United States
Securities and Exchange Commission,
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal period ended: May 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number:
ICON public limited company
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(Exact name of Registrant as specified in its charter)
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Ireland
(Jurisdiction of incorporation or organization)
South County Business Park, Leopardstown, Dublin 18, Ireland.
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(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
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None
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class
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American Depository Shares, representing Ordinary Shares, par value E0.06 each
Ordinary Shares, par value E0.06 each
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Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 11,841,557 Ordinary Shares.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
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Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
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1
TABLE OF CONTENTS
General 3
Cautionary Statement 3
Part I
Item 1. Identity of Directors, Senior Management and Advisors 3
Item 2. Offer Statistics and Expected Timetable 3
Item 3. Key Information 4
Item 4. Information on the Company 8
Item 5. Operating and Financial Review and Prospects 18
Item 6. Directors, Senior Management and Employees 27
Item 7. Major Shareholders and Related Party Transactions 30
Item 8. Financial Information 31
Item 9. The Offer and the Listing 31
Item 10. Additional Information 32
Item 11. Quantitative and Qualitative Disclosures about
Market Risk 37
Item 12. Description of Securities Other than Equity
Securities 38
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies 38
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds 38
Item 15. Reserved 38
Item 16. Reserved 38
Part III
Item 17. Financial Statements 39
Item 18. Financial Statements 39
Item 19. Financial Statements and Exhibits 39
2
General
As used herein, "ICON plc" and the "Company" refer to ICON public limited
company and its consolidated subsidiaries, unless the context requires
otherwise.
Unless otherwise indicated, ICON's financial statements and other financial data
contained in this Form 20-F are presented in United States dollars ($) and are
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP").
In this Form 20-F, references to "U.S. dollars," "U.S.$" or "$" are to the
lawful currency of the United States, references to "pounds sterling",
"sterling", "(pound)", "pence" or "p" are to the lawful currency of the United
Kingdom, references to "Israeli Shekels" or "ILS" are to the lawful currency of
Israel, references to "Euro" or "E" are to the European single currency adopted
by twelve members of the European Union (including the Republic of Ireland,
France, Germany & the Netherlands). ICON publishes its consolidated financial
statements in U.S. dollars.
ICON prepares its consolidated financial statements on the basis of a fiscal
year beginning on June 1 and ending on May 31. References to a fiscal year in
this Form 20-F shall be references to the fiscal year ending on May 31 of that
year. In this Form 20-F, financial results and operating statistics are, unless
otherwise indicated, stated on the basis of such fiscal years.
Cautionary Statement
Statements included herein which are not historical facts are forward looking
statements. Such forward looking statements are made pursuant to the safe harbor
provisions of the U.S. Private Securities Litigation Reform Act of 1995 (the
"PSLRA"). The forward looking statements involve a number of risks and
uncertainties and are subject to change at any time. In the event such risks or
uncertainties materialize, our results could be materially affected. The risks
and uncertainties include, but are not limited to, dependence on the
pharmaceutical industry and certain clients, the need to regularly win projects
and then to efficiently execute them, the challenges presented by rapid growth,
competition and the continuing consolidation of the industry, the dependence on
certain key executives and other factors identified in ICON's Securities and
Exchange Commission filings. ICON has no obligation under the PSLRA to update
any forward looking statements and does not intend to do so.
Part I
Item 1. Identity of Directors, Senior Management and Advisors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
3
Item 3. Key Information.
Selected Historical Consolidated Financial Data for ICON plc
The following selected financial data set forth below are derived from ICON's
consolidated financial statements and should be read in conjunction with, and
are qualified by reference to, "Operating and Financial Review and Prospects"
and ICON's consolidated financial statements and related notes thereto included
elsewhere in this Form 20-F.
Year Ended May 31,
1999 2000 2001 2002 2003
(in thousands, except share and per share data)
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Statement of Operations Data:
Gross revenue $98,910 $115,087 $151,832 $218,842 $340,971
Subcontractor costs (1) (39,003) (34,320) (35,669) (62,287) (115,246)
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Net revenue 59,907 80,767 116,163 156,555 225,725
Costs and expenses:
Direct costs 31,662 42,007 63,800 83,371 122,373
Selling, general and administrative 19,200 27,348 36,312 48,951 71,118
Merger costs (3) - 1,617 - - -
Depreciation and amortization 2,066 3,264 4,975 6,020 7,305
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Total costs and expenses 52,928 74,236 105,087 138,342 200,796
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Income from operations 6,979 6,531 11,076 18,213 24,929
Net interest income 2,631 2,659 2,519 1,116 354
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Income before provision for income taxes 9,610 9,190 13,595 19,329 25,283
Provision for income taxes (1,557) (3,122) (2,617) (5,129) (7,000)
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Net income (4) $8,053 $6,068 $10,978 $14,200 $18,283
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Net income per ordinary share (2):
Basic $0.74 $0.55 $0.97 $1.22 $1.55
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Diluted $0.68 $0.51 $0.92 $1.16 $1.50
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Weighted average number of ordinary
shares outstanding:
Basic (4) 10,908,409 11,050,556 11,292,610 11,656,153 11,813,788
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Diluted (4) 11,917,605 11,824,359 11,943,849 12,241,820 12,181,094
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Pro forma information
Adjustment for pro forma income taxes (3) (181) 537
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Pro forma net income 7,872 6,605
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Net income per ordinary share:
Basic $0.72 $0.60
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Diluted $0.66 $0.56
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4
As of May 31,
1999 2000 2001 2002 2003
(in thousands)
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Balance Sheet Data:
Cash and cash equivalents $12,353 $26,552 $11,179 $36,291 $18,311
Short term investments 35,936 21,405 35,941 18,551 -
Working capital 56,944 57,962 61,147 72,923 53,827
Total assets 95,758 100,118 128,967 165,794 235,014
Total debt 3,514 2,251 11,518 11,745 7,126
Government grants 624 533 476 962 1,140
Shareholders' equity $71,633 $77,053 $86,580 $107,561 $136,910
(1) Subcontractor costs comprise investigator payments and certain other
costs reimbursed by clients under terms specific to each of ICON's
contracts. See Note 2(d) to the consolidated financial statements.
(2) Net income per ordinary share is based on the weighted average number
of outstanding ordinary shares and in the case of diluted net income
per share includes potential ordinary shares from the exercise of
options.
(3) On January 28, 2000, ICON completed a merger with Pacific Research
Associates Inc. ("PRAI"), a company specializing in data management,
statistical analysis, and medical and regulatory consulting based in
Mountain View, USA. The merger with PRAI was accounted for as a
pooling-of-interests transaction and accordingly, the historical
financial information contained within this Form 20-F reflects the
combined results of ICON and PRAI.
The adjustment for pro forma income taxes is to normalize the tax
charge in relation to PRAI. As PRAI was treated as an S-Corporation
(with no corporate tax therefore charged to income) prior to the
merger with ICON.
(4) As explained in Note 17 to our Audited Consolidated Financial
Statements, ICON adopted Statement of Financial Accounting Standards
("SFAS") No.142 effective June 1, 2001. Under SFAS No.142, goodwill
and intangible assets with indefinite lives are no longer amortized,
but instead are tested for impairment at least annually. The following
table provides a reconciliation of reported net income to adjusted net
income and earnings per ordinary share excluding amortization expense
for all periods presented:
Year ended May 31,
1999 2000 2001 2002 2003
(in thousands)
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Reported net income $8,053 $6,068 $10,978 $14,200 $18,283
Add back goodwill amortization - 38 210 - -
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Adjusted net income $8,053 $6,106 $11,188 $14,200 $18,283
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(in dollars)
Basic net income per ordinary share reported $0.74 $0.55 $0.97 $1.22 $1.55
Add back goodwill amortization - - $0.02 - -
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Adjusted basic net income per ordinary
share reported $0.74 $0.55 $0.99 $1.22 $1.55
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(in dollars)
Diluted net income per ordinary share reported $0.68 $0.51 $0.92 $1.16 $1.50
Add back goodwill amortization - - $0.02 - -
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Adjusted diluted net income per ordinary
share reported $0.68 $0.51 $0.94 $1.16 $1.50
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5
Risk Factors
You should carefully consider the following factors and any other information in
this document before deciding to purchase our American Depository Shares
("ADSs").
We are dependent on the continued outsourcing of research and development by the
pharmaceutical and biotechnology industries. We are dependent upon the ability
and willingness of the pharmaceutical and biotechnology companies to continue to
spend on research and development and to outsource the services that we provide.
We are therefore subject to risks, uncertainties and trends that affect
companies in these industries. We have benefited to date from the tendency of
pharmaceutical and biotechnology companies to outsource clinical research
projects. Any downturn in these industries or reduction in spending or
outsourcing could adversely affect our business. For example, if these companies
expanded upon their in-house clinical or development capabilities, they would be
less likely to utilize our services. In addition, if governmental regulations
were changed, they could affect the ability of our clients to operate
profitably, which may lead to a decrease in research spending and therefore this
could have a material adverse effect on our business.
We depend on a limited number of clients and a loss of or significant decrease
in business from them could affect our business. We have in the past and may in
the future derive a significant portion of our net revenue from a relatively
limited number of clients. During the fiscal year ended May 31, 2003, 51% of our
net revenue was derived from our top five clients. In fiscal 2003, 21% of our
net revenue was from Astra Zeneca, 11% from Sanofi and 10% from Pfizer. During
the fiscal year ended May 31, 2002, 60% of our net revenue was derived from our
top five clients. In fiscal 2002, 16% of our net revenue was from Astra Zeneca,
14% from Pfizer and 12% from Bristol Myers Squibb. During the fiscal year ended
May 31, 2001, we derived 58% of our net revenue from our top five clients. In
fiscal 2001, 19% of our net revenue was from Pfizer and 15% from
GlaxoSmithKline. The loss of, or a significant decrease in business from, one or
more of these clients could have a material adverse effect on our business.
If our clients discontinue using our services, or cancel or discontinue
projects, our revenue will be adversely affected and we may not receive their
business in the future or may not be able to attract new clients.
Our clients may discontinue using our services completely or cancel some
projects either without notice or upon short notice. The termination or delay of
a large contract or of multiple contracts could have a material adverse effect
on our revenue and profitability. Historically, clients have canceled or
discontinued projects and may in the future cancel their contracts with us for
reasons including:
o the failure of products being tested to satisfy safety or efficacy
requirements;
o unexpected or undesired clinical results of the product;
o a decision that a particular study is no longer necessary;
o insufficient patient enrollment or investigator recruitment; or
o production problems resulting in shortages of the drug.
If we lose clients, we may not be able to attract new ones, and if we lose
individual projects, we may not be able to replace them.
We compete against many companies and research institutions that may be larger
or more efficient than we are. This may preclude us from being given the
opportunity to bid, or may prevent us from being able to competitively bid on
and win new contracts.
The market for CROs is highly competitive. We primarily compete against in-house
departments of pharmaceutical companies and other CROs including Quintiles
Transnational Corporation, Covance Inc., PAREXEL International Corp., Kendle
International Inc., Ingenix Inc. (United Health), Omnicare Inc., PRA Inc., MDS
Inc., Inveresk Research Group, Inc. and Pharmaceutical Product Development, Inc.
Some of these competitors have substantially greater capital, research and
development capabilities and human resources than we do. As a result, they may
be selected as preferred vendors of our clients or potential clients for all
projects or for significant projects, or they may be able to price projects more
competitively than us.
Any of these factors may prevent us from getting the opportunity to bid on new
projects or prevent us from being competitive in bidding on new contracts.
Our quarterly results are dependent upon a number of factors and can fluctuate
from quarter to quarter.
6
Our results of operations in any quarter can fluctuate depending upon, among
other things, the number and scope of ongoing client projects, the commencement,
postponement, variation and termination of projects in the quarter, the mix of
revenue, cost overruns, employee hiring and other factors. Our net revenue in
any period is directly related to the number of employees and the percentage of
these employees who were working on projects and billed to the client during
that period. We may be unable to compensate for periods of underutilization
during one part of a fiscal period by augmenting revenues during another part of
that period. We believe that operating results for any particular quarter are
not necessarily a meaningful indication of future results.
Approximately 80% of our net revenue is earned from long-term fixed-fee
contracts. We would lose money in performing these contracts if the costs of
performance exceed the fixed fees for these projects. Approximately 80% of our
net revenue is earned from long-term fixed-fee contracts. We have in the past
and therefore will continue to bear the risk of cost overruns under these
contracts. If the costs of performing these projects exceed the fixed fees for
these projects, for example if we underprice these contracts, if there are
significant cost overruns or if there are unanticipated delays under these
contracts, our business, financial condition and operating results could be
adversely affected.
