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
For the fiscal year ended May 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
Fiscal Year Ended May 31, 2003
TABLE OF CONTENTS
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Page
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General.....................................................................2
Report of Independent Chartered Accountants.................................3
Consolidated Balance Sheets.................................................4
Condensed Consolidated Statements of Operations for the
twelve months ended May 31, 2003, 2002 and 2001.........................5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income....................................................6
Consolidated Statements of Cash Flows.......................................7
Notes to Consolidated Financial Statements..................................8
Signature Page.............................................................33
1
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
General
We are a Clinical Research Organization ("CRO") providing clinical research and
development services on a global basis to the pharmaceutical and biotechnology
industries. We specialize in the management, execution and analysis of complex,
multinational clinical trials in most major therapeutic areas. We believe that
we are one of a select group of CROs with the capability and expertise to
conduct clinical trials on a global basis. As of May 31, 2003, we had
approximately 2,300 employees and operations in 29 locations in 17 countries,
including the United States and major markets in Europe and Rest of World and
have managed clinical trials in 55 countries. For the fiscal year ended May 31,
2003, we derived approximately 70.3%, 27.0% and 2.7% 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.
During the fiscal year ended May 31, 2003, we commenced operations in Montreal,
Canada, Tampa, Florida, Raleigh, North Carolina and Moscow, Russia. We also
merged two existing California based operations into one office in Redwood City,
California.
On October 9, 2002, we acquired Barton & Polansky Associates, Inc ("BPA") and
its sister company, Managed Clinical Solutions, Inc ("MCS"), contract research
organizations in New York.
On January 24, 2003, we acquired Medeval Group Limited, ("Medeval"), a UK based
specialist provider of Phase I clinical trials to the pharmaceutical and
biotechnology industries.
On July 3, 2003, we entered into a creditline facility for a total of U.S.$60
million. This facility was entered into jointly with Bank of Ireland plc and
Ulster Bank Ireland Ltd, and replaces both the existing Allied Irish Banks plc
and the PNC facilities.
On July 21, 2003 we entered into a letter of intent for acquisition of Globomax
LLC, a drug development consultancy company based in Baltimore, Maryland, USA.
ICON plc's principal executive office is located at: South County Business Park,
Leopardstown, Dublin 18, Republic of Ireland. The contact telephone number of
this office is 353 (1) 291 2000.
2
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Directors and Shareholders of ICON plc
We have audited the accompanying consolidated balance sheets of ICON plc
and subsidiaries as of May 31, 2002 and 2003 and the related consolidated
statements of operations, shareholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended May
31, 2003. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Ireland and the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of ICON plc and subsidiaries as of May 31, 2002 and 2003, and
the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended May 31, 2003 in
conformity with accounting principles generally accepted in the United
States.
KPMG
Chartered Accountants
Dublin, Ireland
July 25, 2003
3
ICON plc
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
May 31,
2002 2003
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $36,291 $18,311
Short term investments - available for sale (Note 3) 18,551 -
Accounts receivable 41,306 74,645
Unbilled revenue 26,387 44,783
Other receivables 2,093 4,385
Deferred taxes (Note 12) 408 32
Prepayments and other current assets 5,183 8,326
-------------------------------------------------------------------------------------------------------------------
Total current assets 130,219 150,482
Other Assets:
Property, plant and equipment, net (Note 5) 25,482 39,503
Goodwill (Note 4) 10,093 45,029
-------------------------------------------------------------------------------------------------------------------
Total Assets $165,794 $235,014
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $5,788 $11,092
Payments on account 19,854 45,763
Other liabilities (Note 6) 16,308 28,289
Taxes payable 3,601 4,385
Bank overdraft and loan facilities (Note 7) 11,745 7,126
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 57,296 96,655
Other Liabilities:
Long term government grants (Note 10) 937 1,140
Long term finance leases - 309
Shareholders' Equity:
Ordinary shares, par value 6 Euro cents per share; 20,000,000 shares
authorized, 11,798,501 shares issued and outstanding at May 31, 2002 and
11,841,557 shares issued and outstanding at May 31, 2003 (Note 11) 839 841
Additional paid-in capital 60,348 61,164
Accumulated other comprehensive income (2,461) 7,787
Merger reserve 47 47
Retained earnings 48,788 67,071
-------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 107,561 136,910
-------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $165,794 $235,014
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
ICON plc
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
2001 2002 2003
(in thousands, except share and per share data)
Revenue:
Gross revenue $151,832 $218,842 $340,971
Subcontractor costs (35,669) (62,287) (115,246)
-------------------------------------------------------------------------------------------------------
Net revenue 116,163 156,555 225,725
Costs and expenses:
Direct costs 63,800 83,371 122,373
Selling, general and administrative 36,312 48,951 71,118
Depreciation and amortization 4,975 6,020 7,305
-------------------------------------------------------------------------------------------------------
Total costs and expenses 105,087 138,342 200,796
-------------------------------------------------------------------------------------------------------
Income from operations 11,076 18,213 24,929
Interest income 2,945 1,603 633
Interest expense (426) (487) (279)
-------------------------------------------------------------------------------------------------------
Income before provision for income taxes 13,595 19,329 25,283
Provision for income taxes (Note 12) (2,617) (5,129) (7,000)
-------------------------------------------------------------------------------------------------------
Net income $10,978 $14,200 $18,283
-------------------------------------------------------------------------------------------------------
Net income per ordinary share:
Basic $0.97 $1.22 $1.55
------------------------------------------------------------------------ ---------------- --------------
Diluted $0.92 $1.16 $1.50
------------------------------------------------------------------------ ---------------- --------------
Weighted average number of ordinary shares outstanding:
Basic 11,292,610 11,656,153 11,813,788
------------------------------------------------------------------------ ---------------- --------------
Diluted 11,943,849 12,241,820 12,181,094
------------------------------------------------------------------------ ---------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
ICON plc
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
-------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Paid-in Comprehensive Retained Merger
Shares Amount Capital Income Earnings Reserve Total
(in thousands, except share and per share data)
---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 11,153,669 $851 $55,665 $(3,120) $23,610 $47 $77,053
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income - - - - 10,978 - 10,978
Currency translation adjustment - - - (2,291) - - (2,291)
--------------
Total comprehensive income 8,687
Exercise of share options 275,960 15 474 - - - 489
Renominalization of Ordinary Shares
- (47) 47 - - - -
Deferred tax benefit on exercise
of options 351 - - 351
- - -
---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2001 11,429,629 $819 $56,537 $(5,411) $34,588 $47 $86,580
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income - - - - 14,200 - 14,200
Currency translation adjustment - - - 2,950 - - 2,950
--------------
Total comprehensive income 17,150
Exercise of share options 358,100 19 2,655 - - - 2,674
Shares issued 10,772 1 364 - - - 365
Deferred tax benefit on
exercise of options - - 792 - - - 792
