UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 205494
------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-10173
------------------------
LIFE SCIENCES RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649 9961
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
At July 31, 2002: 11,932,338 Voting Common Stock of $0.01 each
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2002 and
2001.
3
Condensed Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk. 14
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and reports on Forms 6-K and 8-K 15
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended Six months ended
June 30 June 30
(Dollars in thousands, except per share data) 2002 2001 2002 2001
Net revenues 28,590 24,012 54,725 46,701
Cost of revenue (23,120) (20,454) (44,766) (41,369)
------------ ------------
------------- -------------
Gross profit 5,470 3,558 9,959 5,332
Selling and administrative expenses (4,324) (4,178) (8,626) (8,184)
Other operating (expense)/income (14) 169 (1,531) (5)
------------- ------------ ------------ -------------
Operating income/(loss) 1,132 (451) (198) (2,857)
Interest income 27 36 33 75
Interest expense (1,524) (1,616) (3,151) (3,284)
Other income/(loss) 3,255 (346) 2,149 (2,417)
------------ ------------ ------------- -------------
Income/(loss) before income taxes 2,890 (2,377) (1,167) (8,483)
Income tax benefit 26 705 768 2,475
------------ ------------ ------------- -------------
Net income/(loss) 2,916 (1,672) (399) (6,008)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Income/(loss) per common share
- - Basic 0.24 (0.28) (0.04) (1.02)
- - Diluted 0.24 (0.28) (0.04) (1.02)
Weighted average common shares outstanding
- - Basic (000's) 11,932 5,870 9,428 5,867
- - Diluted (000's) 12,053 5,870 9,428 5,867
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands) June 30, December 31,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents 9,282 2,240
Accounts receivable, net of allowance
of $58 (2001: $124) 20,363 18,257
Unbilled receivables 11,262 13,920
Inventories 1,605 1,275
Prepaid expenses and other 4,098 2,777
Deferred income taxes - 73
-------------- -------------
Total current assets 46,610 38,542
-------------- -------------
Property and equipment, net 91,698 90,353
-------------- -------------
Investments 228 202
Unamortized capital bonds issue costs 643 691
Deferred income taxes 4.992 4,176
-------------- -------------
Total assets 144,171 133,964
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable 10,315 9,899
Accrued payroll and other benefits 1,486 2,323
Accrued expenses and other liabilities 9,191 10,336
Fees invoiced in advance 22,488 17,722
Short-term borrowings 146 158
-------------- -------------
Total current liabilities 43,626 40,438
-------------- -------------
Long-term debt 87,015 59,302
Related party loans 552 28,821
Other long-term liabilities 26 174
Deferred income taxes 10,144 9,953
-------------- -------------
Total liabilities 141,363 138,688
-------------- -------------
Commitments and contingencies - -
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value
Authorized at June 30, 2002, 50,000,000
(December 31, 2001, 50,000,000) Issued
and outstanding at June 30, 2002, 11,032,338
(December31, 2001, 5,870,305) 105 59
Non-Voting Common Stock, $0.01 par value
Authorized at June 30, 2002, 5,000,000
(December 31, 2001, 5,000,000)
Issued and oustanding at June 30, 2002, 900,000
(December 31,2001,Nil) 9 -
Preferred Stock, $0.01 par value
Authorized at June 30, 2002 5,000,000
(December 31, 2001, 5,000,000)
Issued and outstanding at June 30 2002, Nil
(December 31, 2001, Nil) - -
Paid in capital 74,303 66,035
Foreign currency translation adjustments (4,752) (4,360)
Accumulated deficit (66,857) (66,458)
-------------- -------------
Total shareholders' equity /(deficit) 2,808 (4,724)
-------------- -------------
Total liabilities and shareholders' equity /(deficit) 144,171 133,964
-------------- -------------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended June 30
(Dollars in thousands) 2002 2001
Cash flows from operating activities:
Net loss (399) (6,008)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 3,793 4,184
Foreign exchange transaction (gain)/loss on Capital Bonds (2,285) 3,019
Deferred income taxes (768) (2,475)
Provision for losses on accounts receivable 29 44
Amortization of warrants 78 -
Amortization of Capital Bonds issue costs 78 78
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses 860 (764)
Inventories (260) (259)
Accounts payable, accrued expenses and other liabilities (2,670) 2,770
Fees invoiced in advance 3,769 786
---------------- ----------------
---------------- ----------------
Net cash provided by operating activities 2,225 1,375