If we fail to attract or retain qualified staff, our performance may suffer.
Our business, future success and ability to expand operations depends upon our
ability to attract, hire, train and retain qualified professional, scientific
and technical operating staff. We compete for qualified professionals with other
CROs, temporary staffing agencies and the in-house departments of pharmaceutical
and biotechnology companies. Although we have not had any difficulty attracting
or retaining qualified staff in the past, there is no guarantee that we will be
able to continue to attract a sufficient number of clinical research
professionals at an acceptable cost.
Failure to comply with the regulations of the U.S. Food and Drug Administration
and other regulatory authorities could result in substantial penalties and/or
loss of business. The U.S. Food and Drug Administration, or FDA, and other
regulatory authorities inspect us from time to time to ensure that we comply
with their regulations and guidelines, including environmental and health and
safety matters. In addition, we must comply with the applicable regulatory
requirements governing the conduct of clinical trials in all countries in which
we operate. If we fail to comply with any of these requirements we could suffer:
o the termination of any research;
o the disqualification of data;
o the denial of the right to conduct business;
o criminal penalties; and
o other enforcement actions.
Our exposure to exchange rate fluctuations could adversely affect our results of
operations.
We derived approximately 29.7% of our consolidated net revenue in 2003 from our
operations outside of the United States. Our financial statements are presented
in U.S. dollars. Accordingly, changes in exchange rates between the U.S. dollar
and other currencies in which we report local results, including the pound
sterling and the euro, will affect the translation of a subsidiary's financial
results into U.S. dollars for purposes of reporting our consolidated financial
results.
7
In addition, our contracts with our clients are sometimes denominated in
currencies other than the currency in which we incur expenses related to such
contracts. Where expenses are incurred in currencies other than those in which
contracts are priced, fluctuations in the relative value of those currencies
could have a material adverse effect on our results of operations. We regularly
review our currency exchange exposure and hedge a portion of this exposure using
forward exchange contracts. In fiscal 2003, we purchased $6.0 million of foreign
exchange contracts to hedge against U.S. dollar net revenue arising in non-U.S.
operations.
Liability claims brought against us could result in payment of substantial
damages to plaintiffs and decrease our profitability.
We contract with physicians who serve as investigators in conducting clinical
trials to test new drugs on their patients. This testing creates the risk of
liability for personal injury to or death of the patients. Although
investigators are generally required by law to maintain their own liability
insurance, we could be named in lawsuits and incur expenses arising from any
professional malpractice actions against the investigators with whom we
contract. To date, we have not been subject to any liability claims that are
expected to have a material effect on us.
Indemnifications provided by our clients against the risk of liability for
personal injury to or death of the patients vary from client to client and from
trial to trial and may not be sufficient in scope or amount or the providers may
not have the financial ability to fulfill their indemnification obligations.
Furthermore, we would be liable for our own negligence.
In addition, we maintain approximately $20.0 million of worldwide Professional
Liability/Error and Omissions Insurance. The amount of coverage we maintain
depends upon the nature of the trial. We may in the future be unable to maintain
or continue our current insurance coverage on the same or similar terms. If we
are liable for a claim that is beyond the level of insurance coverage, we may be
responsible for paying all or part of any award.
Item 4. Information on the Company.
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 August 6, 2003, we completed a secondary offering on the NASDAQ exchange
raising approximately $44.3 million after the deduction of costs through the
issuance of an additional 1.5 million shares at $32.25 per share.
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.
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.
8
Industry Overview
The CRO industry provides independent product development services for the
pharmaceutical and biotechnology industries. Companies in these industries
outsource product development services to CROs in order to manage the drug
development process more efficiently and cost-effectively to maximize the profit
potential of patent-protected products. The CRO industry has evolved since the
1970s from a small number of companies that provided limited clinical services
to a larger number of CROs that offer a range of services that encompass the
entire research and development process, including pre-clinical development,
clinical trials management, clinical data management, study design,
biostatistical analysis, central laboratory and regulatory affairs services.
CROs are required to provide these services in accordance with good clinical and
laboratory practices, as governed by the applicable regulatory authorities.
The CRO industry is highly fragmented, consisting of several hundred small,
limited-service providers and a limited number of medium-sized and large CROs
with global operations. Although there are few barriers to entry for small,
limited-service providers, we believe there are significant barriers to becoming
a CRO with global capabilities. Some of these barriers include the
infrastructure and experience necessary to serve the global demands of clients,
the ability to manage simultaneously complex clinical trials in numerous
countries, broad therapeutic expertise and the development and maintenance of
the complex information technology systems required to integrate these
capabilities. In recent years, the CRO industry has experienced consolidation,
resulting in the emergence of a select group of CROs that have the capital,
technical resources, integrated global capabilities and expertise to conduct
multiple phases of clinical trials on behalf of pharmaceutical and biotechnology
companies. We believe that some large pharmaceutical companies, rather than
utilizing many CRO service providers, are selecting a limited number of CROs who
are invited to bid for projects. We believe that this trend will further
concentrate the market share among CROs with a track record of quality, speed,
flexibility, responsiveness, global capabilities and overall development
experience and expertise.
Trends Affecting the CRO Industry
CROs derive substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. Based on industry
surveys and investment analyst research, we estimate that clinical development
expenditures outsourced by pharmaceutical and biotechnology companies worldwide
in 2002 was in excess of $10 billion. We believe that the following trends
create further growth opportunities for global CROs, although there is no
assurance that growth will materialize.
Increasing Drug Development Activity.
Recent improvements in drug discovery and screening technology, biotechnology
and disease pathology have reduced the time to develop new drug candidates.
These improvements, combined with the threat of patent expirations on existing
drugs, have led drug developers to increase the rate at which they are creating
new drug candidates for clinical trials. As the number of trials that need to be
performed increases, we believe that drug developers will increasingly rely on
CROs to manage these trials in order to continue to focus on drug discovery. In
addition, as many biotechnology companies do not have a clinical development
infrastructure, we believe that the services offered by CROs will continue to be
in demand from such companies.
Pressure to Accelerate Time to Markets; Globalization of the Marketplace.
Reducing product development time maximizes the client's potential period of
patent exclusivity, which in turn maximizes potential economic returns. We
believe that clients are increasingly using CROs that have the appropriate
expertise to improve the speed of product development to assist them in
improving economic returns. In addition, applying for regulatory approval in
multiple markets and for multiple indications simultaneously, rather than
sequentially, reduces product development time and thereby maximizes economic
returns. We believe that CROs with global operations and experience in a broad
range of therapeutic areas are a key resource to support a global regulatory
approval strategy.
Cost Containment Pressures.
Over the last several years, drug companies have sought more efficient ways of
conducting business due to margin pressures stemming from patent expirations,
greater acceptance of generic drugs, pricing pressures caused by the impact of
managed care,
9
purchasing alliances and regulatory consideration of the economic benefit of new
drugs. Consequently, drug companies are centralizing research and development,
streamlining their internal structures and outsourcing certain functions to
CROs, thereby converting previously fixed costs to variable costs. The CRO
industry, by specializing in clinical trials management, is often able to
perform the needed services with greater focus and at a lower cost than the
client could perform internally.
Increasing Number of Large Long-Term Post-Marketing Studies.
We believe that to establish competitive claims and to encourage drug
prescription by physicians in some large and competitive categories, more
clients need to conduct outcome studies to demonstrate, for example, that
mortality rates are reduced by certain drugs. To verify such outcomes, very
large patient numbers are required and they must be monitored over long time
periods. We believe that as these types of studies increase there will be a
commensurate increase in demand for the services of CROs who have the ability to
quickly assemble large patient populations, globally if necessary, and manage
this complex process throughout its duration.
Increasing Regulatory Demands.
We believe that regulatory agencies are becoming more demanding with regard to
the data required to support new drug approvals and are seeking more evidence
that new drugs are safer and more effective than existing products. As a result,
the complexity of clinical trials and the size of regulatory submissions are
driving the demand for services provided by CROs.
Company Operating Procedures
We have developed a unique operating model for clinical trial projects based on
a "dedicated team approach" in which a team of full time professionals,
operating out of centralized offices, is assigned exclusively to each project.
This contrasts with the approach of many competitors whose staff typically work
on multiple projects at once, sometimes operating from non-office bases in
remote locations and some of whom may be part-time. We believe that this
operating model offers the following advantages:
o each client's project receives undivided attention and is executed
efficiently as team members do not have conflicting demands;
o the absence of conflicting demands on the project team also ensures a
high quality service;
o the dedicated team approach allows us to develop strong relationships
with our clients and to be more responsive to our clients' needs;
o focused project teams facilitate efficient supervision of the project,
enhance productivity and improve cost control; and
o less administration is required to co-ordinate assignments, leading to
a more streamlined corporate management structure.
We believe our dedicated team approach has led to repeat business and an
expanding client base.
Strategy
We believe that our operating model based on dedicated teams differentiates us
from our competition in the CRO industry and enables us to deliver high quality
services to our clients. Our strategy is to continue to grow by applying this
model to penetrate further our existing client base and add new clients. We
intend to implement our strategy by continuing to deliver high quality services,
by increasing our geographic presence and by expanding the scale and range of
our services. We intend to supplement our internal growth with strategic
acquisitions.
10
Continue to Deliver High Quality Services and Customer Satisfaction. We believe
that our dedicated team approach allows us to provide high quality, timely and
cost effective services that are designed to be highly responsive to our
clients' needs. We believe that the resulting customer satisfaction and enhanced
reputation in the industry will continue to enable us to penetrate our existing
client base and add new clients. In the fiscal year ended May 31, 2003,
approximately 95% of our net revenue was derived from second or subsequent
projects with clients. The remaining 5% of the net revenue was derived from 89
initial projects with new clients.
Expand Geographic Presence. We believe that the capability to provide our
services on a global basis in most major and developing pharmaceutical markets
enhances our ability to compete for new business from large multinational
pharmaceutical and biotechnology companies. We have expanded geographically
through the establishment of 29 offices in 17 countries and intend to continue
expanding into regions that have the potential to increase our client base or
increase our investigator and patient populations.
Increase Scale and Range of Services. We seek to enhance our competitive
position by increasing the scale and range of our services. We intend to expand
our clinical trials, central laboratory, IVRS (interactive voice recognition
system), data management, statistical and consulting operations in order to
capitalize further on the outsourcing opportunities currently available from our
clients.
Services
Consistent high quality performance is what ICON has come to stand for with our
Clients and a large part of our continued success is due to the high quality
standards we have set and delivered on projects to date. The achievement of
these quality goals is made possible by the implementation and maintenance of an
effective quality management system, which not only ensures that our business
and quality objectives are achieved, but which is sufficiently dynamic to
rapidly respond to changes in the clinical research and regulatory environments.
The quality management system at ICON is based on the requirements of ISO 9000
international standards and includes over 700 standard operating procedures
(SOPs), which are implemented on a global basis. In addition, our independent
quality assurance division has the responsibility for assuring that processes
conform to pre-determined quality, ethical and regulatory standards.
One of the driving forces behind ICON's quality performance is management
commitment to ISO 9000. In 1994, ICON became the first multinational CRO to
become ISO 9002 registered and remains the only CRO to have ISO registration
across all offices and operational functions. To maintain continuing
registration it is necessary to successfully undergo several quality systems
surveillance audits each year.
In keeping with this commitment, following ten successful global audits in 2003,
ICON transitioned to the new ISO 9001: 2000 standard. This standard integrates
the business process with the principles of Total Quality Management. Achieving
registration was a 12 month project which included the implementation of new and
the updating of existing procedures and is evidence of the dedication to quality
and continuous improvement that is in place throughout the organization.
Also in 2003, the Dublin laboratory became CAP (College of American Pathology)
certified which added to our existing US certification and both ICON
laboratories achieved ISO 17025 accreditation. This ISO standard is a specific
standard for Calibration and Testing Laboratories, which in addition to the ISO
quality system requirements, includes the principles of Good Laboratory
Practice.
Our recently acquired Phase I facility holds GLP and UKAS certifications for its
bioanalytical and clinical pathology laboratories and plans to adopt ISO in the
coming year.
11
Organizational Structure
Name Country of incorporation Group ownership
ICON Clinical Research (UK) Limited United Kingdom 100%
ICON Clinical Research Inc. USA 100%
ICON Clinical Research Limited Republic of Ireland 100%
ICON Japan K.K. Japan 100%
ICON Clinical Research GmbH Germany 100%
ICON Clinical Research Pty Limited Australia 100%
ICON Clinical Research S.A. Argentina 100%
ICON Clinical Research SARL France 100%
ICON Clinical Research Pte Singapore 100%
ICON Clinical Research Israel Limited Israel 100%
Medeval Group Limited UK 100%
ICON Laboratories, Inc. USA 100%
Managed Clinical Solutions, Inc. USA 100%
ICON Clinical Research (Canada) Inc. Canada 100%
All shareholdings comprise ordinary shares.