---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2002 11,798,501 $839 $60,348 $(2,461) $48,788 $47 $107,561
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income - - - - 18,283 - 18,283
Currency translation adjustment - - - 10,248 - - 10,248
--------------
Total comprehensive income 28,531
Exercise of share options 39,360 2 726 - - - 728
Share issue costs - - (35) - - - (35)
Shares issued 3,696 - 77 - - - 77
Deferred tax benefit on
exercise of options - - 48 - - - 48
---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2003 11,841,557 $841 $61,164 $7,787 $67,071 $47 $136,910
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
ICON plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------
Year Ended May 31,
2001 2002 2003
(in thousands)
Cash flows from operating activities:
Net income $10,978 $14,200 $18,283
Adjustments to reconcile net income to net cash
(used in)/ provided by operating activities:
Loss on disposal of fixed assets 89 46 -
Depreciation 4,765 6,020 7,305
Goodwill amortization 210 - -
Amortization of grants (12) (46) (36)
Deferred taxes (38) 19 376
Changes in assets and liabilities:
Increase in accounts receivable (12,789) (10,873) (23,232)
Increase in unbilled revenue (6,759) (5,376) (14,480)
(Increase)/decrease in other receivables (2,074) 2,062 7,515
Increase in prepayments and other current assets (431) (2,697) (1,965)
Increase in payments on account 1,957 8,655 25,485
Increase/(decrease) in other liabilities 2,513 731 (1,787)
Increase in income taxes payable 1,096 2,897 253
(Decrease)/increase in accounts payable 1,631 3,768
(1,075)
-------------------------------------------------------------------------------------------------------------------
Net cash (used in) /provided by operating activities (1,570) 17,269 21,485
Cash flows from investing activities:
Purchase of fixed assets (6,689) (10,425) (15,788)
Purchase of subsidiary undertakings (1,754) - (36,873)
Cash acquired with subsidiary undertakings 555 - 1,910
Deferred payments in respect of prior year acquisitions (149) (2,615) (3,078)
Sale of short term investments 4,455 29,868 18,551
Purchase of short term investments (18,991) (12,478) -
Receipt of government grant - 464 -
-------------------------------------------------------------------------------------------------------------------
Net cash (used in) /provided by investing activities (22,573) 4,814 (35,278)
Cash flows from financing activities:
Proceeds / (repayment of) from bank overdraft 9,339 547 (5,319)
Repayment of long term debt (50) (338) -
Proceeds from exercise of share options and issue of shares 489 2,674 693
Repayment of other liabilities (215) (165) -
-------------------------------------------------------------------------------------------------------------------
Net cash provided by /(used in) financing activities 9,563 2,718 (4,626)
Effect of exchange rate movements on cash (793) 311 439
-------------------------------------------------------------------------------------------------------------------
Net (decrease) /increase in cash and cash equivalents (15,373) 25,112 (17,980)
Cash and cash equivalents at beginning of year 26,552 11,179 36,291
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $11,179 $36,291 $18,311
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
7
ICON plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
ICON plc and subsidiaries ("The Company") is a Contract Research Organization
("CRO") providing clinical research and development services on a global basis
to the pharmaceutical and biotechnology industries. The Company specializes in
the management, execution and analysis of complex, multinational clinical trials
in most major therapeutic areas. The Company believes that it is one of a select
group of CROs with the capability and expertise to conduct clinical trials on a
global basis. As of May 31, 2003, the Company had approximately 2,300 employees
and operations in 29 locations in 17 countries, including the United States and
major markets in Europe and Rest of World and has managed clinical trials in 55
countries. For the fiscal year ended May 31, 2003, we derived approximately
70.3%, 27.0% and 2.7% of our net revenue in the United States, Europe and Rest
of World, respectively.
2. Significant Accounting Policies
The accounting policies noted below were applied in the preparation of the
accompanying financial statements of the Company and are in conformity with
accounting principles generally accepted in the United States.
(a) Basis of consolidation
The consolidated financial statements include the financial statements of ICON
plc and all of its subsidiaries. All significant intercompany profits,
transactions and account balances have been eliminated. The results of
subsidiary undertakings acquired in the year are included in the consolidated
statement of operations from the date of acquisition.
(b) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(c) Revenue recognition
The Company primarily earns revenues by providing a number of different services
to its customers. These services include clinical trials management, biometric
activities, consulting and laboratory services. Contracts range in duration from
a number of months to several years.
Clinical trials management revenue is earned on the basis of the relationship
between time incurred and the total estimated duration of the trial. Biometrics
revenue is recognized on a fee-for-service method on the basis of the number of
units completed in a period as a percentage of the total number of contracted
units. Consulting revenue is recognized on a fee-for-service basis as the
related service is performed. Laboratory service revenue is recognized on a
fee-for-service basis. The Company accounts for laboratory service contracts as
multiple element arrangements, with contractual elements comprising laboratory
kits and laboratory testing, each of which can be sold separately. Fair values
for contractual elements are determined by reference to objective and reliable
evidence of their fair values. Non-refundable set-up fees are allocated as
additional consideration to the contractual elements based on the proportionate
fair values of each of these elements. Revenues for contractual elements are
recognised on the basis of the number of deliverable units completed in the
period.
Contracts generally contain provisions for renegotiation in the event of changes
in the scope, nature, duration, volume of services or conditions of the
contract. Renegotiated amounts are recognized as revenue by revision to the
total contract value arising as a result of an authorized customer change order.
Provisions for losses to be incurred on contracts are recognized in full in the
period in which it is determined that a loss will result from performance of the
contractual arrangement.
8
The difference between the amount of revenue recognized and the amount billed on
a particular contract is included in the balance sheet as unbilled revenue.
Normally, amounts become billable upon the achievement of certain milestones, in
accordance with pre-agreed payment schedules included in the contract or on
submission of appropriate billing detail. Such cash payments are not
representative of revenue earned on the contract as revenues are recognized over
the period in which the specified contractual obligations are fulfilled. Amounts
included in unbilled revenue are expected to be collected within one year and
are included within current assets. Advance billings to customers, for which
revenue has not been recognized, are recognized as payments on account within
current liabilities.
In the event of contract termination, if the value of work performed and
recognized as revenue is greater than aggregate milestone billings at the date
of termination, cancellation clauses ensure that the Company is paid for all
work performed to the termination date.
(d) Subcontractor costs
Subcontractor costs comprise investigator payments and certain other costs which
are reimbursed by clients under terms specific to each contract and are deducted
from gross revenue in arriving at net revenue. Investigator payments are accrued
based on patient enrollment over the life of the contract. Investigator payments
are made based on predetermined contractual arrangements, which may differ from
the accrual of the expense. Payments to investigators in excess of the accrued
expense are classified as prepaid expenses and accrued expense in excess of
amounts paid are classified as accounts payable.
(e) Direct costs
Direct costs consist of compensation and associated employee benefits for
project-related employees and other direct project-related costs.
(f) Advertising costs
All costs associated with advertising and promotion are expensed as incurred.
