Our main operations are in the United States, South America, Europe and the Rest
of the World. For the nine months ended February 28, 2003, we derived
approximately 71.0%, 26.4% and 2.6% of our net revenue in the United States,
Europe and Rest of World, respectively.
Headquartered in Dublin, Ireland, we began operations in 1990 and have expanded
our business through internal growth and strategic acquisitions.
On January 24, 2003, we completed the acquisition of Medeval Group Limited,
("Medeval"), a specialist provider of Phase I clinical trials to the
pharmaceutical and biotechnology industries.
1
ICON plc
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT FEBRUARY 28, 2003 AND MAY 31, 2002
(Unaudited) (Audited)
February 28, 2003 May 31, 2002
----------------- ------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $21,862 $36,291
Short term investments (available for sale) .................................... - 18,551
Accounts receivable............................................................. 45,337 41,306
Unbilled revenue................................................................ 53,082 26,387
Other receivables............................................................... 8,166 2,093
Deferred taxes.................................................................. 408 408
Prepayments and other current assets............................................ 8,886 5,183
------------- -------------
Total current assets............................................................ 137,741 130,219
Other Assets:
Property, plant and equipment, net.............................................. 35,335 25,482
Goodwill........................................................................ 41,968 10,093
------------- -------------
Total Assets.......................................................................... $215,044 $165,794
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $7,184 $5,788
Payments on account............................................................. 37,989 19,854
Other liabilities............................................................... 23,804 16,308
Taxes payable................................................................... 7,810 3,601
Bank creditlines and loan facilities............................................ 10,503 11,745
------------- -------------
Total current liabilities...................................................... 87,290 57,296
Other Liabilities:
Long term government grants..................................................... 1,054 937
Other liabilities............................................................... 350 -
Shareholders' Equity:
Ordinary Shares, par value 6 euro cents per share; 20,000,000 shares
authorized, 11,828,217 shares issued and outstanding at February 28, 2003
and 11,798,501 shares issued and outstanding at May 31, 2002 840 839
Additional paid-in capital...................................................... 60,865 60,348
Accumulated other comprehensive income.......................................... 2,821 (2,461)
Merger reserve.................................................................. 47 47
Retained earnings............................................................... 61,777 48,788
------------- -------------
Total Shareholders' Equity............................................................ 126,350 107,561
------------- -------------
Total Liabilities and Shareholders' Equity............................................ $215,044 $165,794
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands except share and per share data)
Revenue:
Gross revenue.............................................. $79,205 $53,055 $236,270 $153,356
Subcontractor costs........................................ (19,894) (13,485) (76,565) (39,798)
------------- -------------- ------------ -------------
Net revenue................................................ 59,311 39,570 159,705 113,558
Costs and expenses:
Direct costs............................................... 33,366 20,932 87,507 60,446
Selling, general and administrative expense................ 17,890 12,462 49,481 35,550
Depreciation .............................................. 1,869 1,538 5,017 4,416
------------- -------------- ------------ -------------
Total costs and expenses................................... 53,125 34,932 142,005 100,412
------------- -------------- ------------ -------------
Income from operations........................................ 6,186 4,638 17,700 13,146
Interest income............................................... 178 371 594 1,282
Interest expense.............................................. (58) (86) (215) (418)
------------- -------------- ------------ -------------
Income before provision for income taxes...................... 6,306 4,923 18,079 14,010
Provision for income taxes.................................... (1,709) (1,325) (5,090) (3,625)
------------- -------------- ------------ -------------
Net income.................................................... $4,597 $3,598 $12,989 $10,385
============= ============== ============ =============
Net income per Ordinary Share:
Basic...................................................... $0.39 $0.31 $1.10 $0.90
============= ============== ============ =============
Diluted................................................... $0.38 $0.29 $1.07 $0.85
============= ============== ============ =============
Weighted average number of Ordinary Shares outstanding:
Basic.................................................... 11,818,704 11,707,978 11,804,576 11,576,692
============== ============= ============= ==============
Diluted.................................................. 12,220,266 12,229,874 12,169,875 12,224,383
============== ============= ============= ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
Nine Months Ended
-----------------
February 28
-----------
2003 2002
---- ----
(in thousands)
Cash flows from operating activities:
Net income................................................ $12,989 $10,385
Adjustments to reconcile net income to net cash provided by/ (used in)
operating activities:..................................