All subsidiary undertakings are involved in the provision of contract research
services to the pharmaceutical and biotechnology industries.
12
The range of clinical research services we provide facilitates the collection,
analysis and reporting of clinical trials data, which will ultimately become
part of a client's drug registration submission. The range of services is
outlined below:
Study Protocol Preparation
This study protocol is the critical document provided to the investigator which
defines the study and details the procedures which must be followed for the
proper conduct of the trial. ICON has extensive experience in preparing study
protocols in a broad range of therapeutic areas.
Case Report Form ("CRF") Preparation
The CRF is a study specific document in which the investigator records all
relevant information on a trial patient in accordance with the requirements of
the protocol. ICON has the capability of producing CRFs for a wide variety of
therapeutic indications and in all required languages.
Clinical Trial Approvals
Prior to start-up, all clinical trials must be approved by the relevant
government agencies, by institutional review boards and ethics committees and by
certain other bodies in accordance with local requirements. ICON has extensive
experience in obtaining such approvals on a multinational basis.
Investigator Recruitment
The success of a clinical trial is dependent upon finding experienced
investigators who are capable of performing clinical trials in accordance with
the highest ethical and scientific standards. We have a database of several
thousand such investigators who are experienced in numerous therapeutic areas
and who have successfully completed many clinical trials for us.
Laboratory Services
An important element in monitoring patient safety during a clinical trial is the
conduct of various laboratory tests on the patient's blood, urine and other
bodily fluids at appropriate intervals during the trial. The analysis of these
samples must be standardized and the results must be promptly transmitted to the
investigator. Our central laboratory operation provides:
o A broad range of sample analyses.
o An efficient logistics system to ensure rapid receipt of samples from the
investigator.
o State of the art analytical technology.
o Electronic transmission of test results to the investigator.
Study Monitoring and Data Collection
As patients in a clinical trial are examined and tests are conducted in
accordance with the study protocol, patient data is recorded on CRFs and
laboratory reports. In order to ensure accurate results, we provide:
o Specially trained monitors who visit sites regularly to ensure that the
CRFs are completed correctly and that all data specified in the protocol
are collected.
o Personnel who review CRFs for consistency and accuracy before the data is
entered into an electronic database.
o Study monitoring and data collection services which comply with the FDA's
good clinical practice guidelines and other relevant regulatory
requirements.
Patient Safety Monitoring
In a clinical trial, patient safety is paramount. We have teams of trained
physicians and paramedical staff who review any serious adverse events which may
occur during a trial and prepare detailed reports of these events on a timely
basis for the pharmaceutical company and regulatory bodies as required.
Clinical Data Management
As the study progresses, the data from the CRFs is entered into databases that
are designed in accordance with the specifications of the project and the
particular needs of the client. We provide:
o Personnel who screen the data to detect errors, omissions or other
deficiencies prior to data entry.
o Study specific computer programs which are written in order to validate the
data.
o The creation of a final database that is electronically transferred to a
biostatistical group for subsequent analysis.
Biostatistical Services
Our biostatistical group primarily provides detailed analyses of data generated
from clinical trials. In addition to providing this in-house statistical
support, our biostatisticians assist clients with all phases of drug development
through biostatistical consulting, database design, data analysis and
statistical reporting.
Medical Reporting
The results of the statistical analysis of the data collected during the trial,
together with other clinical data are included in a final clinical trial report,
which may then become part of the drug registration submission. ICON's medical
reporting team prepare this report and may assist in the presentation of the
data in different formats, including for journal publication or for presentation
to international symposia.
Animal Health
The Animal Health division of ICON has broad capabilities in clinical research
for the development of drugs, vaccines, and devices for the global animal health
industry. The combination of expertise and geographical reach puts ICON in the
top tier of animal CROs globally. This group has been dedicated to animal health
clinical research for over 10 years and has experience in all target species and
all major pharmacological classes. Capabilities include: Complete clinical
project management, contract monitoring, data management, statistical analysis,
quality assurance services, final study reports, development consulting and
post-marketing survey management.
Regulatory Consultancy
Medicinal products are subject to strict regulatory requirements throughout
their development, testing and marketing. Authorization by drug regulatory
authorities is necessary prior to any product being marketed. The regulatory
processes and requirements are lengthy and complex. ICON's regulatory
consultancy division provides consultancy on global regulatory requirements
during development, advises on suitability of client's documentation for
regulatory approvals, prepares and submits applications for regulatory approvals
and provides post licensing regulatory support services.
13
Information Systems
Our information technology strategy is to build our systems around open
standards and leading commercial hardware and software. All critical business
systems are formally validated following a documented approach in accordance
with the latest FDA regulations.
Recognizing that each client has its own requirements and systems, we seek to
ensure an entirely flexible approach to client needs. An example of this
flexibility includes linking directly to client systems if this is required or
for a client to have access to designated ICON systems. Frequently, we have
established wide area network, or WAN, links to the client's data systems, have
trained our staff in those systems and have delivered data on-line to the
client's database. We also provide secure remote access to our systems for
clients to review their study information.
We have internally developed a suite of proprietary software applications that
assists in the management of our activities, including a clinical trials
management application that tracks all relevant data in a trial and automates
all management and reporting processes and an investigator grants management
application which utilizes this tracking data to trigger payments when they
become due to investigators. We have also developed an interactive voice
response system to increase the efficiency of clinical trials. This system
provides features such as centralized patient randomization, drug inventory
management, and patient diary collection and provides our clients with a fully
flexible data retrieval solution which can be utilized via telephone, internet
browser or WAP enabled device.
In our central laboratory, we utilize a comprehensive suite of software,
including a laboratory information management system, a kit/sample management
system and a web interface system to allow clients to review results online.
We have implemented externally developed critical business systems that are
highly integrated into our business processes. These include systems to manage,
validate and analyze clinical data, systems to record, track and report safety
issues, systems to manage regulatory submissions, systems to control documents
and to review and record training and systems to record activity and manage
resources.
Our IT systems are operated from hubs in Philadelphia and Dublin. Other offices
are linked to these hubs through dedicated lines, frame relay networks or
virtual private networks, or VPNs. Travelling staff can also access all systems
via VPN facilities. A global corporate portal provides access to all authorized
data and applications for our staff.
Sales and Marketing
Our sales and marketing strategy is to focus our business development efforts on
pharmaceutical and biotechnology companies whose development projects are
advancing and to develop close relationships with such companies. By maintaining
such relationships with our clients, we gain repeat business and achieve lateral
penetration into other therapeutic divisions where applicable.
While our sales and marketing activities are carried out locally by executives
in each of our major locations, the sales and marketing process is coordinated
centrally. In addition, all of our business development professionals, senior
executives and project team leaders share responsibility for the maintenance of
key client relationships and business development activities.
Clients
In 2003 revenue was earned from over 280 clients, including 19 of the top 20
pharmaceutical companies as ranked by 2002 revenues. We believe that our
operating model positions us well to increase the penetration of our existing
client base and to add new clients.
ICON has expanded geographically in order to pursue larger multi-national
clinical trials in markets worldwide and has expanded through acquisition to
offer a broader range of services. In the fiscal year ended May 31, 2003, 70.3%
of our net revenue was generated in the United States, 27.0% in Europe and 2.7%
in Rest of World.
14
ICON has in the past and may in the future derive a significant portion of its
net revenue from a relatively limited number of major projects or clients. In
fiscal 2001, we received 19% of our net revenue from Pfizer and 15% from Glaxo
Wellcome, respectively. During the fiscal year ended May 31, 2002, we received
16% of our net revenue from Astra Zeneca, 14% from Pfizer and 12% from Bristol
Myers Squibb. In fiscal 2003, we received 21% of our net revenue from Astra
Zeneca, 11% from Sanofi and 10% from Pfizer. We believe that the importance of
certain clients reflects our success in penetrating our client base. The loss
of, or a significant decrease in business from, one or more of these key clients
could result in a material adverse effect.
Contractual Arrangements
We are generally awarded contracts based upon our response to requests for
proposals received from pharmaceutical and biotechnology companies.
Most of our revenues are earned from contracts which are fixed price, based on
certain activity and performance specifications. Consequently, although we
typically bear the cost of overruns, with certain exceptions, we benefit if our
costs are lower than anticipated. Payment terms usually provide either for
payments based on the achievement of certain identified milestones or activity
levels or monthly payments according to a fixed payment schedule over the life
of the contract. Where clients request changes in the scope of a trial or in the
services to be provided by us, we deal with these by a change order, often
resulting in additional revenue to us. We also contract on a "fee-for-service,"
"days worked" or "time and materials" basis but this accounts for approximately
20% of revenues.
Contract terms may range from one year to several years depending on the nature
of the work to be performed. In most cases, a portion of the contract fee,
typically 10% to 20%, is paid at the time the study or trial is started. The
balance of the contract fee payable is generally payable in installments over
the study or trial duration and may be based on the achievement of certain
performance targets or "milestones" or, to a lesser extent, on a fixed monthly
payment schedule. For instance, installment payments may be based on patient
enrollment or delivery of the database. Reimbursable expenses are typically
estimated and budgeted within the contract and invoiced on a monthly basis.
Reimbursable expenses include payments to investigators for patients enrolled in
trials, travel and accommodation costs and various other direct costs incurred
in the course of the clinical trial which are fully reimbursable by the client.
Most of our contracts are terminable immediately by the client with cause in
certain circumstances and on 30-60 days notice without cause. In the event of
termination, we are entitled to all sums owed for work performed through the
notice of termination and certain costs associated with termination of the
study. Some of our contracts provide for an early termination fee. Termination
or delay in the performance of a contract occurs for various reasons, including,
but not limited to, unexpected or undesired results, production problems
resulting in shortages of the drug, adverse patient reactions to the drug, the
client's decision to de-emphasize a particular trial or inadequate patient
enrollment or investigator recruitment.
Backlog
ICON's backlog consists of potential net revenue yet to be earned from projects
awarded by clients. Due to their varied durations, we believe that the most
meaningful measure of backlog is the amount that we estimate will be earned from
such projects in the following twelve months.
At May 31, 2003, we estimate that we had backlog to be earned in the following
twelve months of $221 million, compared with approximately $144 million at May
31, 2002. We believe that our backlog as of any date is not necessarily a
meaningful predictor of future results, due to the potential for cancellation or
delay of the projects underlying the backlog, and no assurances can be given
that we will be able to realize this backlog as net revenue.
15
Competition
The CRO industry is highly fragmented, consisting of several hundred small,
limited-service providers and a limited number of medium-sized and large CROs
with global operations. We primarily compete against in-house departments of
pharmaceutical companies and other CROs with global operations. Some of these
competitors have substantially greater capital, technical and other resources
than us. CROs generally compete on the basis of previous experience, the quality
of contract research, the ability to organize and manage large-scale trials on a
global basis, the ability to manage large and complex medical databases, the
ability to provide statistical and regulatory services, the ability to recruit
suitable investigators, the ability to integrate information technology with
systems to improve the efficiency of contract research, an international
presence with strategically located facilities, financial viability, medical and
scientific expertise in specific therapeutic areas and price. We believe that we
compete favorably in these areas. Our principal CRO competitors are Quintiles
Transnational Corporation, Covance Inc., PAREXEL International Corp., Kendle
International Inc., Ingenix Inc. (United Health), Omnicare, Inc., PRA Inc., MDS
Inc, Inveresk Research Group, Inc. and Pharmaceutical Product Development, Inc.
The trend toward CRO industry consolidation has resulted in heightened
competition among the larger CROs for clients and acquisition candidates.
Government Regulation
Regulation of Clinical Trials
The clinical investigation of new drugs is highly regulated by government
agencies. The standard for the conduct of clinical research and development
studies is good clinical practice, which stipulates procedures designed to
ensure the quality and integrity of data obtained from clinical testing and to
protect the rights and safety of clinical subjects. While good clinical practice
has not been formally adopted by the FDA or, with certain exceptions, by similar
regulatory authorities in other countries, some provisions of good clinical
practice have been included in regulations adopted by the FDA. Furthermore, in
practice, the FDA and many other regulatory authorities require that study
results submitted to such authorities be based on studies conducted in
accordance with good clinical practice.