The advertising and promotion expense was U.S.$1,166,000, U.S.$988,000 and
U.S.$1,336,000 for the years ended May 31, 2001, 2002 and 2003 respectively.
(g) Foreign currencies and translation of subsidiaries
The Company's financial statements are prepared in United States dollars.
Transactions in currencies other than United States dollars are recorded at the
rate ruling at the date of the transactions. Monetary assets and liabilities
denominated in currencies other than United States dollars are translated into
United States dollars at exchange rates prevailing at the balance sheet date.
Adjustments resulting from these translations are charged or credited to income
and where material are separately disclosed. For the years ended May 31, 2001,
2002 and 2003 amounts (credited)/charged to income amounted to (U.S.$1,474,000),
U.S. $1,412,000 and U.S.$1,968,000 respectively.
The financial statements of subsidiaries with other functional currencies are
translated at year end rates for the balance sheet and average rates for the
income statement. Translation gains and losses arising are reported as a
movement on reserves.
During the year, the Company entered into foreign exchange currency contracts to
manage its exposure against currency fluctuations on anticipated Euro
denominated cashflows. Currency gains and losses arising in the year under these
arrangements are recorded in the statement of operations.
(h) Disclosure about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of
each material class of financial instrument:
Cash, cash equivalents, unbilled revenue, other receivables, short term
investments, prepayments and other current assets, accounts receivable, accounts
payable, investigator payments, payments received on account, accrued
9
liabilities, accrued bonuses, bank overdraft and taxes payable carrying amount
approximates fair value due to the short term maturities of these instruments.
Long-term debt and other liabilities carrying amounts approximate fair value
based on net present value of estimated future cash flows.
(i) Leased Assets
Costs in respect of operating leases are charged to the statement of operations
on a straight line basis over the lease term.
Assets acquired under capital finance leases are included in the balance sheet
at the present value of the future minimum lease payments and are depreciated
over the shorter of the lease term and their remaining useful lives. The
corresponding liabilities are recorded in the balance sheet and the interest
element of the capital lease rental is charged to interest expense.
(j) Goodwill
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 changed 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.
The Company adopted SFAS No.142 effective June 1, 2001 and ceased amortization
of goodwill as of June 1, 2001. Goodwill amortization for the year ended May 31,
2001 amounted to U.S.$210,000. The Company does not have any intangible assets.
SFAS No.142 requires a two step impairment test for goodwill. The first step is
to compare the carrying amount of the reporting units' assets to the fair value
of the reporting unit. If the carrying amount exceeds the fair value then a
second step is required to be completed which involves the fair value of the
reporting unit being allocated to each asset and liability with the excess being
implied goodwill. The impairment loss is the amount by which the recorded
goodwill exceeds the implied goodwill. The Company has completed its
transitional and annual assessments of goodwill impairment and concluded that no
indication of goodwill impairment existed at June 1, 2001, May 31, 2002 or 2003.
(k) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
initial maturities of three months or less and is stated at cost, which
approximates market value.
(l) Short term investments - available for sale
The Company has classified short-term investments as available for sale in
accordance with the terms of SFAS No.115 "Accounting for Certain Investments in
Debt and Equity Securities". Realized gains and losses are determined using
specific identification. The investments are reported at fair value, with
unrealized gains or losses reported in a separate component of shareholder
equity. In the years to May 31, 2001, 2002 and 2003 no unrealized gains or
losses arose. Any differences between the cost and fair value of the investments
are represented by accrued interest.
(m) Inventory
Inventory is valued at the lower of cost and net realizable value and after
provisions for obsolescence. Cost in the case of raw materials comprises the
purchase price and attributable costs, less trade discounts. Cost in the case of
work in progress and finished goods, comprises fixed labor, raw materials costs
and attributable overheads.
10
(n) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of property, plant and equipment is computed using the straight
line method based on the estimated useful lives of the assets as listed below:
Years
-----
Building 40
Computer equipment and software 4
Office furniture and fixtures 8
Laboratory equipment 5
Motor vehicles 5
Leasehold improvements are amortized using the straight-line method over the
estimated useful life of the asset or the lease term, whichever is shorter.
(o) Income taxes
The Company applies Statement of Financial Accounting Standard ("SFAS") No. 109,
"Accounting for Income Taxes," which requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
(p) Government grants
Government grants received relating to capital expenditure are shown as deferred
income and credited to income on a basis consistent with the depreciation policy
of the relevant assets.
Grants relating to categories of operating expenditures are credited to income
in the period in which the expenditure to which they relate is charged.
Under the grant agreements amounts received may become repayable in full should
certain circumstances specified within the grant agreements occur, including
downsizing by the Company, disposing of the related assets, ceasing to carry on
its business or the appointment of a receiver over any of its assets.
The Company has not recognized any loss contingency having assessed as remote
the likelihood of these events arising.
(q) Pension costs
The Company contributes to defined contribution plans covering all eligible
employees. The Company contributes to these plans based upon various fixed
percentages of employee compensation and such contributions are expensed as
incurred.
The Company operates, through a subsidiary, a defined benefit plan for certain
of its United Kingdom employees. The Company accounts for the costs of this plan
using actuarial models required by SFAS No.87, "Employers Accounting for
Pensions". Disclosures are presented in accordance with the requirements of SFAS
No.132, "Employees' Disclosures about Pensions and Other Post-retirement
Benefits".
(r) Net income per ordinary share
11
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:
Year Ended May 31,
2001 2002 2003
Weighted average number of ordinary shares
outstanding for basic net income per
ordinary share 11,292,610 11,656,153 11,813,788
Effect of dilutive share options outstanding 651,239 582,908 367,306
Effect of dilutive shares to be issued as part of
deferred consideration - 2,759 -
----------------------------------------------------------------------------------------------------------
Weighted average number of ordinary shares for
diluted net income per ordinary share 11,943,849 12,241,820 12,181,094
----------------------------------------------------------------------------------------------------------
(s) Stock-based compensation
The Company accounts for its share options in accordance with the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows
entities to continue to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. APB No. 25 permits entities to recognize as expense, over the
vesting period, the fair value of all stock- based awards on the date of grant.
The Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share
as if the fair value method of SFAS No. 123 had been applied to all outstanding
and unvested stock options in each period.
Year Ended May 31,
2001 2002 2003
(in thousands)
(except per share data)
Net income, as reported $10,978 $14,200 $18,283
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
- - -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,190) (1,609) (2,096)
--------------------------------------------------------------------------------------------------------
Pro forma net income $9,788 $12,591 $16,187
--------------------------------------------------------------------------------------------------------
Earnings per share (in $):
Basic - as reported $0.97 $1.22 $1.55
Basic - pro forma 0.87 1.08 1.37
Diluted - as reported 0.92 1.16 1.50
Diluted - pro forma 0.82 1.03 1.33
--------------------------------------------------------------------------------------------------------
12
(t) Impairment of long-lived assets
Long lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
selling costs.