Loss on disposal of fixed assets....................... 5 40
Depreciation........................................... 5,017 4,416
Amortization of grants................................. (20) (111)
Changes in assets and liabilities:
Decrease /(increase) in accounts receivable............ 4,395 (3,257)
Increase in unbilled revenue........................... (22,704) (4,253)
(Increase) /decrease in other receivables.............. (2,044) 639
Increase in prepayments and other current assets....... (2,752) (3,646)
Increase in payments on account........................ 17,762 7,216
(Decrease)/ increase in other liabilities.............. (185) 2,264
Increase in income taxes payable....................... 3,887 1,594
Increase in accounts payable........................... 213 1,020
--------------- ---------------
Net cash provided by operating activities................. 16,563 16,307
Cash flows from investing activities:
Purchase of fixed assets............................... (11,157) (7,238)
Sale of short term investments......................... 23,190 25,911
Purchase of short term investments..................... (4,639) (12,479)
Purchase of subsidiary................................. (35,721) -
Cash acquired with subsidiary ......................... 1,910 -
Payments in respect of prior year acquisitions (3,078) (2,591)
Receipt of grant ...................................... - 464
--------------- ---------------
Net cash (used in)/ provided by investing activities...... (29,495) 4,067
Cash flows from financing activities:
Repayment of bank overdraft............................... (1,941) (976)
Repayment of long term debt............................... - (338)
Proceeds from exercise of share options................... 441 2,305
Repayment of other liabilities............................ (136) (58)
--------------- ---------------
Net cash (used in)/ provided by financing activities...... (1,636) 933
Effect of exchange rate movements on cash................. 139 187
--------------- ---------------
Net (decrease)/ increase in cash and cash equivalents..... (14,429) 21,494
Cash and cash equivalents at beginning of period.......... 36,291 11,179
--------------- ---------------
Cash and cash equivalents at end of period................ $21,862 $32,673
=============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
Accumulated
Additional Other
Paid-in Comprehensive Retained Merger
Shares Amount Capital Income Earnings Reserve Total
------ ------ ------- ------ -------- ------- -----
(dollars in thousands, except share data)
Balance at May 31, 2002........ 11,798,501 $839 $60,348 ($2,461) $48,788 $47 $107,561
Comprehensive Income:
Net income....................... - - - 12,989 - 12,989
Currency translation adjustment.. - - - 5,282 - - 5,282
--------
Total comprehensive income....... 18,271
Exercise of Share Options........ 26,020 1 440 - - - 441
Shares issued.................... 3,696 - 77 - - - 77
---------- ---- ------- ------- ------- --- --------
Balance at February 28, 2003 11,828,217 $840 $60,865 $2,821 $61,777 $47 $126,350
========== ==== ======= ======= ======= === ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ICON plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2003
1. Basis of Presentation
These condensed consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles, have not
been audited. The condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the operating results and financial position for the periods
presented. The preparation of the condensed consolidated financial statements in
conformity with United States generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts and
disclosures in the condensed consolidated financial statements. Actual results
could differ from those estimates. There has been no significant change in ICON
plc's accounting policies from those outlined in ICON's annual report on Form
20-F for the year ended May 31, 2002, except as described below.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with the United States generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The condensed
consolidated financial statements should be read in conjunction with the
accounting policies and notes to the consolidated financial statements included
in ICON's 2002 annual report on Form 20-F. Operating results for the nine months
ended February 28, 2003 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 2003.
2. Acquisitions
Acquisition of Barton & Polansky Associates, Inc. and Managed Clinical
Solutions, Inc.
On October 9, 2002, the Company acquired 100% of the outstanding shares of
Barton & Polansky Associates, Inc. ("BPA") and its sister company Managed
Clinical Solutions, Inc. ("MCS"), both based in New York, USA, for an initial
cash consideration of U.S.$15.7 million, excluding costs of acquisition.
Earn-out and working capital provisions have been built into the acquisition
contract requiring the potential payment of additional deferred consideration up
to a maximum of U.S.$18 million depending on the performance of MCS over the
period to May 31, 2006. Such potential additional consideration will be
accounted for as goodwill. The total amount of goodwill is expected to be tax
deductible.
On December 20, 2002, an additional cash payment of U.S.$3.7 million was made to
the former shareholders of BPA and MCS as part of the working capital provisions
in the contract.
The acquisitions of BPA and MCS have been accounted for as a purchase in
accordance with SFAS No. 141, "Business Combinations". The following table
summarises the fair values of the assets acquired and the liabilities assumed at
the date of acquisition.
At October 9,
-------------
2002
----
(in thousands)
Property, Plant & Equipment $2
Goodwill 14,163
Current Assets 9,533
Current liabilities (2,795)
------------------------------------------------------------
Purchase Price $20,903
------------------------------------------------------------
6
The primary purpose of the acquisition was to expand our expertise in the US in
the area of immuno-suppressant drugs, including those used to treat transplant
patients, and to provide contract staffing solutions to the pharmaceutical and
biotechnology industries. The results of BPA and MCS have been included in the
condensed consolidated financial statements from October 1, 2002.
Acquisition of Medeval Group Ltd
On January 24, 2003, the Company acquired 100% of the outstanding shares of
Medeval Group Limited ("Medeval") for an initial cash consideration of sterling
(pound)9.5 million (U.S.$15.5 million), excluding costs of acquisition. Earn-out
provisions have been built into the acquisition contract requiring the potential
payment of additional deferred consideration up to a maximum of sterling
(pound)4.3 million (U.S.$6.7 million) depending on the performance of Medeval
over the period to May 31, 2004. Such potential additional consideration will be
accounted as goodwill.
