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 August 31, 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 August 31, 2003
CONTENTS Page
General................................................................... 1
Condensed Consolidated Balance sheets -
August 31, 2003 and May 31, 2003.......................................... 2
Condensed Consolidated Statements of Operations for the
three months ended August 31, 2003 and 2002............................... 3
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 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....................................... 11
Signature Page............................................................ 17
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 2,500 employees and operations in 31 locations in 18 countries.
Our main operations are in the United States, South America, Europe and the Rest
of the World. For the three months ended August 31, 2003, we derived
approximately 64.5%, 32.4% and 3.1% 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 September 9, 2003, we completed the acquisition of Globomax LLC,
("Globomax"), a leading US Drug Development Company which provides a range of
development and consulting services to the Pharmaceutical and Biotechnology
industries.
1
ICON plc
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 2003
(Unaudited) (Audited)
August 31, May 31,
---------- -------
2003 2003
---- ----
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $57,415 $18,311
Accounts receivable............................................................. 69,087 74,645
Unbilled revenue................................................................ 52,402 44,783
Other receivables............................................................... 3,961 4,385
Deferred taxes.................................................................. 32 32
Prepayments and other current assets............................................ 9,950 8,326
------------- -------------
Total current assets......................................................... 192,847 150,482
Other Assets:
Property, plant and equipment, net.............................................. 38,711 39,503
Goodwill........................................................................ 44,175 45,029
------------- -------------
Total Assets.......................................................................... $275,733 $235,014
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $5,317 $11,092
Payments on account............................................................. 47,362 45,763
Other liabilities............................................................... 28,445 28,289
Taxes payable................................................................... 6,267 4,385
Bank creditlines and loan facilities............................................ 6,046 7,126
------------- -------------
Total current liabilities...................................................... 93,437 96,655
Other Liabilities:
Long term government grants..................................................... 1,041 1,140
Other liabilities............................................................... 305 309
Shareholders' Equity:
Ordinary Shares, par value 6 euro cents per share; 20,000,000 shares
authorized, 13,543,387 shares issued and outstanding at August 31, 2003
and 11,841,557 shares issued and outstanding at May 31, 2003 959 841
Additional paid-in capital...................................................... 107,181 61,164
Accumulated other comprehensive income.......................................... 88 7,787
Merger reserve.................................................................. 47 47
Retained earnings............................................................... 72,675 67,071
------------- -------------
Total Shareholders' Equity............................................................ 180,950 136,910
------------- -------------
Total Liabilities and Shareholders' Equity............................................ $275,733 $235,014
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands except share
and per share data)
Revenue:
Gross revenue ................................... $ 106,177 $ 72,087
Subcontractor costs ............................. (37,242) (25,228)
--------- ---------
Net revenue ..................................... 68,935 46,859
Costs and expenses:
Direct costs .................................... 37,699 25,425
Selling, general and administrative expense ..... 21,025 14,643
Depreciation .................................... 2,589 1,570
--------- ---------
Total costs and expenses ........................ 61,313 41,638
--------- ---------
Income from operations ............................. 7,622 5,221
Interest income .................................... 73 270
Interest expense ................................... (26) (84)
--------- ---------
Income before provision for income taxes ........... 7,669 5,407
Provision for income taxes ......................... (2,065) (1,434)
--------- ---------
Net income ......................................... $ 5,604 $ 3,973
========= =========
Net income per Ordinary Share:
Basic ........................................... $ 0.46 $ 0.34
========= =========
Diluted ......................................... $ 0.44 $ 0.33
========= =========
Weighted average number of Ordinary Shares outstanding:
Basic ........................................... 12,153,772 11,798,354
========== ==========
Diluted ......................................... 12,606,971 12,147,634
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended
------------------
August 31
---------
2003 2002
---- ----
(in thousands)
Cash flows from operating activities:
Net income................................................ $5,604 $3,973
Adjustments to reconcile net income to net cash (used in)/provided by
operating activities:..................................