3. Short term investments - available for sale
The Company has classified its entire investment portfolio comprising floating
rate and medium term minimum "A" rated corporate securities, as available for
sale. The investments are reported at fair value, with unrealized gains or
losses reported in a separate component of shareholder equity. In the years to
May 31, 2001, 2002 and 2003 no unrealized gains or losses arose. Any differences
between the cost and fair value of the investments are represented by accrued
interest.
13
4. Goodwill
2002 2003
(in thousands)
Opening Goodwill .............................. $6,642 $10,093
Arising during the year........................ - 32,302
Arising on earn-out (current and prior
year acquisitions)........................... 3,287 2,003
Foreign exchange movement...................... 164 631
--------------------------------------------------------------------------
Closing Goodwill............................... $10,093 $45,029
--------------------------------------------------------------------------
The distribution of goodwill by business segment was as follows:
2002 2003
(in thousands)
Central laboratory $ 6,596 $6,596
Clinical research 3,497 38,433
-------------------------------------------------------------------------
Total $10,093 $45,029
-------------------------------------------------------------------------
In July 2001 the Financial Accounting Standards Board, or FASB, issued two
new statements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". Those Statements changed 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. The
Company has no intangible assets with infinite lives. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, ceased
upon adoption of SFAS No. 142. The Company adopted SFAS No. 142, effective
June 1, 2001.
The following table reconciles the prior periods' reported net income to
their prospective pro forma balances adjusted to exclude goodwill
amortization, which is no longer recorded under SFAS No. 142:
14
Year
ended May
31, 2001
(in thousands,
except per share
data)
Reported net income $10,978
Add back goodwill amortization 210
---------------------
Adjusted net income $11,188
---------------------
Basic net income per ordinary share
Reported $0.97
Add back goodwill amortization 0.02
---------------------
Adjusted basic net income per share $0.99
---------------------
Diluted net income per ordinary share
Reported $0.92
Add back goodwill amortization 0.02
---------------------
Adjusted diluted net income per share $0.94
---------------------
(a) Acquisition of YRCR Ltd.
On January 27, 2000, the Company acquired YRCR Limited ("YRCR"), a U.K. based
regulatory consultancy company. The Company acquired YRCR in exchange for cash
of Stg(pound)500,000 (U.S.$819,000) and 51,387 ordinary shares, the fair market
value of which was Stg(pound)500,000 (U.S.$819,000) on the date the contract
terms were agreed, excluding costs of acquisition. The acquisition of YRCR has
been accounted for as a purchase.
Earn-out provisions were built into the contract, over the period to May 2003 up
to a maximum additional consideration of Stg(pound)2.0 million (U.S.$2.9
million). These earn-outs were paid in the form 50% cash and 50% shares.
Additional purchase consideration was recorded as goodwill.
On April 3, 2000, an additional cash payment of Stg(pound)250,000 (U.S.$393,043)
was made to YRCR as part of the earn-out provision. On May 31, 2000, an
additional 24,272 ordinary shares were issued to YRCR with a fair market value
of Stg(pound)250,000 (U.S.$367,500).
As part of the earn-out provisions, on August 31, 2001, an additional 10,772
ordinary shares were issued to YRCR with a fair market value of
Stg(pound)250,000 (U.S.$365,400), and, on September 3, 2001, an additional cash
payment of Stg(pound)250,000 (U.S.$365,400) was made. Of these amounts
Stg(pound)400,000 (U.S.$590,800) was provided at May 31, 2001, as the earn-out
target had been reached, with the balance of Stg(pound)100,000 (U.S.$140,000)
accounted for during the year ended May 31, 2002.
On August 30, 2002, an additional cash payment of Stg(pound)50,000 (U.S.$77,526)
was made to YRCR and on October 8, 2002, an additional 3,696 ordinary shares
were issued to YRCR with a fair market value of Stg(pound)50,000 (U.S.$77,440)
as part of the earn-out provisions. Both these earn out payments were accrued
for at May 31, 2002.
The initial purchase price of U.S.$1,838,000 including costs of acquisition
together with subsequent additional consideration of U.S.$1,646,309 for YRCR was
allocated as follows:
(in thousands)
Property, plant and equipment............................. $125
Goodwill.................................................. 3,169
Current assets............................................ 879
Accounts payable.......................................... (689)
-----------------------------------------------------------------------
Purchase price............................................ $3,484
-----------------------------------------------------------------------
15
(b) Acquisition of Protocole
On March 14, 2000, the Company acquired Protocole ("Protocole"), a Paris based
veterinary CRO. The Company acquired Protocole for initial cash consideration of
French Francs 4,000,000 (U.S.$586,240), 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 French Francs
4,000,000 depending on the performance of Protocole over the period to May 31,
2003. None of the earn-out provisions have been reached at May 31, 2003. The
acquisition of Protocole has been accounted for as a purchase.
The purchase price of U.S.$732,000 for Protocole was allocated as follows:
(in thousands)
Property, plant and equipment................... $12
Goodwill........................................ 731
Current assets.................................. 114
Current liabilities............................. (125)
------------------------------------------------------------
Purchase price.................................. $732
------------------------------------------------------------
(c) Acquisition of UCT (U.S.) Inc.
On June 8, 2000, the Company acquired UCT (U.S.) Inc. ("UCT"), subsequently
renamed ICON Laboratories Inc., a central laboratory company based in New York,
USA. The Company acquired UCT in exchange for cash of U.S.$1,200,000. Earn-out
provisions were built into the acquisition contract requiring the potential
payment of additional deferred consideration of U.S.$18 million depending on the
performance of UCT over the period to May 31, 2003. The acquisition of UCT has
been accounted for as a purchase.
Additional consideration paid was in the form of cash and was accounted for as
goodwill.
On September 1, 2001, an additional cash payment of U.S.$2,250,000 was made to
UCT as part of the earn-out provisions. The first earn-out target was reached as
at May 31, 2001 and this consideration has been included in the purchase price
below.
On August 30, 2002 the Company made a cash payment of U.S.$3,000,000 to the
former shareholders of UCT (U.S.) Inc., under the terms of an earn out provision
entered into on the acquisition of UCT on June 8, 2000. The earn-out target was
reached at May 31, 2002 and this consideration was recorded at that date in the
financial statements.
The purchase price of U.S.$7,003,000 including total earn-out provisions of
U.S.$5,250,000 and acquisition costs of U.S.$553,000 was allocated as follows:
(in thousands)
Property, plant and equipment....................... $1,415
Goodwill............................................ 6,667
Current assets...................................... 4,276
Accounts payable.................................... (5,355)
-----------------------------------------------------------------
Purchase price...................................... $7,003
-----------------------------------------------------------------
16
(d) 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 which
amounted to U.S.$0.8 million. 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, and April 15, 2003, additional cash payments of U.S.$3.7
million and U.S.$0.3 million respectively were 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.