The acquisition of Medeval has been accounted for as a purchase in accordance
with SFAS No. 141, "Business Combinations". The following table summarises the
fair values of the assets acquired and the liabilities assumed at the date of
acquisition.
At January 24,
--------------
2003
----
(in thousands)
Property, Plant & Equipment $1,632
Goodwill 17,863
Current Assets 2,738
Current liabilities (2,456)
----------------------------------------------------------
Purchase Price $19,777
----------------------------------------------------------
Medeval is a specialist provider of Phase I clinical trials to the
pharmaceutical and biotechnological industries, based in Manchester, UK. The
acquisition marks ICONs first entry into the Phase I arena. The results of
Medeval have been included in the condensed consolidated financial statements
from January 24, 2003.
The proforma effect of the acquisitions if completed on June 1, 2002 would have
resulted in net revenue, net income and earnings per share for the three and
nine months ended February 28, 2003 and 2002 as follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Net Revenue $61,824 $48,908 $177,460 $140,788
Net Income $4,740 $3,931 $13,846 $12,340
Basic Earnings per Share $0.40 $0.34 $1.17 $1.07
Diluted Earnings Per Share $0.39 $0.32 $1.14 $1.01
In August 2002, a $900,000 distribution was made to the former shareholders of
BPA and MCS, which was recorded as other expenses. In July 2001 and 2002, there
were dividends paid to the former shareholders of Medeval of sterling
(pound)25,679 (U.S.$36,148) and sterling (pound)109,700 (U.S.$168,134)
respectively which were also recorded in net income. Both these are included in
the proforma results.
Prior Period Acquisitions
On August 31, 2002 the Company made a payment of Sterling (pound)100,000
(U.S.$146,602) to the former shareholders of YRCR Limited ("YRCR") in the form
50% cash and 50% shares under the terms of an earn out provision entered into on
the acquisition of YRCR on January 27, 2000. This amount had been accrued at May
31, 2002.
7
On September 1, 2002 the Company made a cash payment of U.S.$3.0 million to the
former shareholders of UCT (U.S.) Inc., ("UCT") under the terms of an earn out
provision entered into on the acquisition of UCT on June 8, 2000. This amount
had been accrued at May 31, 2002.
3. Goodwill
Nine months ended Year ended
----------------- ----------
February 28, May 31
------------ ------
2003 2002
---- ----
(in thousands) (in thousands)
Opening Balance $10,093 $6,642
Arising on earn out 3,686 3,287
Arising on acquisition 28,340 -
Exchange Movement (151) 164
---------------------------------------------------------------------
Closing Balance $41,968 $10,093
=====================================================================
Goodwill arising on acquisition for the nine months ended February 28, 2003
wholly relates to the acquisition of BPA, MCS and Medeval (see note 2).
4. Net income per Ordinary Share
Basic net income per Ordinary Share has been computed by dividing net income
available to ordinary shareholders by the weighted average number of Ordinary
Shares outstanding during the period. Diluted net income per Ordinary Share is
computed by adjusting the weighted average number of Ordinary Shares outstanding
during the period for all potentially dilutive Ordinary Shares outstanding
during the period and adjusting net income for any changes in income or loss
that would result from the conversion of such potential Ordinary Shares.
There is no difference in net income used for basic and diluted net income per
Ordinary Share. The reconciliation of the number of shares used in the
computation of basic and diluted net income per Ordinary Share is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted average number of Ordinary Shares outstanding for
basic net income per Ordinary Share 11,818,704 11,707,978 11,804,576 11,576,692
Effect of dilutive share options outstanding 401,562 521,896 365,299 647,691
------------------ -------------- ------------- --------------
Weighted average number of Ordinary Shares for diluted net
income per Ordinary Share 12,220,266 12,229,874 12,169,875 12,224,383
================== ============== ============= ==============
5. Business Segment Information
The Company's areas of operation outside of Ireland principally include the
United States, United Kingdom, Germany, France, The Netherlands, Latvia, Israel,
Sweden, Australia, Argentina, Japan, Singapore, South Africa, Canada and India.
Segment information for the three and nine month periods ended February 28, 2003
and 2002 are as follows:
8
a) The distribution of net revenue by geographical area was as follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Ireland* $6,118 $5,352 $18,419 $14,380
Rest of Europe 8,865 5,466 23,795 18,650
U.S. 42,860 27,763 113,439 77,808
Other 1,468 989 4,052 2,720
-------------------------------------- ---------------- ----------- ------------------
Total $59,311 $39,570 $159,705 $113,558
-------------------------------------- ---------------- ----------- ------------------
* All sales shown for Ireland are export sales.