Loss on disposal of fixed assets....................... - 4
Depreciation........................................... 2,589 1,570
Amortization of grants................................. (9) (5)
Changes in assets and liabilities:
Decrease in accounts receivable........................ 4,055 4,231
Increase in unbilled revenue........................... (8,090) (6,975)
(Increase)/decrease in other receivables............... (3,466) 547
(Increase)/decrease in prepayments and other current assets (1,976) 779
Increase in payments on account........................ 1,736 1,828
Increase/(decrease) in other liabilities............... 2,823 (2,698)
Increase in income taxes payable....................... 2,138 368
Decrease in accounts payable........................... (5,612) (1,587)
--------------- ---------------
Net cash (used in)/provided by operating activities....... (208) 2,035
Cash flows from investing activities:
Purchase of fixed assets............................... (3,428) (3,130)
Sale of short term investments......................... - 6,072
Purchase of short term investments..................... - (4,638)
Payments in respect of prior year acquisitions (102) (3,078)
--------------- ---------------
Net cash used in investing activities..................... (3,530) (4,774)
Cash flows from financing activities:
Repayment of bank overdraft............................... (1,080) (678)
Proceeds from issuance of share capital................... 45,705 -
Proceeds from exercise of share options................... 1,819 26
Share issuance costs...................................... (402) -
Repayment of other liabilities............................ (3) -
--------------- ---------------
Net cash provided by/(used in) financing activities....... 46,039 (652)
Effect of exchange rate movements on cash................. (3,197) (42)
--------------- ---------------
Net increase/(decrease) in cash and cash equivalents...... 39,104 (3,433)
Cash and cash equivalents at beginning of period.......... 18,311 36,291
--------------- ---------------
Cash and cash equivalents at end of period................ $57,415 $32,858
=============== ===============
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, 2003........ 11,841,557 $841 $61,164 $7,787 $67,071 $47 $136,910
Comprehensive Income:
Net income....................... - - - - 5,604 - 5,604
Currency translation adjustment.. - - - (7,699) - - (7,699)
---------
Total comprehensive income....... (2,095)
Exercise of Share Options........ 201,830 14 1,805 - - - 1,819
Shares issued.................... 1,500,000 104 45,601 - - - 45,705
Share Issue costs................ - - (1,389) - - - (1,389)
---------- ---- -------- ------- ------- --- ---------
Balance at August 31, 2003 13,543,387 $959 $107,181 $88 $72,675 $47 $180,950
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ICON plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 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, 2003, 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 2003 annual report on Form 20-F. Operating results for the three
months ended August 31, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ending May 31, 2004.
2. Acquisitions
Prior Period Acquisitions
On July 25, 2003, August 20, 2003 and August 29, 2003, additional cash payments
totaling U.S.$33,700 were made to the former shareholders of Barton & Polansky
Associates, Inc. ("BPA") and Managed Clinical Solutions, Inc. ("MCS"), Companies
we acquired on October 9, 2002, as part of the working capital provisions in the
acquisition contract.
On May 31, 2003, an amount of Stg(pound)1.225 million (U.S.$2.0 million) was
accrued, in relation to the Medeval Group Limited ("Medeval") acquisition, a
Company we acquired on January 24, 2003, as the first earn-out target identified
in the acquisition contract was reached on this date.
3. Goodwill
Three months Year ended
ended
August 31, May 31
2003 2003
(in thousands)
Opening Balance $45,029 $10,093
Arising during the year - 32,302
Arising on earn-out (current and
prior year acquisitions) 34 2,003
Foreign exchange Movement (888) 631
----------------------------------------------------------- ----------------
Closing Goodwill $44,175 $45,029
=========================================================== ================
6
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
------------------
August 31,
----------
2003 2002
---- ----
Weighted average number of Ordinary Shares outstanding
for basic net income per Ordinary Share 12,153,772 11,798,354
Effect of dilutive share options outstanding 453,199 349,280
-------------------- --------------
Weighted average number of Ordinary Shares for
diluted net income per Ordinary Share 12,606,971 12,147,634
==================== ==============
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,
Hungary, Russia, Sweden, Australia, Argentina, Japan, Singapore, South Africa,
Canada and India. Segment information for the three month periods ended August
31, 2003 and 2002 are as follows:
a) The distribution of net revenue by geographical area was as follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Ireland* $9,884 $5,166
Rest of Europe 12,459 7,015
U.S. 44,464 33,394
Other 2,128 1,284
------------------------------------------------------------------------
Total $68,935 $46,859
========================================================================
* All sales shown for Ireland are export sales.