---------------- ----------------
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (1,501) (2,022)
---------------- ----------------
---------------- ----------------
Net cash from investing activities (1,501) (2,022)
---------------- ----------------
---------------- ----------------
Cash flows from financing activities:
Proceeds from issue of Voting Common Stock 4,423 84
Proceeds from issue of Non Voting Common Stock 1,500 -
Proceeds from long-term borrowings - 955
Repayments of short term borrowings (83) (53)
---------------- ----------------
---------------- ----------------
Net cash from financing activities 5,840 986
---------------- ----------------
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 478 (547)
---------------- ----------------
---------------- ----------------
Increase/(decrease) in cash and cash equivalents 7,042 (208)
Cash and cash equivalents at beginning of period 2,240 3,286
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period 9,282 3,078
---------------- ----------------
Supplementary disclosures
Non cash transactions:
Equity issued in exchange for debt conversion 2,400 -
Equity issued in exchange for promissory notes 801 -
---------------- ----------------
---------------- ----------------
Interest paid 2,775 2,909
---------------- ----------------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
Unaudited
1. THE COMPANY AND ITS OPERATIONS
Business
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a leading Contract Research Organization, offering world-wide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that man uses, eats, and is
otherwise exposed to. In addition, it tests the effect of such compounds on the
environment and also performs work on assessing the safety and efficacy of
veterinary products.
Organization
LSR was incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer (the
"Offer") for Huntingdon Life Sciences Group plc ("Huntingdon"). The Offer was
made on October 16, 2001 and was declared unconditional on January 10, 2002, at
which time LSR acquired approximately 89% of the outstanding ordinary shares of
Huntingdon in exchange for approximately 5.3 million shares of LSR Voting Common
Stock. The subsequent offer period expired on February 7, 2002, by which time
approximately 92% of the outstanding ordinary shares had been offered for
exchange. The Company completed its compulsory purchase under UK law of the
remaining outstanding ordinary shares of Huntingdon on March 26, 2002 at which
time Huntingdon became a wholly owned subsidiary of LSR, in exchange for a total
of approximately 5.9 million shares of LSR Voting Common Stock (the "Exchange
Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly,
the Exchange Offer is accounted for as a 'reverse acquisition' for financial
reporting purposes. The reverse acquisition is deemed a capital transaction and
the net assets of Huntingdon (the accounting acquirer) are carried forward to
LSR (the legal acquirer and the reporting entity) at their carrying value before
the combination. Although Huntingdon was deemed to be the acquiring corporation
for financial accounting and reporting purposes, the legal status of LSR as the
surviving corporation does not change. The relevant acquisition process utilizes
the capital structure of LSR and the assets and liabilities of Huntingdon are
recorded at historical cost. In these financial statements, Huntingdon is the
operating entity for financial reporting purposes and the financial statements
for all periods presented represent Huntingdon's financial position and results
of operations. The equity of LSR is the historical equity of Huntingdon,
retroactively restated to reflect the number of shares issued in the Exchange
Offer.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The condensed consolidated financial statements are
unaudited and are subject to such year-end adjustments as may be considered
appropriate and should be read in conjunction with the historical consolidated
financial statements of LSR for the period from July 19, 2001 (date of
inception) to December 31, 2001 and of Huntingdon for the years ended December
31, 2001, 2000, and 1999 included in LSR's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. Operating results for the three and six
months periods ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002.
These financial statements have been prepared in accordance with US GAAP and
under the same accounting principles as the financial statements included in the
Annual Report on Form 10-K.
Certain reclassifications have been made to the 2001 amounts to conform to the
2002 presentation.
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States. The Company has one continuing activity,
Contract Research.