b) The distribution of net revenue by business segment was as follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Central laboratory $6,185 $7,789 $19,402 $19,182
Clinical research 53,126 31,781 140,303 94,376
--------------------------------------------------------------------------------------
Total $59,311 $39,570 $159,705 $113,558
--------------------------------------------------------------------------------------
c) The distribution of income from operations by geographical area was as
follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Ireland $1,230 $1,108 $2,129 $3,171
Rest of Europe 9 (901) 1,325 (8)
U.S. 4,893 4,360 13,813 9,706
Other 54 71 433 277
-------------------------------------------------------------------------------------
Total $6,186 $4,638 $17,700 $13,146
-------------------------------------------------------------------------------------
d) The distribution of income from operations by business segment was as
follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Central laboratory $(451) $1,755 $259 $2,770
Clinical research 6,637 2,883 17,441 10,376
--------------------------------------------------------------------------------------
Total $6,186 $4,638 $17,700 $13,146
--------------------------------------------------------------------------------------
9
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
February 28, May 31,
------------ -------
2003 2002
---- ----
(in thousands)
Ireland $14,828 $9,795
Rest of Europe 5,898 3,581
U.S. 13,676 11,438
Other 933 668
------------------------------------------------------------------------
Total $35,335 $25,482
------------------------------------------------------------------------
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
February 28, May 31,
------------ -------
2003 2002
---- ----
(in thousands)
Central laboratory $3,303 $2,721
Clinical research 32,032 22,761
-------------------------------------------------------------------------
Total $35,335 $25,482
-------------------------------------------------------------------------
g) The distribution of depreciation by geographical area was as follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Ireland $605 $382 $1,599 $1,001
Rest of Europe 290 133 719 532
U.S. 902 957 2,512 2,714
Other 72 66 187 169
---------------------------------------------------------------------------------------
Total $1,869 $1,538 $5,017 $4,416
---------------------------------------------------------------------------------------
h) The distribution of depreciation by business segment was as follows:
Three months ended Nine months ended
------------------ -----------------
February 28, February 28,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Central laboratory $160 $230 $490 $546
Clinical research 1,709 1,308 4,527 3,870
----------------------------------------------------------------------------------------
Total $1,869 $1,538 $5,017 $4,416
----------------------------------------------------------------------------------------
10
i) The distribution of total assets by geographical area was as follows:
February 28, May 31,
------------ -------
2003 2002
---- ----
(in thousands)
Ireland $57,202 $36,549
Rest of Europe 43,606 66,719
U.S. 111,389 60,789
Other 2,847 1,737
-----------------------------------------------------------------------
Total $215,044 $165,794
-----------------------------------------------------------------------
j) The distribution of total assets by business segment was as follows:
February 28, May 31,
------------ -------
2003 2002
---- ----
(in thousands)
Central laboratory $17,911 $16,566
Clinical research 197,133 149,228
-------------------------------------------------------------------------
Total $215,044 $165,794
-------------------------------------------------------------------------
11
ICON plc
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements and accompanying notes included
elsewhere herein and the Consolidated Financial Statements and related Notes
thereto included in our Annual Report on Form 20-F for the fiscal year ended May
31, 2002. The Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Overview
We are a contract research organization, or "CRO", providing clinical research
and development services on a global basis to the pharmaceutical and
biotechnology industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase II - IV
clinical trials management, study design, laboratory services and drug
development support. Through our recent acquisition we have continued to expand
our service offerings to include Phase I Clinical Trials. We believe that we are
one of a select group of CROs with the capability and expertise to conduct
clinical trials in most major therapeutic areas on a global basis. We have
approximately 2,300 employees and operations in 28 locations in 16 countries.
Our main operations are in the United States, South America, Europe and the Rest
of the World. For the nine months ended February 28, 2003, we derived
approximately 71.0%, 26.4% and 2.6% of our net revenue in the United States,
Europe and Rest of World, respectively.
Revenue consists primarily of fees earned under contracts with third-party
clients. In most cases, a portion of the contract fee is paid at the time the
study or trial is started, often upon the signing of a letter of intent, and the
balance of the contract fee is generally payable in instalments over the study
or trial duration, based on the achievement of certain performance targets or
"milestones." Revenue for contracts is recognized on a percentage of completion
basis as work is performed. As is customary in the CRO industry, we subcontract
with third party investigators in connection with clinical trials. All
subcontractor costs, and certain other costs where reimbursed by clients, are,
in accordance with industry practice, deducted from gross revenue to arrive at
net revenue. As no profit is earned on these costs, which vary from contract to
contract, we view net revenue as our primary measure of revenue growth.
Direct costs consist primarily of compensation and associated fringe benefits
for project-related employees and other direct project driven costs. Selling,
general and administrative expenses consist of compensation and related fringe
benefits for selling and administrative employees, professional services,
advertising costs and all costs related to facilities and information systems.
As the nature of our business involves the management of projects having a
typical duration of one to three years, the commencement, completion,
curtailment or early termination of projects in a fiscal year can have a
material impact on revenues earned with the relevant clients in such years. In
addition, as we typically work with some, but not all, divisions of a client,
fluctuations in the number and status of available projects within such
divisions can also have a material impact on revenues earned from such clients
from year to year.
Although domiciled in Ireland, we report our results in U.S. dollars. As a
consequence, the results of our non-United States based operations, when
translated into U.S. dollars, could be materially affected by fluctuations in
exchange rates between the U.S. dollar and the currency of those operations.