7
b) The distribution of net revenue by business segment was as follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Central laboratory $5,723 $7,187
Clinical research 63,212 39,672
---------------------------------------------------------------------
Total $68,935 $46,859
=====================================================================
c) The distribution of income from operations by geographical area was as
follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Ireland $2,056 $17
Rest of Europe 639 593
U.S. 4,835 4,411
Other 92 200
----------------------------------------------------------------------
Total $7,622 $5,221
======================================================================
d) The distribution of income from operations by business segment was as
follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Central laboratory $(1,231) $797
Clinical research 8,853 4,424
------------------------------------------------------------------------
Total $7,622 $5,221
========================================================================
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
August 31, May 31,
---------- -------
2003 2003
---- ----
(in thousands)
Ireland $15,854 $17,003
Rest of Europe 5,976 6,316
U.S. 15,817 15,066
Other 1,064 1,118
----------------------------------------------------------------------
Total $38,711 $39,503
======================================================================
8
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
August 31, May 31,
---------- -------
2003 2003
---- ----
Central laboratory $3,622 $3,560
Clinical research 35,089 35,943
-------------------------------------------------------- -------------
Total $38,711 $39,503
======================================================================
g) The distribution of depreciation by geographical area was as follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Ireland $834 $481
Rest of Europe 418 250
U.S. 1,249 791
Other 88 48
------------------------------------------------------------------
Total $2,589 $1,570
===================================================================
h) The distribution of depreciation by business segment was as follows:
Three months ended
------------------
August 31,
----------
2003 2002
---- ----
(in thousands)
Central laboratory $285 $163
Clinical research 2,304 1,407
-------------------------------------------------------------------
Total $2,589 $1,570
===================================================================
i) The distribution of total assets by geographical area was as follows:
August 31, May 31,
---------- -------
2003 2003
---- ----
(in thousands)
Ireland $108,812 $59,838
Rest of Europe 47,746 60,982
U.S. 115,605 110,602
Other 3,570 3,592
-----------------------------------------------------------------------
Total $275,733 $235,014
=======================================================================
9
j) The distribution of total assets by business segment was as follows:
August 31, May 31,
---------- -------
2003 2003
---- ----
(in thousands)
Central laboratory $19,408 $19,175
Clinical research 256,325 215,839
---------------------------------------------------------- -------------
Total $275,733 $235,014
========================================================================
10
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, 2003. 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 2,500 employees and operations in 31 locations in 18 countries.
Our main operations are in the United States, South America, Europe and the Rest
of the World. For the three months ended August 31, 2003, we derived
approximately 64.5%, 32.4%, and 3.1% of our net revenue in the United States,
Europe and Rest of World, respectively.
We earn revenues by providing a number of different services to our clients.
These services include clinical trials management, biometric activities,
consulting and laboratory services. We recognize biometric, consulting and
laboratory revenues on a fee-for-service basis. Our laboratory service contracts
are multiple element arrangements, with laboratory kits and laboratory testing
representing the contractual elements. We determine the fair values for these
elements, each of which can be sold separately, based on objective and reliable
evidence of their respective fair values. Our laboratory contracts entitle us to
receive non-refundable set up fees and we allocate such fees as additional
consideration to the contractual elements based on the proportionate fair values
of the elements. We recognize revenues for the elements on the basis of the
number of deliverable units completed in a period.