Regulatory authorities, including the FDA, have promulgated regulations and
guidelines that pertain to applications to initiate trials of products, the
approval and conduct of studies, report and record retention, informed consent,
applications for the approval of drugs and post-marketing requirements. Pursuant
to these regulations and guidelines, service providers that assume the
obligations of a drug sponsor are required to comply with applicable regulations
and are subject to regulatory action for failure to comply with such regulations
and guidelines. In the United States and Europe, the trend has been in the
direction of increased regulation by the applicable regulatory authority. We
believe that many pharmaceutical companies do not have the resources to comply
with all of these regulations and standards and that this has contributed and
will continue to contribute to the growth of third-party service providers.
In providing our services in the United States, we are obligated to comply with
FDA requirements governing such activities. These include obtaining patient
informed consents, verifying qualifications of investigators, reporting
patients' adverse reactions to drugs and maintaining thorough and accurate
records. We must maintain source documents for each study for specified periods,
and such documents may be reviewed by the study sponsor and the FDA during
audits.
The services we provide outside the United States are ultimately subject to
similar regulation by the relevant regulatory authority, including the Medicines
Control Agency in the United Kingdom and the Bundesinstitut fur Arzneimittel und
Medizinprodukte in Germany. In addition, our activities in Europe are affected
by the Committee for Proprietary Medicinal Products of the European Union, and
its successor, the European Medicines Evaluation Agency, which is based in
London, England.
We must also retain records for each study for specified periods for inspection
by the client and by the applicable regulatory authority during audits. If such
audits document that we have failed to comply adequately with applicable
regulations and guidelines, it could result in a material adverse effect. In
addition, our failure to comply with applicable regulation and guidelines,
depending on the extent of the failure, could result in fines, debarment,
termination or suspension of ongoing research or the disqualification of data,
any of which could also result in a material adverse effect.
16
New Drug Development - An Overview
Before a new drug may be marketed, the drug must undergo extensive testing and
regulatory review in order to determine that the drug is safe and effective. The
following discussion primarily relates to the FDA approval process. Similar
procedures must be followed for clinical trials in other countries. The stages
of this development process are as follows:
Preclinical Research (1 to 3.5 years). "In vitro" (test tube) and animal
studies are conducted to establish the relative toxicity of the drug over a
wide range of doses and to detect any potential to cause birth defects or
cancer. If results warrant continuing development of the drug, the
manufacturer will file for an Investigational New Drug Application, or IND,
upon which the FDA may grant permission to begin human trials.
Clinical Trials (3.5 to 6 years)
Phase I (6 months to 1 year). Basic safety and pharmacology testing in
20 to 80 human subjects, usually healthy volunteers, includes studies
to determine how the drug works, if it is safe, how it is affected by
other drugs, where it goes in the body, how long it remains active and
how it is broken down and eliminated from the body.
Phase II (1 to 2 years). Basic efficacy (effectiveness) and dose-range
testing in 100 to 200 patients to help determine the best effective
dose, confirm that the drug works as expected, and provide additional
safety data.
Phase III (2 to 3 years). Efficacy and safety studies in hundreds or
thousands of patients at many investigational sites (hospitals and
clinics). These studies can be placebo-controlled trials, in which the
new drug is compared with a "sugar pill", or studies comparing the new
drug with one or more drugs with established safety and efficacy
profiles in the same therapeutic category.
TIND (May span late Phase II, Phase III, and FDA review). When results from
Phase II or Phase III show special promise in the treatment of a serious
condition for which existing therapeutic options are limited or of minimal
value, the FDA may allow the manufacturer to make the new drug available to
a larger number of patients through the regulated mechanism of a Treatment
Investigational New Drug, or TIND. Although less scientifically rigorous
than a controlled clinical trial, a TIND may enroll and collect a
substantial amount of data from tens of thousands of patients.
NDA Preparation and Submission. Upon completion of Phase III trials, the
manufacturer assembles the statistically analyzed data from all phases of
development into a single large submission, the New Drug Application, or
NDA, which today comprises, on average, roughly 100,000 pages.
FDA Review & Approval (1 to 1.5 years). Data from all phases of development
(including a TIND) is scrutinized to confirm that the manufacturer has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study.
Post-Marketing Surveillance and Phase IV Studies. Federal regulation
requires the manufacturer to collect and periodically report to the FDA
additional safety and efficacy data on the drug for as long as the
manufacturer markets the drug (post-marketing surveillance). If the drug is
marketed outside the U.S., these reports must include data from all
countries in which the drug is sold. Additional studies (Phase IV) may be
undertaken after initial approval to find new uses for the drug, to test
new dosage formulations, or to confirm selected non-clinical benefits,
e.g., increased cost-effectiveness or improved quality of life.
Potential Liability and Insurance
We contract with physicians who serve as investigators in conducting clinical
trials to test new drugs on their patients. Such testing creates a risk of
liability for personal injury to or death of the patients resulting from adverse
reactions to the drugs administered. In addition, although we do not believe we
are legally accountable for the medical care rendered by third party
investigators, it is possible that we could be subject to claims and expenses
arising from any professional malpractice of the investigators with whom we
contract. We also could be held liable for errors or omissions in connection
with the services we perform.
We believe that the risk of liability to patients in clinical trials is
mitigated by various regulatory requirements, including the role of
institutional review boards and the need to obtain each patient's informed
consent. The FDA requires each human clinical trial to be reviewed and approved
by the institutional review board at each study site. An institutional review
board is an independent
17
committee that includes both medical and non-medical personnel and is obligated
to protect the interests of patients enrolled in the trial. After the trial
begins, the institutional review board monitors the protocol and measures
designed to protect patients, such as the requirement to obtain informed
consent.
We further attempt to reduce our risks through contractual indemnification
provisions with clients and through insurance maintained by clients,
investigators and us. However, the contractual indemnifications generally do not
protect us against certain of our own actions such as negligence, the terms and
scope of such indemnification vary from client to client and from trial to
trial, and the financial performance of these indemnities is not secured.
Therefore, we bear the risk that the indemnity may not be sufficient or that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations. We maintain worldwide professional liability
insurance. We believe that our insurance coverage is adequate. There can be no
assurance, however, that we will be able to maintain such insurance coverage on
terms acceptable to us, if at all. We could be materially adversely affected if
we were required to pay damages or bear the costs of defending any claim outside
the scope of or in excess of a contractual indemnification provision or beyond
the level of insurance coverage or in the event that an indemnifying party does
not fulfill its indemnification obligations.
Description of Property
We lease all but one of our facilities under operating leases.
Our principal executive offices are located in South County Business Park,
Leopardstown, Dublin, Republic of Ireland, where we own an office facility of
approximately 42,000 square feet on approximately two acres which includes an
extension completed in August 1999. We have also leased an additional office
facility of approximately 25,000 square feet in the same business park.
We also maintain U.S. offices in Chicago, Philadelphia, Nashville, Irvine, San
Francisco, Houston, Wilmington, Raleigh, Tampa and two offices in New York. Our
European subsidiaries maintain offices in Southampton, Frankfurt, Paris, Moscow,
Amsterdam, Marlow, Manchester, Tel Aviv, Stockholm and Riga. Our Rest of World
offices are located in Tokyo, Japan, Singapore, Sydney, Australia, Bangalore,
India, Buenos Aires, Argentina, Johannesburg, South Africa and Montreal, Canada.
Item 5. Operating and Financial Review and Prospects.
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements, accompanying notes and other financial
information, appearing in Item 18. The Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States.
Overview
ICON plc is a contract research organization, 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
multi-national clinical trials. Headquartered in Dublin, Ireland, we began
operations in 1990 and, to date, have expanded our business through internal
growth and strategic bolt-on acquisitions. 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. In
fiscal 2003, 70.3%, 27.0% and 2.7% of our net revenue was derived in the United
States, Europe and Rest of World, respectively. See Note 16 to the Consolidated
Financial Statements.
18
Revenue consists primarily of fees earned under contracts with third-party
clients. In most cases, a portion of the contract fee is paid at the time the
study or trial is started, often upon the signing of a letter of intent, and the
balance of the contract fee is generally payable in installments over the study
or trial duration, based on the achievement of certain performance targets or
"milestones." Revenue for contracts is recognized on the basis of the
relationship between time incurred and the total estimated duration of the trial
or on a fee-for service basis according to the particular circumstances of the
contract. 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
these costs 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.
Our backlog consists of potential net revenue yet to be earned from projects
awarded by clients. Due to their varied durations, we believe that the most
meaningful measure of backlog is the amount that we estimate will be earned from
such projects in the following twelve months. At May 31, 2003, we estimate that
we had backlog to be earned in the following twelve months of $221 million,
compared with approximately $144 million at May 31, 2002. We believe that our
backlog as of any date is not necessarily a meaningful predictor of future
results, due to the potential for cancellation or delay of the projects
underlying the backlog, and no assurances can be given that we will be able to
realize this backlog as net revenue.
As the nature of ICON's business involves the management of projects having a
typical duration of one to three years, the commencement or completion 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.
ICON, although domiciled in Ireland, reports its results in U.S. dollars. As a
consequence, the results of our non-U.S. based operations, when translated into
U.S. dollars, could be materially affected by fluctuations in exchange rates
between the U.S. dollar and the currencies of those operations.
In addition to translation exposures, we are also subject to transaction
exposures because the currency in which contracts are priced can be different
from the currencies in which costs relating to those contracts are incurred. We
have eleven operations trading in U.S. dollars, four trading in Euro, 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 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 ICON's results of operations. We
regularly review our currency exposures and hedge a portion of these, using
forward exchange contracts, where they are not covered by natural hedges. The
introduction of the Euro on January 1, 1999, also reduced the exposures of ICON
as four of its offices, and many of the countries where it is carrying out
projects are within the Euro zone.
We have received capital and revenue grants from Forbairt, 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 ICON or failing
to comply in other respects with the grant agreements. The operating expenditure
grant agreements provide for repayment in the event of a downsizing 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 May 31, 2003, we have received $1,475,375 and $1,796,824 under
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. ICON's results of operations therefore may be
affected by
19
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.
Operating Results
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.
2001 2002 2003 2001 2002
to 2002 to 2003
Percentage of Net Revenue Percentage Increase/
(Decrease)
Net revenue 100.0% 100.0% 100.0% 34.8% 44.2%
Costs and expenses:
Direct costs 54.9% 53.3% 54.2% 30.7% 46.8%
Selling, general and administrative 31.3% 31.3% 31.5% 34.8% 45.3%
Depreciation and amortization 4.3% 3.8% 3.3% 21.0% 21.3%
Income from operations 9.5% 11.6% 11.0% 64.4% 36.9%
Fiscal Year Ended May 31, 2003 Compared to Fiscal Year Ended May 31, 2002
Net revenue increased by $69.1 million, or 44.2%, from $156.6 million to $225.7
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisitions
not included in the comparative period. The additional revenues from these
acquisitions (BPA, MCS and Medeval) amounted to $18.1 million for the fiscal
year ended May 31, 2003. Including the impact of acquisitions, revenues in the
United States and Europe/Rest of World grew by 47.6% and 36.7%, respectively. In
the twelve months to May 31, 2003, net revenue from our central laboratory
business grew by 1.1% from $25.9 million to $26.2 million while our clinical
research segment grew by 52.7% from $130.7 million to $199.6 million over the
comparable period. The growth in net revenue in our clinical research segment
and central laboratory is due to the expansion of our services to both existing
and new clients, increased use of outsourcing by the Pharmaceutical and
Biotechnology industries, an underlying increase in research and development
spending and consolidation in the CRO industry.
Direct costs increased by $39.0 million, or 46.8%, from $83.4 million to $122.4
million, primarily due to increased staff numbers needed to support increased
project related activity and increased costs arising from the acquisitions
amounting to $11.1 million. Direct costs as a percentage of net revenue
increased from 53.3% in the twelve months to May 31, 2002 to 54.2% in the fiscal
2003 and increased to 53.5% when the effects of acquisitions have been excluded.
Selling, general and administrative expenses increased by $22.2 million, or
45.3%, from $48.9 million to $71.1 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of $5.4 million not included in the
comparative period. As a percentage of net revenue, selling, general and
administrative expenses, increased from 31.3% in the twelve months to May 31,
2002 to 31.5% for the fiscal year ended May 31, 2003 or 31.7% when the effects
of acquisitions have been excluded.
Depreciation and amortization expense increased by $1.3 million, or 21.3%, from
$6.0 million to $7.3 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. As a percentage of net revenue, depreciation and amortization
decreased from 3.8% of net revenues in the twelve months to May 31, 2002 to 3.3%
for the fiscal year ended May 31, 2003 or 3.4% when the effects of acquisitions
have been excluded.