In addition to translation exposures, we are also subject to transaction
exposures because the currency in which contracts are priced can be different
from the currencies in which costs relating to those contracts are incurred. We
have twelve operations trading in U.S. dollars, four trading in Euros, three in
pounds sterling, and one each in Australian dollars, Singapore dollars, Japanese
yen, Israeli New shekels, Latvian lats, Swedish krona, South African rand,
Argentine peso, Indian rupee and Canadian dollars. Our operations in the United
States are not materially exposed to such currency differences as the majority
of our revenues and costs are in U.S. dollars. However, outside the United
States the multinational nature of our activities means that contracts are
usually priced in a single currency, most often pounds Sterling, U.S. dollars or
Euros, while costs arise in a number of currencies, depending, among other
things, on which of our offices provide staff for the contract, and the location
of investigator sites. Although many such contracts benefit from some degree of
natural hedging due to the matching of contract revenues and costs in the same
currency, where costs are incurred in currencies other than those in which
contracts are priced, fluctuations in the relative value of those currencies
could have a material effect on our results of operations. We regularly review
our currency exposures and hedge a portion of these, using forward exchange
contracts, where natural hedges do not cover them. The introduction of the Euro
on January 1, 1999, also reduced our exposures as four of our offices, and many
of the countries where we are carrying out projects are within the Euro zone.
12
We have received capital and revenue grants from Enterprise Ireland, an Irish
government agency. We record capital grants as deferred income, which are
credited to income on a basis consistent with the depreciation of the relevant
asset. Grants relating to operating expenditures are credited to income in the
period in which the related expenditure is charged. The capital grant agreements
provide that in certain circumstances the grants received may be refundable in
full. These circumstances include sale of the related asset, liquidation of the
Company or failing to comply in other respects with the grant agreements. The
operating expenditure grant agreements provide for repayment in the event of
downsizing of the Company calculated by reference to any reduction in employee
numbers. We have not recognized any loss contingency having assessed as remote
the likelihood of these events arising. Up to February 28, 2003, we have
received $1,244,195 and $1,551,433 under the capital grants and operating
grants, respectively. Pursuant to the terms of the grant agreements we are
restricted from distributing some of these amounts by way of dividend or
otherwise.
As we conduct operations on a global basis, our effective tax rate has depended
and will depend on the geographic distribution of our revenue and earnings among
locations with varying tax rates. Our results of operations therefore may be
affected by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of our results of operations among various tax
jurisdictions changes, our effective tax rate may vary significantly from period
to period.
Results of Operations
Three Months Ended February 28, 2003 Compared with Three Months Ended February
28, 2002
The following table sets forth for the periods indicated certain financial data
as a percentage of net revenue and the percentage change in these items compared
to the prior comparable period. The trends illustrated in the following table
may not be indicative of future results.
Three Months Ended
------------------
February 28, February 28, 2003
------------ ------------ ----
2003 2002 to 2002
---- ---- -------
Percentage
----------
Percentage of Net Revenue Increase
------------------------- --------
Net revenue............................ 100.0% 100.0% 49.9%
Costs and expenses:
Direct costs........................... 56.3% 52.9% 59.4%
Selling, general and administrative.... 30.2% 31.5% 43.6%
Depreciation and amortization.......... 3.1% 3.9% 21.5%
Income from operations................. 10.4% 11.7% 33.4%
Net revenue increased by $19.7 million, or 49.9%, from $39.6 million to $59.3
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisitions
not included in the comparative period. The additional revenues from these
acquisitions (BPA, MCS and Medeval) amounted to $6.0 million for the three
months ended February 28, 2003. Including the impact of acquisitions, revenues
in the United States, Europe/Rest of World grew 54.4% and 39.3%, respectively.
For the three months ended February 28, 2003, net revenue for our central
laboratory business fell by 20.6% from $7.8 million to $6.2 million while our
clinical research segment grew by 67.2% from $31.8 million to $53.1 million over
the comparable period. The growth in net revenue in our clinical research
segment is due to the expansion of our services to both existing and new
clients, increased use of outsourcing by the Pharmaceutical and Biotechnology
industries, an underlying increase in Research and Development spending and
consolidation in the CRO industry. The decrease in the central laboratory
revenues was due principally to a higher than normal level of project
cancellations in the first quarter of fiscal 2003.
Direct costs increased by $12.5 million, or 59.4%, from $20.9 million to $33.4
million, primarily due to increased staff numbers needed to support increased
project related activity and increased costs arising from the acquisitions
amounting to $4.3 million. Direct costs, as a percentage of net revenue
increased from 52.9% in the three months to February 28, 2002 to 56.3% for the
quarter ended February 28, 2003 or 54.6% when the effects of acquisitions have
been excluded.
Selling, general and administrative expenses increased by $5.4 million, or
43.6%, from $12.5 million to $17.9 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of
13
$1.6 million not included in the comparative period. As a percentage of net
revenue, selling, general and administrative expenses, decreased from 31.5% in
the three months to February 28, 2002 to 30.2% for the quarter ended February
28, 2003, or 30.6% when the effects of acquisitions have been excluded.