(in thousands)
Property, plant & equipment $2
Goodwill 14,439
Current assets 9,533
Bank overdraft (700)
Current liabilities (2,795)
------------------------------------------------------------------
Purchase Price $20,479
------------------------------------------------------------------
The results of BPA and MCS have been included in the consolidated financial
statements from October 1, 2002.
(e) 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
Stg(pound)9.5 million (U.S.$15.5 million), excluding costs of acquisition which
amounted to U.S.$1.0 million. Earn-out provisions have been built into the
acquisition contract requiring the potential payment of additional deferred
consideration up to a maximum of Stg(pound)4.3 million (U.S.$6.9 million)
depending on the performance of Medeval over the period to May 31, 2004. Such
potential additional consideration will be accounted as goodwill. The total
amount of goodwill is expected to be tax deductible.
Stg(pound)1.4 million (U.S.$ 2.0 million) was accrued at May 31, 2003 as the
first earn-out target was reached and this amount has been included in the
purchase price below. 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.
(in thousands)
Property, plant and equipment $1,632
Goodwill 19,866
Current assets 2,738
Pension liabilities (see note 8) (2,588)
Other current liabilities (3,113)
-----------------------------------------------------------------------
Purchase Price $18,535
-----------------------------------------------------------------------
17
The results of Medeval have been included in the consolidated financial
statements from January 24, 2003.
The proforma effect of the BPA, MCS and Medeval acquisitions if completed on
June 1, 2002 would have resulted in net revenue, net income and earnings per
share for the fiscal years ended May 31, 2002 and 2003 as follows:
Year Ended May 31,
2002 2003
---- ----
(in thousands, except per share data)
Net Revenue $189,762 $243,348
Net Income $16,674 $19,140
Basic Earnings per Share $1.43 $1.62
Diluted Earnings Per Share $1.36 $1.57
In August 2002, prior to the date of acquisition, a U.S.$900,000 distribution
was made by BPA and MCS, to the former shareholders of BPA and MCS, which was
recorded as other expenses. In July 2001 and 2002, distributions were paid to
the former shareholders of Medeval by Medeval of Stg(pound)25,679 (U.S.$36,148)
and Stg(pound)109,700 (U.S.$168,134) respectively which were also recorded as
other expenses. These payments are included in the proforma results above.
5. Property, Plant and Equipment
May 31,
2002 2003
(in thousands)
Cost
Land.......................................... $661 $717
Building...................................... 5,034 7,874
Computer equipment and software............... 19,729 33,558
Office furniture and fixtures................. 10,014 13,418
Laboratory equipment.......................... 1,611 3,685
Motor vehicles................................. 37 38
Leasehold improvements........................ 6,033 6,921
--------------------------------------------------------------------------------
43,119 66,211
Less accumulated depreciation................. (17,637) (26,708)
--------------------------------------------------------------------------------
Property, plant and equipment (net)........... $25,482 $39,503
--------------------------------------------------------------------------------
Total cost above at May 31, 2003 includes U.S.$524,632 (2002: U.S.$Nil) relating
to assets acquired under capital finance leases. Related accumulated
depreciation amounted to U.S.$36,272.
6. Other Liabilities
May 31,
2002 2003
---- ----
(in thousands)
Accrued liabilities................................ $7,625 $13,562
Accrued bonuses.................................... 4,549 8,542
Accrued social welfare costs....................... 962 1,301
Contingent purchase consideration payable.......... 3,147 2,003
Short term government grants....................... 25 34
Accrued pension liability (note 8) ................ - 2,632
Short term finance leases (note 14)................ - 215
-------------------------------------------------------------------------------
$16,308 $28,289
-------------------------------------------------------------------------------
18
7. Bank Loans
The Company has short-term bank loan facilities as follows:
On November 17, 1998, the Company entered into an overdraft facility, (the
A.I.B. facility) for (euro)2.5million (U.S.$2.9million) 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. The full amount of the unpaid principal and interest is due
and repayable on demand. This A.I.B. facility expires on June 30, 2003. As of
May 31, 2003, the full amount of this facility was available to be drawn down.
On July 29, 2002, the Company entered into an additional A.I.B. facility for Stg
(pound)50,000 (U.S.$81,746). This facility bears interest at an annual rate
equal to A.I.B. Bank's Prime Rate plus two percent. The full amount of the
unpaid principal and interest is due and repayable on demand. This A.I.B.
facility expires on June 30, 2003. As of May 31, 2003, Stg (pound)8,816
(U.S.$14,413) of this facility was available to be drawn down.
The Company's U.S. subsidiary ICON Clinical Research, Inc.(the "borrower") has a
U.S.$12 million secured line of credit (the "PNC facility") with PNC Bank N.A.
("PNC"). Borrowings under the PNC Facility must be the lesser of (a) U.S.$12
million and (b) the sum of (i) 80% of the borrower's gross accounts receivable
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 plus one quarter 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. As of May 31,
2003, U.S.$5.1 million of this facility was available to be drawn down.
The Company entered into an overdraft agreement with A.I.B., whereby the company
guarantees any overdrafts of the subsidiaries ICON Clinical Research GmbH and
ICON Clinical Research Israel Ltd. up to an amount (euro)120,000 (U.S.$141,396)
and U.S.$250,000 (ILS 1,100,013), respectively. As of May 31, 2003, the full
German facility and Israeli facility were available to be drawn down.
8. Employee Benefits
Certain Company employees are eligible to participate in a defined contribution
plan (the "Plan"). Participants in the Plan may elect to defer a portion of
their pre-tax earnings into a pension plan, which is run by an independent
party. The Company matches each participant's contributions up to 6% of the
participant's annual compensation. Contributions to this plan are recorded, as
expense in the Consolidated Statement of Operations. Contributions for the years
ended May 31, 2001, 2002 and 2003 were U.S.$998,000, U.S.$1,265,000, and
U.S.$1,649,793 respectively.
The Company's United States operations maintain a retirement plan (the "U.S.
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Participants in the U.S. Plan may elect to defer a
portion of their pre-tax earnings, up to the Internal Revenue Service annual
contribution limit. The Company matches 50% of each participant's contributions,
each participant can contribute up to 6% of their annual compensation.
Contributions to this U.S. Plan are recorded, in the year contributed, as an
expense in the Consolidated Statement of Operations. Contributions for the years
ended May 31, 2001, 2002 and 2003 were U.S.$781,000, U.S.$1,320,000, and
U.S.$1,811,156 respectively.
19
One of the Company's subsidiaries which was acquired during the year, Medeval
Group Limited, operates a defined benefit pension plan in the United Kingdom for
its employees. The plan is managed externally and the related pension costs and
liabilities are assessed in accordance with the advice of a professionally
qualified actuary. Plan assets at May 31, 2003 consist of units held in
independently administered funds. The pension costs of this plan are presented
in the following tables in accordance with the requirements of SFAS No.132,
"Employees' Disclosures about Pensions and Other Post-retirement Benefits".