20
Income from operations increased by $6.7 million, or 36.9%, from $18.2 million
to $24.9 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, income from operations
decreased from 11.6% for the twelve months to May 31, 2002 to 11.0% of net
revenues for the fiscal year ended May 31, 2003, and decreased to 11.4% when the
effect of acquisitions have been excluded. For the fiscal year 2003, income from
operations, as a percentage of net revenue for the central laboratory fell to
0.4% from 14.1% in fiscal 2002, due principally to a higher than normal level of
project cancellations in the first quarter of fiscal 2003. Operating margins for
our clinical research segment increased from 11.1% in the twelve months to May
31, 2002, to 12.4% for the fiscal year ended May 31, 2003 due principally to
improved staff utilization.
Net interest income for the year ended May 31, 2003, was $0.4 million, a
decrease of $0.8 million on the equivalent period last year due primarily to
reduced cash on deposit and lower interest rates during the current fiscal year
as cash was used to fund expansion and acquisition.
ICON's effective tax rate for the year ended May 31, 2003, was 27.7% compared
with 26.5% for the comparable period last year. The increase in the effective
rate was primarily due to a change in the geographic distribution of pre-tax
earnings.
Fiscal Year Ended May 31, 2002 Compared to Fiscal Year Ended May 31, 2001
Net revenue increased by $40.4 million, or 34.8%, from $116.2 million to $156.6
million. This increase arose through a combination of increased business from
existing clients and business won from new clients. Of the total increase,
revenues in the United States and Europe/Rest of World grew by 31.3% and 43.2%,
respectively.
Direct costs increased by $19.6 million, or 30.7%, from $63.8 million to $83.4
million, primarily due to increased staff numbers needed to support increased
project related activity. Direct costs as a percentage of net revenue decreased
from 54.9% in the twelve months to May 31, 2001 to 53.3% in the equivalent
period in fiscal 2002 due to increased recovery of our staff on project-related
activity.
Selling, general and administrative expenses increased by $12.6 million, or
34.8%, from $36.3 million to $48.9 million. The increase in costs is due to the
continued expansion of ICON's operations. As a percentage of net revenue,
selling, general and administrative expenses remained at 31.3% in fiscal 2002,
the same level as fiscal 2001.
Depreciation and amortization expense increased by $1.0 million, or 21.0%, from
$5.0 million to $6.0 million. Excluding goodwill amortization of $0.2 million in
fiscal 2001 (in order to be comparative to fiscal 2002 which reflects the
adoption of SFAS No.142), the increase in fiscal 2002 over fiscal 2001 was $1.2
million or 26.5%. This increase is due to the continued investment in facilities
and information technology to support the growth in activity and in providing
for future capacity. As a percentage of net revenue, depreciation and
amortization expenses decreased from 4.3% in the twelve months to May 31, 2001
to 3.8% in the equivalent period in fiscal 2002. Excluding goodwill amortization
in 2001, depreciation and amortization represented 4.1% of net revenues.
Income from operations increased by $7.1 million, or 64.4%, from $11.1 million
to $18.2 million. As a percentage of net revenue, income from operations
increased from 9.5% for the year ended May 31, 2001 to 11.6% of net revenues for
fiscal 2002.
Net interest income for the year ended May 31, 2002, was $1.1 million a decrease
of $1.4 million on the equivalent period last year due primarily to reduced cash
on deposit and lower interest rates during the current fiscal year. Net cash
invested decreased from $35.9 million at May 31, 2001 to $18.6 million at the
end of May 2002.
ICON's effective tax rate for the year ended May 31, 2002, was 26.5% compared
with 19.2% for the comparable period last year. The increase in the effective
rate was primarily due to a change in the geographic distribution of pre-tax
earnings.
21
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 flow from operations
and the $49.1 million of net proceeds received from our initial public offering
in 1998. Our principal cash needs are payment of salaries, office rents, travel
expenditures and payments to investigators. The aggregate amount of employee
compensation, excluding stock compensation expense, paid by us and our
subsidiaries in the three fiscal years ended May 31, 2001, 2002 and 2003,
amounted to $68.6 million, $88.2 million, and $135.2 million, respectively.
Investing activities primarily reflect capital expenditures for facilities,
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 the basis of
the relationship between time incurred and the total estimated contract duration
or on a fee-for-service basis. The cash flow from contracts typically consists
of a down payment of between 10% and 20% paid at the time the contract is
entered into, with the balance paid in installments over the contract's
duration, in some cases on the achievement of certain milestones. Accordingly,
cash receipts do not correspond to costs incurred and revenue recognized on
contracts.
As of May 31, 2003, our working capital was $53.8 million, compared to $72.9
million at May 31, 2002. The most significant influence on our operating cash
flow is revenue outstanding, which comprises accounts receivable and unbilled
revenue, less payments on account. The dollar values of these amounts and the
related days revenue outstanding can vary due to the achievement of contractual
milestones, including contract signing, and the timing of cash receipts. The
number of days revenue outstanding was 64 days at May 31, 2003, 67 days at May
31, 2002 and 93 days at May 31, 2001. The decrease from May 31, 2002 to May 31,
2003, was due primarily to increased cash collections, as a result of a more
stringent application of our trading terms with respect to our accounts
receivable.
Net cash provided by operating activities was $21.5 million in the year ended
May 31, 2003, compared with $17.3 million in fiscal 2002 and net cash used of
$1.6 million in the fiscal year ended May 31, 2001. The increase in cash
provided in fiscal 2003 was due primarily to improved cash collections.
Net cash used in investing activities was $35.3 million in the year ended May
31, 2003, compared to net cash provided by investing activities of $4.8 million
in the year ended May 31, 2002 and net cash used in investing activities of
$22.6 million in the year ended May 31, 2001. This increase in net cash used is
due principally to acquisition activity in the current fiscal year.
Net cash used in financing activities was $4.6 million in the year ended May 31,
2003, compared with net cash provided by financing activities of $2.7 million in
fiscal 2002 and net cash provided by financing activities of $9.6 million in the
fiscal year ended May 31, 2001. This was due principally to repayment of bank
facilities in the current fiscal year.
As a result of these cash flows, cash and cash equivalents decreased by $18.0
million in the year ended May 31, 2003, compared to a net increase of $25.1
million in the year ended May 31, 2002 and a net decrease of $15.4 million in
the year ended May 31, 2001.
On November 17, 1998, the Company entered into an overdraft facility, (the
A.I.B. facility) for E2.5million (U.S.$2.9 million) 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 expired on June 30, 2003 and we expect
it will be renewed. As of May 31, 2003, the full amount of this facility was
available to be drawn down (see recent developments section).
On July 29, 2002, we entered into an additional A.I.B. facility for sterling
(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 expired on June 30, 2003 and we expect it will be renewed. As of May
31, 2003, Sterling (pound)8,816 (U.S.$14,413) of this facility was available to
be drawn down.
22
The Company's U.S. subsidiary ICON Clinical Research, Inc.(the "borrower") has a
$12 million secured line of credit (the "PNC facility") with PNC Bank N.A
("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. This
facility was terminated on July 3, 2003 (see recent developments section).
We 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 E120,000 (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.
On October 9, 2002, we completed the acquisitions of Barton & Polansky
Associates, Inc. and its sister company, Managed Clinical Solutions, Inc.,
contract research organizations in New York, for an initial cash consideration
of $15.7 million and further earn-out payments on December 20, 2002 and April
15, 2003 of $3.7 million and $0.3 million respectively.
On January 24, 2003, we completed the acquisition of Medeval Group Limited, a
specialist provider of Phase I clinical trials to the pharmaceutical and
biotechnology industries, for an initial cash consideration of sterling
(pound)9.5 million (U.S.$15.5 million).
Contractual obligations table
The following table represents the contractual obligations and commercial
commitments of ICON plc as of May 31, 2003:
Contractual obligations and commercial commitments Payments due by period
Total Less than 1 to 5 After 5
1 year years years
(U.S.$ in millions)
Finance leases $0.5 $0.2 $0.3 $-
Operating leases 129.1 17.0 53.8 58.3
Credit facility 7.0 7.0 - -
Earn out payments committed for contingent
consideration (1) 8.9 2.0 6.9 -
- -------------------------------------------------------------------------------------------------------------------
$145.5 $26.2 $61.0 $58.3
- -------------------------------------------------------------------------------------------------------------------
(1) This cash is payable under earn out clauses included in acquisitions
undertaken in fiscal 2003. At May 31, 2003, there are no outstanding earn
out commitments from prior year acquisitions. Of the $8.9 million, $2
million of the earn out targets have been reached at May 31, 2003 and has
been recorded in other liabilities.
We expect to spend approximately $15 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 to increase this 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
businesses to enhance our service offerings and global presence. Any such
acquisitions may require additional external financing and we may from time to
time seek to obtain funds from public or private issues of equity or debt
securities. There can be no assurance that such financing will be available on
terms acceptable to ICON.
Critical Accounting Policies
The preparation of consolidated financial statements in accordance 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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period.
We base our estimates and judgments on historical experience and on the other
factors that we believe are reasonable under current circumstances. Actual
results may differ from these estimates if these assumptions prove to be
incorrect or if conditions
23
develop other than as assumed for the purposes of such estimates. The following
is a discussion of the accounting policies used by us, which we believe are
critical in that they require estimates and judgments by management.
Revenue Recognition
Significant management judgments and estimates must be made and used in
connection with the recognition of revenue in any accounting period. Material
differences in the amount of revenue in any given period may result if these
judgments or estimates prove to be incorrect or if management's estimates change
on the basis of development of the business or market conditions.
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.
If we do not accurately estimate the resources required or the scope of the work
to be performed, or do not manage our projects properly within the planned cost
or satisfy our obligations under the contracts, then future results may be
significantly and negatively affected.
Goodwill
The principal judgements and uncertainties affecting our accounting for goodwill
relate to carrying values. The carrying values of purchased goodwill are
assessed annually, using discounted cash flows and net realisable values. The
estimates and judgements used to assess carrying values include those relating
to commercial risk, revenue and cost projections, our intention with respect to
the acquired goodwill, the impact of competition, the impact of any
reorganisation or change of our business focus, the level of third party
interest in our operations and market conditions.
If the carrying value of goodwill exceeds the recoverable amount, the carrying
value of goodwill would be written down to the recoverable amount. If we were to
use different estimates or judgements, particularly with respect to expected
revenue and cost projections or the impact of any reorganisation or change of
business focus, a material impairment charge to the statement of operations
could arise. We believe that we have used reasonable estimates and judgements in
assessing the carrying value of our goodwill.
Inflation
We believe that the effects of inflation generally do not have a material
adverse impact on our operations or financial conditions.
24
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its expected settlement amount each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Adoption of this standard on June 1, 2002
did not have a material impact on our 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). We adopted SFAS No. 144 on June 1, 2002. Adoption of SFAS No. 144 did
not have a material impact on our results of operations and financial position.
In November 2001, the Emerging Issues Task Force, 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. Our reimbursed costs include such items as payments to
investigators and travel costs for our clinical research staff. We do not earn a
profit on these costs. We have always included such reimbursed costs within our
measure of gross revenues and adoption of EITF Issue 01-14 had no effect on our
reported results.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 provides for the rescission of several previously issued accounting
standards, new accounting guidance of the accounting for certain lease
modifications and various technical corrections that are not substantive in
nature to existing pronouncements. SFAS No. 145 will be adopted beginning June
1, 2003, except for the provisions relating to the amendment of SFAS No. 13,
which have been adopted for the transactions occurring subsequent to May 15,
2002. Adoption of SFAS No. 145 did not have a material impact on our results of
operations and financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting 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 No.
146 requires that a liability for a cost 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
initiated after December 31, 2002 and was effective in our third quarter ending
February 28, 2003. Adoption of 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 our financial position or results of operations.
25
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 No. 148"). SFAS No. 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 No. 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 No. 148 are generally effective for
fiscal years ending after December 15, 2002. The enhanced disclosure
requirements are included in our financial statements. We have 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.
We did not create or obtain an interest in a VIE after January 31, 2003 and we
do 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" ("SFAS No.
149"), 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. SFAS No. 149 has multiple effective date provisions
depending on the nature of the amendment to Statement 133. Under SFAS No. 133,
our foreign exchange contracts do not qualify for hedge accounting treatment. We
do not expect the impact of adopting SFAS No. 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"
("SFAS No. 150"). 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 nonpublic 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. We do not expect the impact of adopting SFAS No. 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. We will adopt
EITF Issue No. 00-21 on June 1, 2003 and do not expect this will have a
significant impact on our financial statements.
26
Item 6. Directors, Senior Management and Employees.
Directors and Senior Management
The following table and accompanying biographies set forth certain information
concerning each of ICON plc officers, directors and other key employees as of
May 31, 2003.