We recognize clinical trials revenue on the basis of the relationship between
time incurred and the total estimated duration of the contract as this
represents the most accurate pattern over which our contractual obligations are
fulfilled. We invoice our customers upon achievement of specified contractual
milestones. This mechanism, which allows us to receive payment from our
customers throughout the duration of the contract, is not reflective of revenue
earned. We recognize revenues over the period from the awarding of the
customer's contract to study completion and acceptance. This requires us to
estimate total expected revenue, time inputs, contract costs, profitability and
expected duration of the clinical trial. These estimates are reviewed
periodically and, if any of these estimates change or actual results differ from
expected results, then an adjustment is recorded in the period in which they
become readily estimable.
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.
11
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, Yen,
Israeli New Shekels, Latvian Lats, Swedish Krona, Argentine Peso, South African
Rand, Indian Rupee, Russian Rouble, Hungarian Forint and Canadian dollar. 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.
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 August 31, 2003, we have received
$1,361,057 and $1,657,598 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 August 31, 2003 Compared with Three Months Ended August 31,
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
------------------
August 31, August 31, 2003
---------- ---------- ----
2003 2002 to 2002
---- ---- -------
Percentage
----------
Percentage of Net Revenue Increase
------------------------- --------
Net revenue............................ 100.0% 100.0% 47.1%
Costs and expenses:
Direct costs........................... 54.7% 54.3% 48.3%
Selling, general and administrative.... 30.4% 31.2% 43.6%
Depreciation and amortization.......... 3.8% 3.4% 64.9%
Income from operations................. 11.1% 11.1% 46.0%
Net revenue increased by $22.0 million, or 47.1%, from $46.9 million to $68.9
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 $8.0 million for the three
12
months ended August 31, 2003. Including the impact of acquisitions, revenues in
the United States, Europe/Rest of World grew 33.1% and 81.7%, respectively. For
the three months ended August 31, 2003, net revenue for our central laboratory
business fell by 20.4% from $7.2 million to $5.7 million while our clinical
research segment grew by 59.3% from $39.7 million to $63.2 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 lower volumes in the quarter compared to the comparative period.
Direct costs increased by $12.3 million, or 48.3%, from $25.4 million to $37.7
million, primarily due to increased staff numbers needed to support increased
project related activity and increased costs arising from the acquisitions
amounting to $4.8 million. Direct costs, as a percentage of net revenue
increased from 54.3% in the three months to August 31, 2002 to 54.7% for the
quarter ended August 31, 2003, or fell to 54.0% when the effects of acquisitions
have been excluded.
Selling, general and administrative expenses increased by $6.4 million, or
43.6%, from $14.6 million to $21.0 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of $2.3 million not included in the
comparative period. As a percentage of net revenue, selling, general and
administrative expenses, decreased from 31.2% in the three months to August 31,
2002, to 30.4% for the quarter ended August 31, 2003 or 30.7% when the effects
of acquisitions have been excluded.
Depreciation and amortization expense increased by $1.0 million, or 64.9%, from
$1.6 million to $2.6 million. 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 and increased cost arising from acquisitions of
$0.2 million in the current quarter. As a percentage of net revenue,
depreciation and amortization increased from 3.4% of net revenues in the three
months to August 31, 2002, to 3.8% for the three months ended August 31, 2003,
or 4.0% when the effects of acquisitions have been excluded.
Income from operations increased by $2.4 million, or 46.0%, from $5.2 million to
$7.6 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 remained unchanged at 11.1% for the three
months ended August 31, 2003, over the comparative period. For the quarter,
income from operations, as a percentage of net revenue, for the central
laboratory was (21.5%) from 11.1% in the same quarter in fiscal 2003, due
principally to lower volumes in the quarter ended August 31, 2003. Operating
margins for our clinical research segment increased from 11.2% in the three
months ended August 31, 2002, to 14.0% for the three months ended August 31,
2003, due principally to improved staff utilization.