Depreciation and amortization expense increased by $0.3 million, or 21.5%, over
the same quarter last year. This increase is due to the continued investment in
facilities and information technology to support the growth in activity and in
providing for future capacity. As a percentage of net revenue, depreciation and
amortisation decreased from 3.9% of net revenues in the three months to February
28, 2002 to 3.1% for the quarter ended February 28, 2003 or 3.4% when the
effects of acquisitions have been excluded.
Income from operations increased by $1.6 million, or 33.4%, from $4.6 million to
$6.2 million, including acquisitions. This improvement is due to increased
levels of activity carried out across the Company together with the acquisition
of BPA, MCS and Medeval. As a percentage of net revenue, including the effect of
acquisitions, income from operations decreased from 11.7% for the three months
ended February 28, 2002 to 10.4% of net revenues for the three months ended
February 28, 2003. For the quarter, income from operations, as a percentage of
net revenue for the central laboratory fell to (7.3%) from 22.5% in the same
quarter in fiscal 2002, due principally to a higher than normal level of project
cancellations in the first quarter of the current fiscal year. Operating margins
for our clinical research segment increased from 9.1% in the three months ended
February 28, 2002 to 12.5% for the three months ended February 28, 2003 due
principally to improved staff utilization.
Net interest income for the three months ended February 28, 2003 was $0.1
million compared to $0.3 million for the equivalent period last year. Net cash
invested decreased from $43.1 million at May 31, 2002 to $11.4 million at
February 28, 2003. Lower average interest rates for the third quarter of fiscal
2003, when compared to the same period last year, together with lower amounts of
cash invested contributed to the lower returns on our investments.
Our effective tax rate for the nine months ended February 28, 2003 was 27.1%
compared to 26.9% for the comparable period last year. The increase in the
effective rate was due to a change in the geographic distribution of pre-tax
earnings and the impact of acquisitions.
Nine Months Ended February 28, 2003 Compared with Nine Months Ended February 28,
2002
The following table sets forth for the periods indicated certain financial data
as a percentage of net revenue and the percentage change in these items compared
to the prior comparable period. The trends illustrated in the following table
may not be indicative of future results.
Nine Months Ended
-----------------
February 28, February 28, 2003 to 2002
------------ ------------ ------------
2003 2002
---- ----
Percentage
----------
Percentage of Net Revenue Increase
------------------------- --------
Net revenue............................ 100.0% 100.0% 40.6%
Costs and expenses:
Direct costs........................... 54.8% 53.2% 44.8%
Selling, general and administrative.... 31.0% 31.3% 39.2%
Depreciation and amortization.......... 3.1% 3.9% 13.6%
Income from operations................. 11.1% 11.6% 34.6%
Net revenue increased by $46.1 million, or 40.6%, from $113.6 million to $159.7
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisitions
not included in the comparative period. The additional revenues from these
acquisitions (BPA, MCS & Medeval) were $9.6 million for the nine months ended
February 28, 2003. Of the total increase, revenues in the United States,
Europe/Rest of World grew by 45.8% and 29.4%, respectively. For the nine months
ended February 28, 2003 net revenue for our central laboratory segment grew from
$19.2 million to $19.4 million, or 1.1% over the comparable period last year,
while our clinical research segment grew from $94.4 million to $140.3 million,
or 48.7% in the same period. The growth in net revenue in both our clinical
research and central laboratory
14
segments is due to the expansion of our services to both existing and new
clients, increased use of outsourcing by the Pharmaceutical and Biotechnology
industries, an underlying increase in Research and Development spending and
consolidation in the CRO industry.
Direct costs increased by $27.0 million, or 44.8%, from $60.5 million to $87.5
million, primarily due to increased staff numbers needed to support increased
project related activity and increased costs arising from the acquisitions
amounting to $6.4 million. Direct costs, as a percentage of net revenue
increased from 53.2% in the nine months to February 28, 2002, to 54.8% for the
nine months ended February 28, 2003 or 54.0% when the effect of acquisitions has
been excluded.
Selling, general and administrative expenses increased by $13.9 million, or
39.2%, from $35.6 million to $49.5 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of $2.6 million not included in the
comparative period. As a percentage of net revenue, selling, general and
administrative expenses, decreased from 31.3% in the nine months to February 28,
2002, to 31.0% for the nine months ended February 28, 2003 or 31.2% when the
effect of acquisitions has been excluded.
Depreciation and amortization expense increased by $0.6 million, or 13.6%, over
the same period last year. This increase is due to the continued investment in
facilities and information technology to support the growth in activity and in
providing for future capacity costs from acquisitions of $0.1 million not
included in the comparative period. As a percentage of net revenue, depreciation
and amortisation decreased from 3.9% of net revenues in the nine months to
February 28, 2002 to 3.1% for the nine months ended February 28, 2003 or 3.3%
when the effect of acquisitions has been excluded.