Name Age Position
- -------------------------------------------------------------------------------------------------------------------
Dr. John Climax(1)(2) 50 Chairman of the Board
Peter Gray(1) 48 Chief Executive Officer, Director
Sean Leech(1) 32 Chief Financial Officer & Company Secretary
Dr. Ronan Lambe(1) 63 Director
Thomas Lynch(2)(3) 46 Director
Edward Roberts(2)(3) 68 Director
Lee Jones(3) 47 Director
Dr. Allan Morgan 49 Chief Medical Officer
William Taaffe 54 President & Chief Executive Officer of ICON Clinical Research - U.S.
Dr. Markus Weissbach 47 President of ICON Clinical Research - Europe
Edward Caffrey 49 President of ICON Laboratories
Dr. John Hubbard 46 Chief Operating Officer, ICON Clinical Research - U.S.
Thomas Frey 50 Chief Operating Officer, ICON Clinical Research - Europe
Josephine Coyle 45 Vice President for Corporate Quality Assurance
- -------------------------------------------------------------------------------------------------------------------
(1) Executive Officer of the Company
(2) Member of Compensation Committee
(3) Member of Audit Committee
Dr. John Climax, one of the Company's co-founders, has served as a director of
the Company and its subsidiaries since June 1990. Dr. Climax served as Chief
Executive Officer from June 1990 to October 2002 and was appointed Chairman of
the Board in November 2002. Dr. Climax has over 18 years of experience in the
contract research industry in both Europe and the United States. Dr. Climax
received his primary degree in pharmacy in 1977 from the University of
Singapore, his masters in applied pharmacology in 1979 from the University of
Wales and his Ph.D. in pharmacology from the National University of Ireland in
1982.
Peter Gray has served as the Chief Executive Officer of ICON and its
subsidiaries since November 2002. He served as the Group Chief Operating Officer
of ICON and its subsidiaries from June 2001, and was Chief Financial Officer
from June 1997 to June 2001. He has been a director of the Company since June
1997. Mr. Gray has over 12 years experience in the pharmaceutical services
industry and has also worked in the engineering and food sectors. Mr. Gray
received a degree in Law from Trinity College Dublin in 1977 and became a
chartered accountant in 1980.
Sean Leech has served as Chief Financial Officer of ICON and its subsidiaries
since June 2001 and previously as Group Vice President of Finance from June
1999. Mr. Leech was Group Financial Controller of Jones Group plc, a shipping,
manufacturing and fuel distribution company based in Ireland, from 1997 to 1999.
Mr. Leech is an Associate member of the Chartered Institute of Management
Accountants.
Dr. Ronan Lambe, one of the Company's co-founders, served as Chairman of the
Board of the Company from June 1990 to November 2002. Dr. Lambe has over 21
years of experience in the contract research industry in Europe. Dr. Lambe
attended the National University of Ireland where he received his bachelor of
science degree in chemistry in 1959, his masters in biochemistry in 1962 and his
Ph.D. in pharmacology in 1976. Dr. Lambe continues to serve as a director of the
Company.
Thomas Lynch has served as an outside director of the Company since January
1996. Since May 1993, Mr. Lynch has held several senior positions in Elan
Corporation, plc, a specialty pharmaceutical company, including Executive Vice
President, Chief Financial Officer and Deputy Chairman. He is currently Senior
Advisor to the Chairman of the Board of Elan Corporation plc. Mr. Lynch is a
director of Nanogen, Inc. and Chairman of Amarin Corporation plc. Mr. Lynch was
a partner at KPMG from May 1990 to May 1993.
27
Edward Roberts has served as an outside director of the Company since February
1998. Mr. Roberts was Managing Director of the Pharmaceutical Division of Merck
KGaA from 1990 to 1998. Prior to that, he held a number of senior management
positions with Eli Lilly International in Europe and the United States. Mr.
Roberts has over 38 years of experience in the pharmaceutical industry. He has
been a partner in Global Health Care Partners since June 1998, and also serves
as Chairman of Biopartners and Chairman of the Advisory Board of Merz & Co.
GmbH.
Lee Jones has served as an outside director of the Company since June 1, 2001.
Since March 2000, he has been Chairman and Chief Executive Officer of Americas
Doctor, a pharmaceutical services company. Previously, he was Divisional
Vice-President of Information Management and Technology in the Pharmaceutical
Product Division of Abbott Laboratories. He has held various senior positions
with Abbott Laboratories and the Upjohn Company.
Dr. Allan Morgan has served as Chief Medical Officer of the Company since
December 1990. Dr. Morgan has 23 years of experience in the pharmaceutical
industry and received his medical degree from the Welsh National School of
Medicine in 1978.
William Taaffe has served as President of ICON Clinical Research - U.S. since
November 1993 and now also holds the title of Chief Executive Officer of ICON
Clinical Research - U.S. Mr. Taaffe has over 27 years of experience in the
contract research and the pharmaceutical industries in Ireland, Canada and the
United States. Mr. Taaffe received his bachelor of science degree in 1970 from
the University College Dublin.
Dr. Markus Weissbach served as President of ICON Clinical Research GmbH from
1996 to 1999 and currently holds the position of President of ICON Clinical
Research Europe. Dr. Weissbach was the head of the Cardiovascular department of
Takeda Euro R&D center from January 1994 to December 1996 and the Associate
Director of Clinical Cardiology/Nephrology at BASF Pharmaceuticals from January
1990 to January 1994. Dr. Weissbach received his degree in medicine from the
University of Freiburg in 1982.
Edward Caffrey has served as President of ICON Laboratories since June 2000. Mr.
Caffrey has over 21 years experience in the contract research industry. From
January 1998 until joining ICON, Mr. Caffrey was Senior Vice President of
Clinical Operations at Covance North America; he also served as a Managing
Director at Covance from January 1990 to January 1998. Mr. Caffrey is a fellow
of the Institute of Biomedical Sciences in London and holds an MSc from Dublin
City University.
Dr. John W. Hubbard has served as Chief Operating Officer of ICON Clinical
Research - U.S. since October 1999. Dr. Hubbard has more than 18 years of
experience in pharmaceutical research and development. From July 1997 until
joining ICON, he held the position of Senior Vice President of Clinical Research
Operations at Clinical Studies, a division of Innovative Clinical Solutions,
Ltd. Dr. Hubbard received a Ph.D. in Cardiovascular Physiology from the
University of Tennessee and a B.S. in Psychology/Biology from the University of
Santa Clara.
Dr. Thomas Frey has served as Chief Operating Officer for ICON Clinical Research
- - Europe since June 2001 and has also served as Vice President of ICON Clinical
Operations Europe from January 2000 to May 2001. Dr. Frey has 15 years of
experience in pharmaceutical research and development. He started his career in
1987 with Hoechst Pharmaceuticals. From 1995 to the end of 1999 he was Senior
Director of Clinical Development Europe at Hoechst Marion Roussel. Dr. Frey
received his medical degree in 1980 from the University of Heidelberg.
Josephine Coyle has served as Vice President for Corporate Quality Assurance
since April 2000. Ms. Coyle has held positions of increasing responsibility in
ICON since August 1992 and previously held the position of director of Quality
Assurance.
Board of Directors
ICON's Articles of Association provide that, unless otherwise determined by ICON
at a general meeting, the number of directors shall not be more than 15 nor less
than 3. At each annual general meeting, one third of the directors who are
subject to retirement by rotation, rounded down to the next whole number if it
is a fractional number, shall retire from office. The directors to retire shall
be those who have been longest in office, but as between persons who became or
were last re-appointed on the same day, those to retire shall be determined,
unless otherwise agreed, by lot. Accordingly, at the annual general meeting of
ICON to be held in 2004, it is anticipated that two directors will retire by
rotation and offer themselves for re-election, such directors to be determined,
unless otherwise agreed, by lot. Any additional director appointed by us shall
hold office until the next annual general meeting and will be subject to
re-election at that meeting.
28
Board committees
We established a compensation committee and an audit committee in 1998, both of
which are committees of the Board of Directors and are composed mainly of
non-executive directors of ICON plc.
Compensation committee
The compensation committee comprises Dr. John Climax, Thomas Lynch (Chairman)
and Edward Roberts. It deals with all aspects of senior executive remuneration.
The committee aims to ensure that remuneration packages are competitive so that
individuals are appropriately rewarded relative to their responsibility,
experience and value to ICON.
Annual bonuses for executive directors are determined by the committee based on
the achievement of ICON's objectives.
Audit committee
The audit committee comprises Edward Roberts (Chairman), Thomas Lynch and Lee
Jones. It reviews the annual report, the quarterly earnings releases, the
effectiveness of the system of internal controls, reviews the compliance with
our ethical code and legal requirements and approves the appointment and removal
of the external auditors. It also addresses all issues raised and
recommendations made by the external auditors.
The aggregate compensation paid by ICON to all persons who served in the
capacity of director or officer in fiscal 2003 (7 persons) was approximately
$2.4 million, but does not include expenses reimbursed to officers (including
business travel, professional and business association dues and expenses). As of
May 31, 2003, options granted to directors and executive officers of ICON to
purchase an aggregate of 127,000 of our ordinary shares were outstanding. The
options are exercisable at prices of $5.45 and $29.00 and expire between April
26, 2004 and January 21, 2011.
In addition, our officers are eligible to participate in ICON's Incentive Share
Option Scheme. See Note 9 to the Consolidated Financial Statements.
Employees
We employed 2,280, 1,637 and 1,262 people for the years ending May 31, 2003,
2002 and 2001, respectively. Our employees are not unionized and we believe that
our relations with our employees are good.
Share Ownership
The following table sets forth certain information regarding beneficial
ownership of ICON's ordinary shares (including ADSs) as of July 25, 2003 by all
of our current directors and executive officers. Unless otherwise indicated
below, to our knowledge, all persons listed below have sole voting and
investment power with respect to their ordinary shares, except to the extent
authority is shared by spouses under applicable law.
Name of Owner or Identity of Group No. of Shares (1) Options
- --------------------------------------------------------------------------------
Dr. Ronan Lambe 2,408,120 4,500
Dr. John Climax (2) 2,638,120 10,000
Mr. Peter Gray 14,220 64,000
Mr. Sean Leech - 25,000
Mr. Thomas Lynch (3) 50,001 11,000
Mr. Edward Roberts 4,001 7,000
Mr. Lee Jones - 5,500
- --------------------------------------------------------------------------------
(1) As used in this table, each person has the sole or shared power to
vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to
dispose, or direct the disposition, of a security). A person is deemed
as of any date to have "beneficial ownership" of any security if that
such person has the right to acquire such security within 60 days
after such date.
(2) Includes 1,115,000 ADSs held by Wineberry Limited, a Jersey company
controlled by Dr. Climax.
(3) Includes 10,000 ordinary shares not beneficially held by Mr. Lynch.
Employee Share Option Schemes
On January 17, 2003, we adopted the Share Option Plan 2003, or the 2003 Plan,
pursuant to which the Compensation Committee of the Board may grant options to
employees of the Company or its subsidiaries for the purchase of ordinary
shares. Each option
29
will be either an incentive stock option, or ISO, described in Section 422 of
the Code or an employee stock option, or NSO, not 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.
Executive officers remuneration
For the year ended May 31, 2003, the total remuneration paid to our directors
and executive officers including salary, bonus, pension and benefits-in-kind
(2002: $1,463,274), was as follows:
U.S.$
- --------------------------------------------------------------------------------
Dr. John Climax (1) 924,449
Dr. Ronan Lambe (1) 531,637
Mr. Peter Gray (1) 619,534
Mr. Sean Leech (1) 286,674
Mr. Lee Jones 25,000
Mr. Edward Roberts 25,000
Mr. Thomas Lynch 25,000
- --------------------------------------------------------------------------------
Total $2,437,294
(1) These amounts include bonuses for the period ended May 31, 2002 and
May 31, 2003.
Item 7. Major Shareholders and Related Party Transactions.
(a) ICON plc, is not directly or indirectly, owned or controlled by
another corporation or by any government.
(b) The following table sets forth certain information regarding
beneficial ownership of ICON's ordinary shares (including ADS's) as of
July 25, 2003 (i) by each person that beneficially owns more than 5%
of the outstanding ordinary shares, based upon publicly available
information; and (ii) by all of our current directors and executive
officers as a group. Unless otherwise indicated below, to our
knowledge, all persons listed below have sole voting and investment
power with respect to their ordinary shares, except to the extent
authority is shared by spouses under applicable law.
Name of Owner or Identity of Group No. of Shares (1) Percent of Class
- --------------------------------------------------------------------------------------------------
Dr. John Climax (2) 2,648,120 22.4%
Dr. Ronan Lambe 2,412,620 20.4%
Fidelity Group Companies, Inc. (3) 1,092,171 9.2%
All officers and executive officers as a group (4) 5,241,462 44.3%
30
(1) As used in this table, each person has the sole or shared power to
vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to
dispose, or direct the disposition, of a security). A person is deemed
as of any date to have "beneficial ownership" of any security if that
such person has the right to acquire such security within 60 days
after such date.