Net interest income for the three months ended August 31, 2003, was $47,000
compared to $186,000 for the equivalent period last year. Net cash invested
increased from $11.2 million at May 31, 2003, to $51.4 million at August 31,
2003, due principally to the net proceeds of US$44.3 million raised in our
secondary offering in August, 2003. Lower interest rates for the first quarter
of fiscal 2004, when compared to the same period last year, contributed to the
lower returns on our investments.
Our effective tax rate for the three months ended August 31, 2003 was 26.9%
compared to 26.5% 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, net proceeds of $49.1 million raised in our initial public offering
in May 1998 and net proceeds of $44.3 million, raised in our secondary offering
in August 2003. 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 three months ended August 31, 2002 and August 31, 2003,
amounted to $27.7 million and $40.3 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
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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 August 31, 2003, our working capital amounted to $99.4 million, compared
to $53.8 million at May 31, 2003. The most significant influence on our
operating cash flow is revenue outstanding, which comprises accounts receivable
and unbilled revenue, less 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 at August 31, 2003, was 64
days, unchanged from the 64 days at May 31, 2003.
Net cash used in operating activities was $0.2 million in the three months ended
August 31, 2003, compared to net cash provided by operating activities of $2.0
million in the three months ended August 31, 2002.
Net cash used in investing activities was $3.5 million in the three months ended
August 31, 2003, compared to $4.8 million used in investing activities in the
three months ended August 31, 2002.
Net cash provided by financing activities was $46.0 million in the three months
ended August 31, 2003, compared with $0.7 million used in financing activities
in the three months ended August 31, 2002. The main reason for this increase is
the receipt of the net proceeds of $45.3 million, following the companies
placing of 1,500,000 American Depositary Shares in August 2003.
As a result of these cash flows, cash and cash equivalents increased by $39.1
million in the three months ended August 31, 2003, compared to a decrease of
$3.4 million in the three months ended August 31, 2002.
On July 3, 2003, ICON entered into a facility agreement (the "Facility
Agreement") for the provision of a term loan facility of U.S.$40 million,
multi-currency overdraft facility of U.S.$5 million; and revolving credit
facility of U.S.$15 million (the "Facilities") with The Governor and Company of
the Bank of Ireland and Ulster Bank Ireland Limited (the "Banks"). The
obligations of the borrowers under the Facilities are secured by certain
composite guarantees and indemnities and pledges in favour of each of the banks.
This facility bears interest at an annual rate equal to the Banks Prime Rate
plus three quarters of one percent. The Company and certain subsidiaries are
entitled to make borrowings under a term loan facility of U.S.$40 million and a
multi currency overdraft facility of U.S.$5 million. As at August 31, 2003, the
full amount of these facilities were available to be drawn down. ICON Clinical
Research, Inc. (a subsidiary of ICON plc) is entitled to make borrowings under a
revolving credit facility of U.S.$15 million. As at August 31, 2003, U.S.$9
million of this facility was available to draw down.
On November 17, 1998, we entered into an overdraft facility (the "A.I.B.
facility") for (euro)2,539,000 (U.S.$2,759,893) with Allied Irish Banks plc
("A.I.B."). This facility bore an annual interest rate equal to A.I.B. Bank's
Prime Rate plus one-quarter of one percent. The full sum of the unpaid principal
and interest was repayable on demand. This facility was terminated on July 3,
2003.
On July 29, 2002, we entered into an additional A.I.B. facility for
STG(pound)50,000 (U.S.$78,844) This facility bore 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 was repayable on demand. This facility was terminated on
July 3, 2003.
Our U.S. subsidiary, ICON Clinical Research, Inc. (the "Borrower"), had a $12
million secured line of credit (the "PNC Facility") with PNC Bank N.A.
("P.N.C."). The PNC Facility bore interest at an annual rate equal to PNC's
Prime Rate less three-quarters of one percent. The full sum of the unpaid
principal and interest was payable on demand. The PNC Facility was secured by a
first priority security interest in certain assets of the Borrower. This
facility was terminated on July 3, 2003.