Change in benefit obligation May 31, 2003
(in thousands)
Benefit obligation at acquisition date $6,759
Service cost 186
Interest cost 127
Plan participants' contributions 96
Actuarial loss (22)
Foreign currency exchange rate changes 61
-----------------------------------------------------------------------------
Benefit obligation at end of year $7,207
-----------------------------------------------------------------------------
Change in plan assets May 31, 2003
(in thousands)
Fair value of plan assets at acquisition date $4,171
Actual return on plan assets (148)
Employer contributions 221
Plan participants' contributions 96
Foreign currency exchange rate changes 38
-----------------------------------------------------------------------------
Fair value of plan assets at end of year $4,378
-----------------------------------------------------------------------------
Funded status May 31, 2003
(in thousands)
Funded status $(2,829)
Unrecognized net loss 197
-----------------------------------------------------------------------------
Pension liability $(2,632)
-----------------------------------------------------------------------------
The net periodic pension cost was comprised of the May 31, 2003
following:
(in thousands)
Service cost $186
Interest cost 127
Expected return on plan assets (99)
-----------------------------------------------------------------------------
Net periodic pension costs $214
-----------------------------------------------------------------------------
The weighted average assumptions used in the calculation of the pension cost
were a discount rate of 5.10% (date of acquisition: 5.25%), an expected return
on plan assets of 6.50% (date of acquisition: 6.50%) and a 3.75% (date of
acquisition: 3.75%) rate of compensation increase.
20
9. Share Options
On January 17, 2003, the Company adopted the Share Option Plan 2003 (the "2003
Plan") pursuant to which the Compensation Committee of the Board may grant
options to officers and other employees of the Company or its subsidiaries for
the purchase of ordinary shares. Each option will be either an incentive stock
option, or ISO, as described in Section 422 of the Code or an employee stock
option, or NSO, as described in Section 422 or 423 of the Code. Each grant of an
option under the 2003 Plan will be evidenced by a Stock Option Agreement between
the optionee and the Company. The exercise price will be specified in each Stock
Option Agreement, however option prices for an ISO will not be less than 100% of
the fair market value of an ordinary share on the date the option is granted.
An aggregate of 1.5 million ordinary shares have been reserved under the 2003
Plan; and, in no event will the number of ordinary shares that may be issued
pursuant to options awarded under the 2003 Plan exceed 10% of the outstanding
shares, as defined in the 2003 Plan, at the time of the grant. Further, the
maximum number of ordinary shares with respect to which options may be granted
under the 2003 Plan during any calendar year to any employee shall be 100,000
ordinary shares.
No options can be granted after January 17, 2013.
The following table summarizes the transactions for the Company's share option
plans for the three year period ended May 31, 2003:
Options Weighted
Granted Average
Prior to Options Granted Number of Exercise
Jan 15, 1998 Under Plans Shares Price
Outstanding at May 31, 2000 756,880 661,610 1,418,490 $8.69
Granted - 199,500 199,500 $20.90
Exercised (254,220) (21,740) (275,960) $1.78
Canceled - (98,610) (98,610) $17.95
--------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2001 502,660 740,760 1,243,420 $11.45
--------------------------------------------------------------------------------------------------------------------
Granted - 223,540 223,540 $28.57
Exercised (210,630) (147,470) (358,100) $7.47
Canceled - (89,240) (89,240) $19.96
--------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2002 292,030 727,590 1,019,620 $15.85
--------------------------------------------------------------------------------------------------------------------
Granted - 283,445 283,445 $27.96
Exercised - (39,360) (39,360) $18.51
Canceled - (78,060) (78,060) $22.22
--------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 2003 292,030 893,615 1,185,645 $18.24
--------------------------------------------------------------------------------------------------------------------
None of the share option grants summarized in the above table resulted in
compensation expense as the option exercise price was equal to or greater than
the estimated fair value of ordinary shares on the date of the grant.
The following table summarizes information concerning outstanding and
exercisable share options as of May 31, 2003:
21
Options Outstanding Options Exercisable
Weighted Weighted
Range Average Average
Exercise Number of Remaining Exercise Number of
Price Shares Contractual Life Price Shares Exercise Price
$0.07 238,030 3.5 $0.07 238,030 $0.07
$5.45 54,000 2.3 $5.45 54,000 $5.45
$15.63 17,000 5.0 $15.63 7,000 $15.63
$17.00 6,400 5.0 $17.00 3,200 $17.00
$18.00 270,490 4.0 $18.00 203,720 $18.00
$21.25 129,920 6.0 $21.25 47,780 $21.25
$23.80 8,000 6.0 $23.80 3,200 $23.80
$26.50 10,000 6.5 $26.50 2,000 $26.50
$27.39 4,000 5.0 $27.39 2,000 $27.39
$29.00 171,060 6.6 $29.00 35,460 $29.00
$28.00 276,745 7.5 $28.00 1,500 $28.00
--------------------------------------------------------------------------------------------------------------
$0.07 - 29.00 1,185,645 5.3 $18.21 597,890 $10.72
--------------------------------------------------------------------------------------------------------------
Substantially all of the options granted at exercise prices from $15.63 to
$29.00 vest over a five year period from the date of grant. All other options
have fully vested as of May 31, 2003.
The weighted average fair value of stock options granted during fiscal 2001,
calculated using the Black-Scholes option pricing model, was $17.90 using the
following assumptions; expected dividend yield - 0%, risk free interest rate -
5.9%, expected volatility - 50% and expected life - 8 years.
The weighted average fair value of stock options granted during fiscal 2002,
calculated using the Black-Scholes option pricing model, was $16.07 using the
following assumptions; expected dividend yield - 0%, risk free interest rate -
5.57%, expected volatility - 50% and expected life - 8 years.
The weighted average fair value of stock options granted during fiscal 2003,
calculated using the Black-Scholes option pricing model, was $15.84 using the
following assumptions; expected dividend yield - 0%, risk free interest rate -
3.39%, expected volatility - 50% and expected life - 8 years.
Had the Company determined compensation expense based on the fair value at the
grant date for these options under SFAS No.123, "Accounting for Stock-Based
Compensation", the Company's net income for fiscal 2001, 2002 and 2003 would
have been reduced to the pro-forma amounts indicated below.
2001 2002 2003
(in thousands, except per share data)
Net Income as reported $10,978 $14,200 $18,283
pro-forma 9,788 12,591 16,187
Net Income per ordinary share
Basic as reported $0.97 $1.22 $1.55
pro-forma 0.87 1.08 1.37
Diluted as reported 0.92 1.16 1.50
pro-forma 0.82 1.03 1.33
22
10. Government Grants
May 31,
2002 2003
(in thousands)
Received and receivable $1,280 $1,280
Less accumulated amortization (244) (280)
Foreign exchange translation adjustment (74) 174
---------------------------------------------------------------------
962 1,174
Less current portion (25) (34)
---------------------------------------------------------------------
$937 $1,140
---------------------------------------------------------------------
Government grants amortized to the profit and loss account amounted to
U.S.$12,000, U.S.$46,000 and U.S.$36,000 for the years ended May 31, 2001, 2002
and 2003, respectively.