(2) Includes 1,115,000 ADSs held by Wineberry Limited, a Jersey company
controlled by Dr. Climax.
(3) Neither the Company nor any of its officers, directors or affiliates
hold any voting power in this entity.
(4) Includes 127,000 ordinary shares issuable upon the exercise of stock
options granted by the Company.
Related Parties
On February 6, 1998, ICON 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 ICON 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 ICON 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.
Item 8. Financial Information.
Financial Statements
See item 18.
Legal Proceedings
ICON is 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.
Dividends
We have not paid cash dividends on our ordinary shares and do not intend to pay
cash dividends on our ordinary shares in the foreseeable future.
Item 9. The Offer and the Listing.
ICON's ADSs are traded on the Nasdaq National Market under the symbol "ICLR".
Our Depository for the ADSs is The Bank of New York. ICON also has a secondary
listing on the Official List of the Irish Stock Exchange. No securities of ICON
are traded in any other market. The following table sets forth the trading price
for the dates indicated for ICON plc ADSs as reported by Nasdaq.
Year Ending High Sales Price Low Sales Price
During Period During Period
- --------------------------------------------------------------------------------
May 31, 1998 $25.68 $23.56
May 31, 1999 $36.75 $10.00
May 31, 2000 $29.00 $11.87
May 31, 2001 $29.75 $15.00
May 31, 2002 $39.58 $22.93
May 31, 2003 $32.87 $14.88
31
Quarter Ending High Sales Price Low Sales Price
During Period During Period
- --------------------------------------------------------------------------------
August 31, 2000 $18.75 $15.38
November 30, 2000 $20.13 $15.00
February 28, 2001 $29.75 $15.38
May 31, 2001 $27.55 $18.38
August 31, 2001 $39.58 $26.74
November 30, 2001 $35.69 $22.93
February 28, 2002 $32.79 $25.13
May 31, 2002 $34.49 $23.87
August 31, 2002 $30.50 $14.88
November 30, 2002 $26.00 $18.99
February 28, 2003 $32.87 $22.35
May 31, 2003 $30.85 $21.36
Month Ending High Sales Price Low Sales Price
During Period During Period
- --------------------------------------------------------------------------------
December 31, 2002 $27.41 $22.35
January 31, 2003 $32.87 $26.78
February 28, 2003 $27.82 $22.86
March 31, 2003 $26.50 $23.50
April 30, 2003 $25.90 $21.36
May 31, 2003 $30.85 $24.10
Item 10. Additional Information.
Memorandum and Articles of Association
Not Applicable
Exchange Controls and Other Limitations Affecting Security Holders.
Irish exchange control regulations ceased to apply from and after December 31,
1992. Except as indicated below, there are no restrictions on non-residents of
Ireland dealing in domestic securities, which includes shares or depository
receipts of Irish companies such as ICON. Except as indicated below, dividends
and redemption proceeds also continue to be freely transferable to non-resident
holders of such securities.
The Financial Transfers Act, 1992 gives power to the Minister for Finance of
Ireland to make provision for the restriction of financial transfers between
Ireland and other countries. Financial transfers are broadly defined, and
include all transfers, which would be movements of capital or payments within
the meaning of the treaties governing the European Communities. The acquisition
or disposal of ADRs representing shares issued by an Irish incorporated company
and associated payments may fall within this definition. In addition, dividends
or payments on redemption or purchase of shares and payments on a liquidation of
an Irish incorporated company would fall within this definition. At present, the
Financial Transfers Act, 1992 prohibits financial transfers only to, or by the
order of, or on behalf of, listed terrorist organizations, also listed residents
and entities of Zimbabwe and Burma without the prior permission of the Central
Bank of Ireland.
Any transfer of, or payment in respect of an ADS involving the government of any
country which is currently the subject of United Nations sanctions, any person
or body controlled by any of the foregoing, or by any person acting on behalf of
the foregoing, may be subject to restrictions pursuant to such sanctions as
implemented into Irish law. There are no restrictions under ICON's Articles of
Association, or under Irish Law, that limit the right of non-residents or
foreign owners to hold or vote the ordinary shares.
32
Taxation
General
The following discussion is based on existing Irish tax law, Irish court
decisions and the practice of the Revenue Commissioners of Ireland, and the
convention between the United States and Ireland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to income and capital
gains (the "Treaty"). This discussion does not purport to deal with the tax
consequences of owning the ordinary shares for all categories of investors, some
of which may be subject to special rules. Prospective purchasers of ordinary
shares are advised to consult their own tax advisors concerning the overall tax
consequences arising in their own particular situations under Irish law. Each
prospective investor should understand that future legislative, administrative
and judicial changes could modify the tax consequences described below, possibly
with retroactive effect.
As used herein, the term "U.S. Holder" means a beneficial owner of ordinary
shares that (i) owns the ordinary shares as capital assets; (ii) is a U.S.
citizen or resident, a U.S. corporation, an estate the income of which is
subject to U.S. federal income taxation regardless of its source or a trust that
meets the following two tests: (A) a U.S. court is able to exercise primary
supervision over the administration of the trust, and (B) one or more U.S.
persons have the authority to control all substantial decisions of the trust;
and for purposes of the discussion under Irish Taxation of U.S. Holders (A) is
not a resident of, or ordinarily resident in, Ireland for the purposes of Irish
tax; and (B) is not engaged in trade or business in Ireland through a permanent
establishment.
AS USED HEREIN, REFERENCES TO THE ORDINARY SHARES SHALL INCLUDE ADSs
REPRESENTING SUCH ORDINARY SHARES AND ADRs EVIDENCING OWNERSHIP OF SUCH ADSs.
Irish Taxation
ICON is a public limited company incorporated and resident for tax purposes in
Ireland.
For Irish tax purposes, the residence of a company is in the jurisdiction where
the central management and control of the company is located. Subject to certain
exceptions, all Irish incorporated companies are deemed to be Irish tax
resident. Companies which are resident in the Republic of Ireland are subject to
Irish corporation tax on their total profits (wherever arising and, generally,
whether or not remitted to the Republic of Ireland). The question of residence,
by virtue of management and control, is essentially one of fact. It is the
present intention of the company's management to continue to manage and control
the company from the Republic of Ireland, so that the company will continue to
be resident in the Republic of Ireland.
The standard rate of Irish corporation tax on trading income (with certain
exceptions) is currently 12.5%.
Patent exemption is available to Irish resident companies whose income derives
from qualifying royalties or license fees paid in respect of qualifying patents.
The main requirement to qualify for the exemption is that the research,
planning, processing, experimentation, testing, devising, designing, developing
or similar activity leading to the invention which is the subject of the patent
is carried out in Ireland. Under Irish law, income from such qualifying patents
is disregarded for taxation purposes. There is no termination date for this
relief specified in the legislation.
To the extent that the company is involved in the "manufacture" of goods in
Ireland, income from this activity, in respect of its data processing operations
carried out in Ireland, can qualify for a 10% rate of tax. This relief is
available until December 31, 2010.
Corporation tax is charged at the rate of 25% on a company's non-trading income
and certain types of trading income not eligible for the lower rates discussed
above.
Irish capital duty, a tax on the issuance of share capital by companies, is
payable at the rate of 1% of proceeds received by the company in consideration
of such issuance.
33
Taxation of Dividends
Unless exempted, all dividends paid by ICON, other than dividends paid entirely
out of exempt patent income, subject to conditions, will be subject to Irish
withholding tax at the standard rate of income tax in force at the time the
dividend is paid, currently 20%. An individual shareholder who is neither a tax
resident nor ordinarily resident in Ireland, but is resident in a country with
which Ireland has a double tax treaty, which includes the United States, or in a
member state of the European Union, other than Ireland (together a "Relevant
Territory"), will be exempt from withholding tax provided he or she makes the
requisite declaration. No dividend withholding tax will apply on the payment of
a dividend from an Irish resident company to its Irish resident 51% parent
company. Where the Irish company receiving the dividend does not hold at least
51% of the shares of the paying company, the dividend will be exempt if the
Irish corporate shareholder makes the requisite declaration.
Non-Irish resident corporate shareholders that:
o are ultimately controlled by residents of a Relevant Territory;
o are resident in a Relevant Territory and are not controlled by Irish
residents;
o have the principal class of their shares, or shares of a 75% parent,
substantially and regularly traded on one or more recognized stock
exchanges in a Relevant Territory or Territories; or
o are wholly owned by two or more companies, each of whose principal
class of shares is substantially and regularly traded on one or more
recognized stock exchanges in a Relevant Territory or Territories;
o will be exempt from withholding tax on the production of the
appropriate certificates and declarations.
U.S. Holders of ordinary shares (as opposed to ADSs: see below) should note,
however, that these documentation requirements may be burdensome. As described
below, these documentation requirements do not apply in the case of ADSs.
Special arrangements are available in the case of shares held in Irish companies
through American depositary banks using ADSs. The depositary bank will be
allowed to receive and pass on a dividend from the Irish company without any
deduction for withholding tax in the following circumstances:
o the depositary has been authorized by the Irish Revenue Commissioners
as a qualifying intermediary and such authorization has not expired or
revoked; and either
o the depositary bank's ADS register shows that the beneficial owner has
a U.S. address on the register; or
o if there is a further intermediary between the depositary bank and the
beneficial owner, where the depositary bank receives confirmation from
the intermediary that the beneficial owner's address in the
intermediary's records is in the U.S.
Income Tax
Under certain circumstances, non-Irish resident shareholders will be subject to
Irish income tax on dividend income. This liability is limited to tax at the
standard rate and therefore, where withholding tax has been deducted, this will
satisfy the tax liability.
However, a U.S. Holder will not have an Irish income tax liability on dividends
from the company if the U.S. Holder is neither resident nor ordinarily resident
in the Republic of Ireland and the U.S. Holder is:
o an individual resident in the U.S. (or several other countries);
o a corporation that is ultimately controlled by persons resident in the
U.S. (or several other countries);
o a corporation whose principal class of shares (or its 75% or greater
parent's principal class of shares) is substantially and regularly
traded on a recognized stock exchange in an EU country or a country
with which Ireland has concluded a double taxation treaty;
o a corporation resident in another EU member state or in a country with
which Ireland has concluded a double taxation treaty, which is not
controlled directly or indirectly by Irish residents; or
o a corporation that is wholly owned by two or more corporations each of
whose principal class of shares is substantially and regularly traded
on a recognized stock exchange in an EU country or a country with
which Ireland has concluded a double taxation treaty.
U.S. Holders that do not fulfill the documentation requirements or otherwise do
not qualify for the withholding tax exemption may be able to claim treaty
benefits under the treaty. U.S. Holders that are entitled to benefits under the
treaty will be able to claim a partial refund of the 20% withholding tax from
the Irish Revenue Commissioners.
34
Taxation of Capital Gains
A person who is not resident or ordinarily resident in Ireland, has not been an
Irish resident within the past five years and who does not carry on a trade in
Ireland through a branch or agency will not be subject to Irish capital gains
tax on the disposal of ordinary shares or ADSs, so long as the ordinary shares
or ADSs, as the case may be, are either quoted on a stock exchange or do not
derive the greater part of their value from Irish land or mineral rights. The
Finance Act, 2003, has introduced provisions to subject a person who disposes of
an interest in a company while temporarily non-resident in the Republic of
Ireland, to Irish capital gains tax. This treatment will apply to individuals
who:
o cease to be Irish resident;
o own the shares when they cease to be resident;
o resume their Irish residence within five years;
o dispose of an interest in a company during this temporary
non-residence; and
o the interest disposed of represents 5% or greater of the share capital
of the company or is worth at least E500,000.
In these circumstances the person will be deemed, for Irish capital gains tax
purposes, to have sold and immediately reacquired the interest in the company on
the date of his or her departure and will be subject to tax at 20% of the
taxable gain.
Irish Capital Acquisitions Tax
Irish capital acquisitions tax (referred to as CAT) applies to gifts and
inheritances.
Where a gift or inheritance is taken under a disposition made after December 1,
1999, it will be within the charge to CAT:
o to the extent that the property of which the gift or inheritance
consists is situated in the Republic of Ireland at the date of the
gift or inheritance;
o where the person making the gift or inheritance is or was resident or
ordinarily resident in the Republic of Ireland at the date of the
disposition under which the gift or inheritance is taken;
o in the case of a gift taken under a discretionary trust where the
person from whom the gift is taken was resident or ordinarily resident
in the Republic of Ireland at the date he made the settlement, or at
the date of the gift or, if he is dead at the date of the gift, at his
death; or
o where the person receiving the gift or inheritance is resident or
ordinarily resident in the Republic of Ireland at the date of the gift
or inheritance.