We have entered into an overdraft agreement with A.I.B., whereby we guaranteed
any overdrafts of our subsidiaries, ICON Clinical Research GmbH and ICON
Clinical Research Israel Ltd., up to an amount (euro)112,484 (U.S.$122,270) and
U.S.$250,000 (ILS 1,112,743), respectively. As at August 31, 2003, the full
German 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
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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 September 9, 2003, we completed the acquisition of Globomax LLC, a leading US
Drug Development Company which provides a range of development and consulting
services to the Pharmaceutical and Biotechnology industries. We acquired
Globomax for an initial consideration of $11 million in cash, with further
payments of up to $4 million payable over the next three fiscal years, subject
to the achievement of certain performance targets.
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 August 2001, the FASB 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). The Company adopted SFAS No. 144 on June 1, 2002. Adoption of SFAS
No. 144 did not have a material impact on the Company's results of operations
and financial position.
In November 2001, the Emerging Issues Task Force, or 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. Reimbursed costs include such items as payments to
investigators and travel costs for our clinical research staff. The Company does
not generally earn a profit on these costs. The Company has always included such
reimbursed costs within the measure of gross revenues and adoption of EITF Issue
01-14 had no effect on the 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 have been adopted for the transactions occurring subsequent to May 15,
2002. Adoption of SFAS No. 145 did not have a material impact on the Company's
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 146 addresses financial
accounting reporting for costs associated with exit or disposal activities and
nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity". SFAS 146 requires
that a liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. SFAS No. 146 did not have a material impact
on our results of operations and financial postion.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"), This interpretation addresses the disclosure
to be made by a guarantor in its financial statements about its obligation under
guarantees. FIN 45 also requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, that is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The disclosure requirements in this Interpretation are effective for
financial statements of interim and annual periods ending after December 15,
2002. The recognition and measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. Adoption of FIN 45 did not have a significant
effect on the Company's financial position or results of operations.
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In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB statement No.
123" ("SFAS 148"). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The enhanced disclosure requirements are included in the
financial statements. The Company has decided to continue to account for stock
options in accordance with the provisions of APB No. 25.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which interprets Accounting Research
Bulletin ("ARB") No. 51, Consolidated Financial Statements. FIN 46 clarifies the
application of ARB No. 51 with respect to the consolidation of certain entities
(variable interest entities - "VIE's") to which the usual condition for
consolidation described in ARB No. 51 does not apply because the controlling
financial interest in VIE's may be achieved through arrangements that do not
involve voting interests. In addition, FIN 46 requires the primary beneficiary
of VIE's and the holder of a significant variable interest in VIE's to disclose
certain information relating to their involvement with the VIE's. The provisions
of FIN 46 apply immediately to VIE's created after January 31, 2003, and to
VIE's in which an enterprise obtains an interest after that date. FIN 46 applies
in the first fiscal year beginning after June 15, 2003, to VIE's in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company did not create or obtain an interest in a VIE after January 31, 2003
and does not expect the impact of fully adopting FIN 46 to have a significant
impact on our financial statements.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives Implementation
Group, (2) developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition of a
derivative. Statement 149 has multiple effective date provisions depending on
the nature of the amendment to Statement 133. Under SFAS No. 133, the Company's
foreign exchange contracts do not qualify for hedge accounting treatment. The
Company does not expect the impact of adopting Statement 149 to have a
significant impact on our financial statements.
On May 15, 2003, the FASB issued FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of non-public entities. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The Company does not expect the impact of adopting Statement 150 to
have a significant impact on our financial statements.
The Emerging Issues Task Force (EITF) has reached a final consensus on EITF
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This Issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities, specifically how
to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. The Issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003, with a possible alternative means of adoption by applying the new rules to
existing contracts and recording the effect of adoption as a cumulative effect
of a change in accounting principle. The Company have adopted EITF Issue No.
00-21 on June 1, 2003 and it did not have a significant impact on the financial
statements.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICON plc
September 26, 2003 /s/ Sean Leech
------------------------------ ---------------------------------
Date Sean Leech
Chief Financial Officer
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