Income from operations increased by $4.6 million, or 34.6%, from $13.1 million
to $17.7 million, including acquisitions. This increase is due to increased
levels of activity carried out across the Company together with the acquisition
of BPA, MCS & Medeval. As a percentage of net revenue, including the effect of
acquisitions, income from operations decreased from 11.6% for the nine months
ended February 28, 2002, to 11.1% for the nine months to February 28, 2003. For
the first nine months of fiscal 2003, income from operations, as a percentage of
net revenue for our central laboratory segment fell to 1.3% from 14.4% in the
same period in fiscal 2002 due principally to a higher than normal level of
project cancellations in the first quarter of the current fiscal year. Operating
margins for our clinical research segment increased from 11.0% in the nine
months ended February 28, 2002 to 12.4% for the nine months ended February 28,
2003 primarily due to improved staff utilization.
Net interest income for the nine months ended February 28, 2003 was $0.4 million
compared to $0.9 million for the equivalent period last year. Net cash invested
decreased from $43.1 million at May 31, 2002 to $11.4 million at February 28,
2003, primarily due to the acquisition of BPA and MCS in October 2002 and
Medeval in January 2003. Lower average interest rates for the first nine months
of fiscal 2003 compared to the same period last year, combined with lower levels
of net cash invested, contributed to the lower returns on our investments.
Our effective tax rate for the nine months ended February 28, 2003 was 28.2%
compared to 25.9% for the comparable period last year. The increase in the
effective rate was due to a change in the geographic distribution of pre-tax
earnings and the impact of acquisitions.
Liquidity and Capital Resources
The CRO industry generally is not capital intensive. Since our inception, we
have financed our operations and growth primarily with cash flows from
operations and the net proceeds of $49.1 million raised in our initial public
offering in May 1998. Our principal cash needs are payment of salaries, office
rents, travel expenditures and payments to subcontractors. The aggregate amount
of employee compensation, excluding stock compensation expense, paid by us and
our subsidiaries in the nine months ended February 28, 2002 and February 28,
2003 amounted to $63.6 million and $96.0 million, respectively. Investing
activities primarily reflect capital expenditures for facilities and for
information systems enhancements, the sale and purchase of short term
investments and acquisitions.
Our clinical research and development contracts are generally fixed price with
some variable components and range in duration from a few months to several
years. Revenue from contracts is generally recognized as income on a percentage
of completion basis as the work is performed. The cash flow from contracts
typically consists of a down payment of between 10% and 20% paid at the time the
contract is entered into, with the balance paid in instalments over the
contract's duration, in some cases on the achievement of certain milestones.
Accordingly, cash receipts do not necessarily correspond to costs incurred and
revenue recognized on contracts.
As of February 28, 2003, our working capital amounted to $50.5 million, compared
to $72.9 million at May 31, 2002. The most significant influence on our
operating cash flow is revenue outstanding, which comprises accounts receivable
and unbilled revenue, less
15
payments on account. The dollar values of these amounts and the related days
revenue outstanding can vary due to the achievement of contractual milestones,
including contract signing, and the timing of cash receipts. The number of days
revenue outstanding was 69 days at February 28, 2003 compared to 67 days at May
31, 2002.
Net cash provided by operating activities was $16.6 million in the nine months
ended February 28, 2003, compared to $16.3 million in the nine months ended
February 28, 2002.
Net cash used in investing activities was $29.5 million in the nine months ended
February 28, 2003, compared to $4.1 million provided by investing activities in
the nine months ended February 28, 2002.
Net cash used in financing activities was $1.6 million in the nine months ended
February 28, 2003, compared with $0.9 million provided by financing activities
in the nine months ended February 28, 2002.
As a result of these cash flows, cash and cash equivalents decreased by $14.4
million in the nine months ended February 28, 2003, compared to an increase of
$21.5 million in the nine months ended February 28, 2002.
On November 17, 1998, we entered into an overdraft facility (the "A.I.B.
facility") for (euro)2,539,000 (U.S.$2,731,710) with Allied Irish Banks plc
("A.I.B."). This facility bears interest at an annual rate equal to A.I.B.
Bank's Prime Rate plus one-quarter of a percent. The full sum of the unpaid
principal and interest is due and repayable on demand. This A.I.B. facility will
be reviewed on June 30, 2003. As at February 28, 2003, (euro)2,056,227
(U.S.$2,212,295) of this facility was available to be drawn down.
On July 29, 2002, we entered into an additional A.I.B. facility for
STG(pound)50,000 (U.S.$79,006) This facility bears interest at an annual rate
equal to A.I.B. Bank's Prime Rate plus two percent. The full sum of the unpaid
principal and interest is due and repayable on demand. This A.I.B. facility will
be reviewed on June 30, 2003. As at February 28, 2003, the full facility was
available to be drawn down.