Where a gift or an inheritance is taken under a disposition made prior to
December 1, 1999, CAT is chargeable in the following circumstances:
o to the extent that the property of which the gift or inheritance
consists is situated in the Republic of Ireland at the date of the
gift or inheritance;
o where the person making the gift or inheritance is or was domiciled in
Ireland at the date of the disposition under which the gift or
inheritance is taken;
o in the case of a gift taken under a discretionary trust, where the
disponer, who is usually the settlor, in relation to that trust was
domiciled in Ireland at the date he made the settlement, or at the
date of the gift or, where the gift is taken after his death, at the
date of his death.
The person who receives the gift or inheritance is primarily liable for CAT. A
person is secondarily liable if he is the donor, his personal representative or
an agent, trustee or other person in whose care the property constituting the
gift or inheritance or the income therefrom is placed. Taxable gifts or
inheritances received by an individual since December 5, 1991 from donors in the
35
same threshold class are aggregated and only the excess over a specified
tax-free threshold is taxed. The tax-free threshold is dependent on the
relationship between the donor and the donees and the aggregation since December
5, 1991 of all previous gifts and inheritances, within the same tax threshold.
The tax-free threshold amounts currently in force are:
o E22,060 in the case of persons who are not related to one another;
o E44,120 in the case of gifts or inheritances received from inter alia
a brother or sister or from a brother or sister of a parent or from a
grandparent; and
o E444,198 in the case of gifts and inheritances received from a parent
(or from a grandparent by a minor child of a deceased child) and
specified inheritances received by a parent from a child.
Gifts and inheritances passing between spouses are exempt from CAT.
A gift or inheritance of ordinary shares or ADSs will be within the charge to
Irish capital acquisitions tax, notwithstanding that the person from whom or by
whom the gift or inheritance is received is domiciled or resident outside
Ireland.
The Estate Tax Convention between Ireland and the United States generally
provides for Irish capital acquisitions tax paid on inheritances in Ireland to
be credited against U.S. federal estate tax payable in the United States and for
tax paid in the United States to be credited against tax payable in Ireland,
based on priority rules set forth in the Estate Tax Convention. The Estate Tax
Convention does not apply to Irish capital acquisitions tax paid on gifts.
Irish Probate Tax
Irish probate tax was abolished under the Finance Act, 2001. No probate tax will
arise on any assets passing in respect of a death occurring on or after December
6, 2000.
Irish Stamp Duty - Ordinary Shares
Irish stamp duty, which is a tax on certain documents, including CREST operator
instructions, is payable on all transfers of the ordinary shares (other than
between spouses) whenever a document of transfer is executed. Where the transfer
is attributable to a sale, stamp duty will be charged at a rate of 1%, rounded
to the nearest Euro. The stamp duty is calculated on the amount or value of the
consideration (i.e. purchase price) or, if the transfer is by way of a gift
(subject to certain exceptions) or for consideration less than the market value,
on the market value of the shares. Where the consideration for the sale is
expressed in a currency other than Euro, the duty will be charged on the Euro
equivalent calculated at the rate of exchange prevailing on the date of the
transfer.
Transfers of ordinary shares between associated companies (broadly, companies
within a 90% group relationship, and subject to the satisfaction of certain
conditions) are exempt from stamp duty in the Republic of Ireland. In the case
of transfers of ordinary shares where no beneficial interest passes (e.g. a
transfer of shares from a beneficial owner to his nominee), no stamp duty arises
where the transfer contains the appropriate certificate and, in the absence of
such certificate, a flat rate of E12.70 (the nominal rate) will apply.
Irish Stamp Duty - ADSs Representing Ordinary Shares
A transfer by a shareholder to the depositary or custodian of ordinary shares
for deposit under the deposit agreement in return for ADSs and a transfer of
ordinary shares from the depositary or the custodian upon surrender of ADSs for
the purposes of the withdrawal of the underlying ordinary shares in accordance
with the terms of the deposit agreement will be stampable at the ad valorem rate
if the transfer relates to a sale or contemplated sale or any other change in
the beneficial ownership of such ordinary shares. However, it is not certain
whether the mere withdrawal of ordinary shares in exchange for ADSs or ADSs for
ordinary shares would be deemed to be a transfer of or change in the beneficial
ownership which would be subject to stamp duty at the ad valorem rate. Where the
transfer merely relates to a transfer where no change in the beneficial
ownership in the underlying ordinary shares is effected or contemplated, no
stamp duty arises where the transfer contains the appropriate certificate and,
in the absence of such certificate, the nominal rate stamp duty of E12.70
applies.
Transfers of ADSs are exempt from Irish stamp duty as long as the ADSs are dealt
in on the Nasdaq National Market or any recognized stock exchange in the United
States or Canada.
36
The person accountable for payment of stamp duty is the transferee or, in the
case of a transfer by way of gift, or for a consideration less than the market
value, all parties to the transfer. A late or inadequate payment of stamp duty
will result in a liability to pay interest, penalties and fines.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended, and file reports and other information with the SEC. You
may read and copy any of our reports and other information at, and obtain copies
upon payment of prescribed fees from, the Public Reference Room maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
SEC's regional office at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
We "incorporate by reference" information that we file with the SEC, which means
that we can disclose important information to you by referring you to those
documents. The information incorporated by reference is an important part of
this report and more recent information automatically updates and supersedes
more dated information contained or incorporated by reference in this report.
Our SEC file number is 333-8704.
As a foreign private issuer, we are exempt from the rules under the Securities
Exchange Act of 1934, as amended, prescribing the furnishing and content of
proxy statements to shareholders.
We will provide without charge to each person, including any beneficial owner,
on the written or oral request of such person, a copy of any or all documents
referred to above which have been or may be incorporated by reference in this
report (not including exhibits to such incorporated information that are not
specifically incorporated by reference into such information). Requests for such
copies should be directed to us at the following address: ICON plc, South County
Business Park, Leopardstown, Dublin 18, Ireland, Attention: Brian O'Dwyer,
telephone number: (353) 1 291 2000.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
Qualitative Disclosure of Market Risk. The principal market risks (i.e. risk of
loss arising from adverse changes in market rates and prices) to which we are
exposed are:
o Interest rate changes on short term investments (available for sale)
in the form of floating rate notes and medium term minimum "A" rated
corporate securities, and
o Foreign currency risk on non-U.S. dollar denominated cash and non-U.S.
dollar denominated debt.
We use derivative financial instruments solely to hedge exposure to these market
risks and we do not enter into these instruments for trading or speculative
purposes.
Our primary foreign currency exchange risk relates to movements in rates between
the U.S. dollar, Sterling and the Euro. At May 31, 2003, we had cash and short
term debt denominated in non-U.S. dollar denominated currencies. In order to
reduce the foreign currency exchange risk during the year, we entered into
certain derivative instruments to reduce our exposure to adverse changes in
exchange rates. These financial instruments comprised of a series of foreign
exchange forward contracts all of which were settled during the 2003 fiscal
year. At May 31, 2003, we held no foreign exchange forward contracts maturing
within the next 12 months.
Quantitative disclosure of Market Risk. The analysis below presents the
sensitivity of the market value, or fair value of our financial instruments to
selected changes in market rates and prices. The changes chosen represent our
view of changes that are reasonable over a one year period. The estimated fair
value of the foreign exchange forward contracts is based on quotations from
independent third party financial institutions.
37
The hypothetical changes in fair value are estimated based on the same
methodology used by the third party financial institutions to calculate the fair
value of the original instruments, keeping all variables constant except the
relevant exchange rate, as the case may be, which has been adjusted to reflect
the hypothetical change. Fair value estimates by their nature are subjective and
involve uncertainties and matters of significant judgment and therefore cannot
be determined precisely.
Foreign Currency Exchange Risk
The sensitivity analysis below represents the hypothetical change in fair value
based on an immediate 10% movement in the exchange rates.
Fair value Change +10% Fair value Change -10%
Fair value at movement in foreign movement in foreign
May 31, 2003 exchange rate exchange rate
(in thousands) (in thousands) (in thousands)
Non-U.S. Dollar denominated cash $4,590 $459 $(459)
Non-U.S. Dollar denominated short term debt (204) (20) 20
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
None.
Item 15. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal controls.
The CEO and CFO have concluded there were no significant changes in the
Company's internal controls or in the other factors that could significantly
affect those controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Item 16. Reserved.
38
Part III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
Reference is made to pages 41 to 69 of this Form 20-F.
Item 19. Financial Statements and Exhibits.
Financial statements of ICON plc and subsidiaries
Report of Independent Chartered Accountants
Consolidated Balance Sheets at May 31, 2002, and May 31, 2003
Consolidated Statements of Operations for the years ended May 31, 2001,
2002 and 2003
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended May 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the years ended May 31, 2001,
2002 and 2003
Notes to the Consolidated Financial Statements
Exhibits of ICON plc and subsidiaries
Significant subsidiaries
Section 906 certifications
39
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
40
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.
41
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.
42
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.
43
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 (1,075) 1,631 3,768
- -------------------------------------------------------------------------------------------------------------------
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.
44
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.
45
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 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.
46
(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.
(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.
47
(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
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
------------------------------------------------------------------------------------------------------------
48
(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:
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
-------------------------------------------------------------------------------------------------------------------
(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.
49
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:
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
- --------------------------------------------------------------------------------
50
(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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
51
(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
- --------------------------------------------------------------------------------
(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.
52
(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
- --------------------------------------------------------------------------------
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.
53
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
- --------------------------------------------------------------------------------
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 E2.5million (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.
54
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
E120,000 (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.
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
- --------------------------------------------------------------------------------
55
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 following:
May 31, 2003
(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.
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.
56
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 Options Average
Prior to Granted Number Exercise
Jan 15, 1998 Under Plans of 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:
Options Outstanding Options Exercisable
Weighted
Range Average Weighted
Exercise Number of Remaining Average Number of Exercise
Price Shares Contractual Life Exercise Price Shares 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.
57
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
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.
58
11. Share Capital
Ordinary Shares
Holdersof 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 E0.06 per share. The renominalization
generated a capital conversion reserve fund of E39,499 (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 E0.06 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 E0.06 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 E0.06 each were issued to the YRCR shareholders and on August 31,
2001, a further 10,772 ordinary shares of E0.06 were issued. On October 8,
2002, a further 3,696 ordinary shares of E0.06 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.
59
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;
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:
60
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 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.
61
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.
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:
62
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:
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
- -------------------------------------------------------------------------------------------------------------------
63
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 $737 $591 $732
Clinical research 4,238 5,429 6,573
- --------------------------------------------------------------------------------
Total $4,975 $6,020 $7,305
- --------------------------------------------------------------------------------
64
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 $16,566 $19,175
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
- --------------------------------------------------------------------------------
65
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 included such reimbursed costs within
the measure of gross revenues and adoption of EITF Issue 01-14 had no
effect on the reported results.
66
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.
67
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. 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.
68
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned thereunto duly authorized.
ICON public limited company
/s/ Sean Leech
------------------------
July 25, 2003. Sean Leech
Date Chief Financial Officer
69
Certification of Chief Executive Officer
Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, Peter Gray, certify that:
1. I have reviewed this annual report on Form 20-F of ICON plc ("the
registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 21, 2003
/s/ Peter Gray
- -------------------------
Peter Gray
Chief Executive Officer
70
Certification of Chief Financial Officer
Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, Sean Leech, certify that:
1. I have reviewed this annual report on Form 20-F of ICON plc ("the
registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 21, 2003
/s/ Sean Leech
- ---------------------------
Sean Leech
Chief Financial Officer
71
EXHIBIT INDEX
99.1 Certifications of the Company's CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
72
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of ICON plc (the "Company") on Form 20-F
for the period ending May 31, 2003, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Peter Gray, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: October 21, 2003
/s/ Peter Gray
- -------------------------------
Peter Gray
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the report
or as a separate disclosure document. A signed original of this written
statement required by section 906 has been provided to ICON plc and will be
retained by ICON plc and furnished to the Securities and Exchange Commission or
its staff upon request.
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of ICON plc (the "Company") on Form 20-F
for the period ending May 31, 2003, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Sean Leech, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date: October 21, 2003
/s/ Sean Leech
- ---------------------------
Sean Leech
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the report
or as a separate disclosure document. A signed original of this written
statement required by section 906 has been provided to ICON plc and will be
retained by ICON plc and furnished to the Securities and Exchange Commission or
its staff upon request.
73