As of May 31, 2003 the Company had U.S.$1,351,000 in restricted retained
earnings, pursuant to the terms of the grant agreements.
11. Share Capital
Ordinary Shares
Holders of ordinary shares will be entitled to receive such dividends as may be
recommended by the board of directors of the Company and approved by the
shareholders and/or such interim dividends as the board of directors of the
Company may decide. On liquidation or a winding up of the Company, the par value
of the ordinary shares will be repaid out of the assets available for
distribution among the holders of the Company's ADSs and ordinary shares not
otherwise represented by ADRs. Holders of ordinary shares have no conversion or
redemption rights. On a show of hands, every holder of an ordinary share present
in person at a general meeting of shareholders, and every proxy, shall have one
vote, for each ordinary share held with no individual having more than one vote.
On November 22, 2000, the ordinary share capital of the Company was
redenominated from IR5p per share to (euro)0.06 per share. The renominalization
generated a capital conversion reserve fund of (euro)39,499 (U.S.$47,277) which
was recorded within additional paid in capital.
On January 28, 2000, the Company merged with Pacific Research Associates Inc.
("PRAI") in a transaction accounted for as a pooling-of-interests transaction.
The Company issued 838,828 ordinary shares of (euro)0.06 each to PRAI
shareholders for this transaction. These shares have been treated as outstanding
for all periods presented.
On January 27, 2000, the Company acquired YRCR for cash and shares. The Company
issued 51,387 ordinary shares of (euro)0.06 each to YRCR shareholders for this
transaction. At May 31, 2000, pursuant to an earn-out clause contained in the
purchase agreement with YRCR, a further 24,272 ordinary shares of (euro)0.06
each were issued to the YRCR shareholders and on August 31, 2001, a further
10,772 ordinary shares of (euro)0.06 were issued. On October 8, 2002, a further
3,696 ordinary shares of (euro)0.06 were issued (see note 4).
During the year to May 31, 2001, 275,960 options were exercised by employees at
an average exercise price of U.S.$1.78 per share.
During the year to May 31, 2002, a further 358,100 options were exercised by
employees at an average exercise price of U.S.$7.47 per share.
During the year to May 31, 2003, a further 39,360 options were exercised by
employees at an average exercise price of U.S.$18.51 per share for total
procceeds of U.S.$728,554.
23
12. Income Taxes
The U.S. based and Irish-based subsidiaries file tax returns in the United
States and Ireland, respectively. The other foreign subsidiaries are taxed
separately under the laws of their respective countries.
The components of income before provision for income tax expense are as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Ireland $3,194 $7,702 $6,556
Other 10,401 11,627 18,727
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Income before provision for income taxes $13,595 $19,329 $25,283
---------------------------------------------------------------------------
The components of total income tax expense are as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Provision for income taxes
Current:
Ireland $440 $1,164 $1,158
United States 1,613 3,684 4,334
Other 602 262 1,132
------------------------------------------------------------------------------
2,655 5,110 6,624
Deferred expenses/(benefit):
Ireland - - 31
United States (38) 19 345
------------------------------------------------------------------------------
Provision for income taxes 2,617 5,129 7,000
Shareholders' equity for compensation
expense for tax purposes in excess of
amounts recognized for financial
reporting purposes (351) (792) (48)
------------------------------------------------------------------------------
Total $2,266 $4,337 $6,952
------------------------------------------------------------------------------
On January 1,2001, Ireland's statutory income tax rate decreased from 24% to
20%, on January 1, 2002 from 20% to 16% and on January 1, 2003, from 16% to
12.5%. Certain activities carried out by the Irish company, principally data
processing services, are taxed at a reduced rate of 10%. The Company's
consolidated effective tax rate differed from the blended statutory rate as set
forth below;
24
Year Ended May 31,
2001 2002 2003
(in thousands)
Taxes at Irish statutory rate of 14.54% (18.33% in
2002; 22.33% in 2001) $3,035 $3,543 $3,676
Irish income at reduced rates (273) (537) (523)
Foreign and other income taxed at (reduced)/higher rates (616) 1,126 2,397
United States state tax net of United States Federal
benefit 249 468 556
Movement in valuation allowance (63) (127) 374
Non deductible expenses - 161 35
Other 285 495 485
-----------------------------------------------------------------------------------------------------------
Total provision for income taxes $2,617 $5,129 $7,000
-----------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
Year Ended May 31,
2002 2003
(in thousands)
Deferred tax liabilities:
Property, plant and equipment $ 497 $764
Goodwill and related assets 193 828
Other - 172
------------------------------------------------------------------------
Total deferred tax liabilities 690 1,764
Deferred tax assets:
Deferred revenue 287 -
Net operating loss carryforwards 1,376 2,292
Accrued expenses and payments on account 819 946
Deferred compensation expense 234 474
------------------------------------------------------------------------
Total deferred tax assets 2,716 3,712
Valuation allowance for deferred tax assets (1,618) (1,916)
------------------------------------------------------------------------
Deferred tax assets recognized $1,098 $1,796
------------------------------------------------------------------------
Net deferred tax asset $408 $32
------------------------------------------------------------------------
At May 31, 2002 and 2003, European subsidiaries had operating loss carryforwards
for income tax purposes that may be carried forward indefinitely, available to
offset against future taxable income, if any, of approximately U.S.$600,000 and
U.S.$1,400,000 respectively.
At May 31, 2002 and 2003, a U.S. subsidiary had a net operating loss
carryforwards for U.S. Federal and State income tax purposes, available to
offset against future taxable income if any of approximately U.S.$2,000,000,
which expires between 2009 and 2020. Under section 382 of the Internal Revenue
Code of 1986, as amended, the subsidiary's ability to use the net operating loss
carryforward is limited to U.S.$113,000 per year since the subsidiary
experienced a change in ownership of more than 50 percentage points in 2000.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
provided a valuation allowance for the years ended May 31, 2002 and 2003 of
U.S.$1,618,000
25
and U.S.$1,916,000 respectively. This valuation allowance is based on
management's belief that it is more likely than not that the European and US
entities' losses and other deferred tax assets will not be utilized given their
history of operating losses.
13. Significant Concentrations
The Company does business with most major international pharmaceutical companies
(see note 15). The Company has not written off any accounts receivable since
inception.