Our U.S. subsidiary, ICON Clinical Research, Inc. (the "Borrower"), has a $12
million secured line of credit (the "PNC Facility") with PNC Bank N.A
("P.N.C."). Borrowings under the PNC Facility must be the lesser of (a) $12
million and (b) the sum of (i) 80% of the borrower's gross accounts receivables
less than 90 days from the date of invoice issuance ("Qualified receivables")
plus (ii) 50% of gross unbilled receivables less than 90 days ("Qualified
unbilled receivables") provided always that drawings against Qualified unbilled
receivables shall at no time exceed 50% of drawings against Qualified
receivables. The PNC Facility bears interest at an annual rate equal to PNC's
Prime Rate less three-quarters of a percent. The full sum of the unpaid
principal and interest is due and payable on demand. The PNC Facility is secured
by a first priority security interest in certain assets of the Borrower. This
facility will expire on December 31, 2002. As of February 28, 2003, $8.9 million
was drawn down of the available $12 million.
We have entered into an overdraft agreement with A.I.B., whereby we guarantee
any overdrafts of our subsidiaries, ICON Clinical Research GmbH and ICON
Clinical Research Israel Ltd., up to an amount (euro)112,484 (U.S.$121,022) and
U.S.$250,000 (ILS 1,209,499), respectively. As of February 28, 2003, the full
German facility and Israeli facility were available to be drawn down.
We expect to spend approximately U.S.$15.0 million in the next twelve months on
further investments in information technology, the expansion of existing
facilities and the addition of new offices, and expect an increased level of
spending in subsequent years. We believe that we will be able to fund our
additional foreseeable cash needs for the next twelve months from cash flow from
operations and existing cash balances. In the future, we will consider acquiring
further businesses to enhance our service offerings and global presence. Any
such acquisitions may require additional external financing and we may from time
to time seek to obtain funds from public or private issues of equity or debt
securities. There can be no assurance that such financing will be available on
terms acceptable to us.
On October 9, 2002 we completed the acquisition of Barton & Polansky Associates,
Inc. and its sister company, Managed Clinical Solutions, Inc., contract research
organisations in New York, for an initial cash consideration of $15.7 million
and a further U.S.$3.7 million in an earn-out payment on December 20, 2002.
During the quarter, we completed the acquisition of Medeval Group Limited, or
Medeval, a specialist provider of Phase I clinical trials to the pharmaceutical
and biotechnology industries, for an initial cash consideration of sterling
(pound)9.5 million (U.S.$15.5 million).
16
Inflation
We believe the effects of inflation generally do not have a material adverse
impact on our operations or financial conditions.
New Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board ("FASB") issued two new
statements: SFAS No. 141, "Business Combinations", and Statement No. 142,
"Goodwill and Other Intangible Assets". Those Statements change the accounting
for business combinations and goodwill in two significant ways. First, SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is prohibited. Second, SFAS No.142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS
No. 144 after its adoption. We have no intangible assets with infinite lives.
Thus, amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of SFAS No. 142. We adopted SFAS No 142,
effective June 1, 2001. We completed our transitional assessment of goodwill
impairment during the year and our assessment indicates that there is no charge
for impairment.
In July 2001 the FASB issued SFAS No. 143, " Accounting for Asset Retirement
Obligations". SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its expected settlement amount each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. We have not yet adopted this new standard
and are currently assessing the impact of the standard but its adoption is not
likely to have a material impact on our results of operations and financial
position.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions for the disposal of a segment of a business of Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. SFAS No. 144 also retains the basic provisions of
APB Opinion No. 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). We adopted SFAS No. 144 on June 1, 2002.
Adoption of SFAS No.144 did not have a material impact on our results of
operations and financial position.
In November 2001, the Emerging Issues Task Force ("EITF") released EITF Issue
01-14 " Income Statement Characterization of Reimbursements Received for `Out of
Pocket' Expenses Incurred", requiring companies to report reimbursed costs as
part of gross revenues. Our reimbursed costs include such items as payments to
investigators and travel costs for our clinical research staff. We do not earn a
profit on these costs. We have always included such reimbursed costs within our
measure of gross revenues and adoption of EITF Issue 01-14 had no effect on our
reported results.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.4,
44 and 64, Amendment of FASB Statement No.13, and Technical Corrections". SFAS
No.145 provides for the rescission of several previously issued accounting
standards, new accounting guidance of the accounting for certain lease
modifications and various technical corrections that are not substantive in
nature to existing pronouncements. SFAS No. 145 will be adopted beginning June
1, 2003, except for the provisions relating to the amendment of SFAS No.13,
which was adopted for the transactions occurring subsequent to May 15, 2002.
Adoption of SFAS No.145 did not have a material impact on our results of
operations and financial position.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Costs Incurred in a Restructuring". The statement also
establishes that fair value is the objective for initial measurement of the
liability. The statement is also effective for exit or disposal activities
initiated after December 31, 2002. Adoption of SFAS No.146 had no impact on our
consolidated financial statements.
17
Legal Proceedings
We are not party to any litigation or other legal proceedings that we believe
could reasonably be expected to have a material adverse effect on our business,
results of operations and financial condition.
18
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.
ICON plc
March 28, 2003 /s/ Sean Leech
------------------------------- -----------------------------
Date Sean Leech
Chief Financial Officer
19