14. Commitments and Contingencies
The Company is not party to any litigation or other legal proceedings that the
Company believes could reasonably be expected to have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company has several non-cancellable operating leases, primarily for
facilities, that expire over the next 10 years. These leases generally contain
renewal options and require the Company to pay all executory costs such as
maintenance and insurance. The Company paid U.S.$7,618,000, U.S.$10,963,000 and
U.S.$15,743,000 in rental expense for the fiscal years ended May 31, 2001, 2002
and 2003, respectively. Future minimum rental commitments for operating leases
with non-cancellable terms in excess of one year are as follows:
Minimum rental payments
(in thousands)
2004 $16,975
2005 16,633
2006 14,755
2007 11,730
2008 10,720
Thereafter $58,776
---------------------------------------------------------------------------
The Company has a number of finance leases, primarily over furniture and
equipment, that expire over the next four years. Future commitments are as
follows:
Lease payments
(in thousands)
2004 $268
2005 244
2006 79
2007 48
Thereafter 19
Less future finance charges (134)
---------------------------------------------------------------------------
Total $524
---------------------------------------------------------------------------
The Company made a number of acquisitions in recent years with earn-out
provisions built into the purchase contracts, which may require cash payments of
U.S.$8,946,000 to be made during fiscal 2005 if the specified earn-out targets
are achieved.
15. Business Segment Information
The Company operates predominantly in the contract clinical research industry
providing a broad range of clinical research and integrated product development
services on a global basis for the pharmaceutical and biotechnology industries.
On June 8, 2000, the Company acquired for cash UCT (U.S.), Inc. ("UCT"),
subsequently renamed ICON Laboratories Inc., a central laboratory company based
in New York, USA. This, together with laboratory services based in Dublin, form
the central laboratory information disclosed below.
26
The Company's areas of operation outside of Ireland principally include the
United Kingdom, United States, Germany, Australia, Argentina, France, Japan,
Israel, Singapore, Canada, Sweden, The Netherlands, Latvia, South Africa and
India. Segment information for the fiscal years ended May 31, 2001, 2002 and
2003 is as follows:
a) The distribution of net revenue by geographical area was as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Ireland* $10,302 $20,406 $26,293
Rest of Europe 21,939 24,605 34,727
U.S. 82,572 107,520 158,707
Other 1,350 4,024 5,998
----------------------------------------------------------------------
Total $116,163 $156,555 $225,725
----------------------------------------------------------------------
* All sales shown for Ireland are export sales.
b) The distribution of net revenue by business segment was as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Central laboratory $13,564 $25,887 $26,168
Clinical research 102,599 130,668 199,557
------------------------------------------------------------------------
Total $116,163 $156,555 $225,725
------------------------------------------------------------------------
c) The distribution of income from operations by geographical area was as
follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Ireland $1,655 $7,706 $6,532
Rest of Europe 3,250 (3,397) 1,192
U.S. 6,424 13,398 17,091
Other (253) 506 114
----------------------------------------------------------------------
Total $11,076 $18,213 $24,929
----------------------------------------------------------------------
d) The distribution of income from operations by business segment was as
follows:
27
Year Ended May 31,
2001 2002 2003
(in thousands)
Central laboratory $(316) $3,660 $115
Clinical research 11,392 14,553 24,814
-----------------------------------------------------------------------
Total $11,076 $18,213 $24,929
-----------------------------------------------------------------------
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
Year Ended May 31,
2002 2003
(in thousands)
Ireland $9,795 $17,003
Rest of Europe 3,581 6,316
U.S. 11,438 15,066
Other 668 1,118
-----------------------------------------------------------------
Total $25,482 $39,503
---------------------------------------------- ------------------
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
Year Ended May 31,
2002 2003
(in thousands)
Central laboratory $2,721 $3,560
Clinical research 22,761 35,943
--------------------------------------------------------------------
Total $25,482 $39,503
--------------------------------------------------------------------
g) The distribution of depreciation and amortization by geographical area
was as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Ireland $973 $1,302 $2,330
Rest of Europe 728 975 1,138
U.S. 3,136 3,513 3,535
Other 138 230 302
---------------------------------------------------------------------
Total $4,975 $6,020 $7,305
---------------------------------------------------------------------
h) The distribution of depreciation and amortization by business segment
was as follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Central laboratory $732
$737 $591
Clinical research 4,238 5,429 6,573
-----------------------------------------------------------------------
Total $4,975 $6,020 $7,305
-----------------------------------------------------------------------
28
i) The distribution of total assets by geographical area was as follows:
Year Ended May 31,
2002 2003
(in thousands)
Ireland $36,549 $59,838
Rest of Europe 66,719 60,982
U.S. 60,789 110,602
Other 1,737 3,592
--------------------------------------------------------------
Total $165,794 $235,014
--------------------------------------------------------------
j) The distribution of total assets by business segment was as follows:
Year Ended May 31,
2002 2003
(in thousands)
Central laboratory $19,175
$16,566
Clinical research 149,228 215,839
-------------------------------------------------------------
Total $165,794 $235,014
-------------------------------------------------------------
k) The distribution of capital expenditures by geographical area was as
follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Ireland $1,656 $3,158 $6,375
Rest of Europe 621 2,563 1,686
U.S. 4,341 4,938 7,274
Other 71 291 658
--------------------------------------------------------------------
Total $6,689 $10,950 $15,993
--------------------------------------------------------------------
l) The distribution of capital expenditures by business segment was as
follows:
Year Ended May 31,
2001 2002 2003
(in thousands)
Central laboratory $547 $1,965 $1,520
Clinical research 6,142 8,985 14,473
---------------------------------------------------------------------
Total $6,689 $10,950 $15,993
---------------------------------------------------------------------
29
m) The following table sets forth the clients which represented 10% or more
of the Company's net revenue in each of the periods set out below.
Year Ended May 31,
2001 2002 2003
Client A 19% 14% 10%
Client B 15% * *
Client C * 16% 21%
Client D * 13% *
Client E * * 11%
* Net Revenue did not exceed 10%
16. Supplemental Disclosure of Cash Flow Information
Year Ended May 31,
2001 2002 2003
(in thousands)
Cash paid for interest $426 $462 $279
-----------------------------------------------------------------------
Cash paid for income taxes $727 $2,514 $7,186
-----------------------------------------------------------------------
17. New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143, which was 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. The adoption of this standard did not
have a material impact on the Company's results of operations and financial
position.
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
30
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.
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
31
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. Early adoption is permitted. The Company
will adopt EITF Issue No. 00-21 on June 1, 2003 and does not expect this will
have a significant impact on its financial statements.
18. Related Parties
On February 6, 1998, the Company entered into an Option Agreement with Rosa
Investment Limited ("Rosa"). Rosa's sole activity is to hold an investment in
Clear Investments Limited ("Clear"), the sole activity of which is to hold
Mr. Gray's option to exercise 54,000 ordinary shares. At any time between
April 26, 2000 and April 26, 2004, Rosa may sell Clear to the Company in
exchange for 54,000 ordinary shares, provided that Clear still holds Mr.
Gray's option and cash equal to the exercise price of Mr. Gray's option. Such
sale to the Company would be the economic equivalent of an exercise of stock
options directly by Mr. Gray. Mr. Gray is a director of Rosa and Clear. Rosa
is owned by a trust of which Mr. Gray is a beneficiary.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 6-K to be signed on its behalf by the
undersigned thereunto duly authorized.
ICON public limited company
August 1, 2003. /s/ Sean Leech
--------------------------- -----------------------------
Date Sean Leech
Chief Financial Officer
33