The analysis of the Company's net revenues and operating income/(loss) by
segment for the three and six month periods ended June 30, 2002 and June 30,
2001 is as follows:
Three months ended Six months ended
June 30 June 30
(Dollars in thousands) 2002 2001 2002 2001
Net revenues
UK 22,126 17,918 42,710 34,593
US 6,464 6,094 12,015 12,108
------------- ------------ ------------ -------------
28,590 24,012 54,725 46,701
------------- ------------ ------------ -------------
Operating income/(loss) before other operating
expenses
UK 866 (692) 1,596 (3,053)
US 280 72 (263) 201
------------- ------------ ------------ -------------
1,146 (620) 1,333 (2,852)
------------- ------------ ------------ -------------
Other operating (expense)/income
UK (14) 169 (14) (5)
US - - (1,517) -
------------- ------------ ------------ -------------
(14) 169 (1,531) (5)
------------- ------------ ------------ -------------
Operating income/(loss)
UK 852 (523) 1,582 (3,058)
US 280 72 (1,780) 201
------------- ------------ ------------ -------------
1,132 (451) (198) (2,857)
------------- ------------ ------------ -------------
4. REFINANCING
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million).
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr Baker ($2.1
million) and Focused Healthcare Partners ("FHP") ($0.3 million) and $825,000 was
paid with promissory notes.
5. CONTINGENCIES
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
a) Three months ended June 30, 2002 compared with three months ended June 30,
2001.
Net revenues for the three months ended June 30, 2002 were $28.6 million, an
increase of 19% on net revenues of $24.0 million for the three months ended June
30, 2001. Excluding the effect of exchange rate movements, the increase was 18%.
UK net revenues increased by 23%, at constant exchange rates the increase was
22%. This reflected the continued growth in orders, particularly in toxicology.
In the US, net revenues increased by 6%. Orders in the US for the three months
ended June 30, 2002 though were 24% up on the same period last year also due to
the strength of the toxicology business.
Cost of sales for the three months ended June 30, 2002 were $23.1 million, an
increase of 13% on cost of sales of $20.5 million for the three months ended
June 30, 2001. Excluding the effects of exchange rate movements, the increase
was 12%. This increase was driven by the improvement in net revenues though it
was lower than the increase in net revenues as the business is characterized by
a high level of fixed costs. UK cost of sales increased by 14%, at constant
exchange rates the increase was 12%, reflecting the increase in volumes. US cost
of sales increased by 9%, also as a result of the increase in volumes.
Selling and administration expenses rose by 3% to $4.3 million for the three
months ended June 30, 2002 from $4.2 million in the corresponding period in
2001. Excluding the effects of exchange rate movements, the increase was 2%. The
increase was due to higher labor costs of $0.2 million, higher travel costs of
$0.1 million, offset by lower miscellaneous costs of $0.2 million. UK selling
and administration expenses increased by 13%, at constant exchange rates the
increase was 11%. This increase was due to the factors outlined above. US costs
decreased by 22% mainly due to lower depreciation $0.1 million and lower
insurance $0.1 million.
Other operating expense in the three months to June 30, 2002 was $14 thousand
and comprised refinancing costs. This compared to other operating income in the
three months to June 30, 2001 of $169 thousand which comprised a reversal of the
refinancing costs charged in the first quarter.
Net interest expense for the three months ended June 30, 2002 was $1.5 million,
$0.1 million lower than the net interest expense for the three months ended June
30, 2001, due to lower interest rates.
The unrealized non-cash gain on exchange of $3.3 million arose on net
liabilities at our UK subsidiary denominated in US dollars (primarily the
Convertible Capital Bonds of $50 million) with the weakening of the dollar
against sterling. In the second quarter of 2001, the dollar strengthened against
sterling resulting in a $0.3 million loss on exchange.
The tax benefit on profits for the three months ended June 30, 2002, was $26
thousand, and represents a tax benefit at a rate of 1%. The charge arising from
the treatment of exchange gains and losses on the Convertible Capital Bonds
increased this credit by $1.0 million, while the adjustments to tax losses
brought forward reduced the benefit by $0.1 million. The foreign rate
differential between the US and the UK accounted for the balance of the
difference between the credit of 1% and the US corporate tax rate of 40% of $0.3
million. The tax benefit for the three months ended June 30, 2001 was $0.7
million.
The overall net income for the three months ended June 30, 2002 was $2.9 million
compared to a net loss of $1.7 million for the three months ended June 30, 2001.
The reduction in the net loss of $4.6 million is due to a reduction in the
operating loss of $1.6 million and exchange gains compared to exchange losses of
$3.6 million; offset by a reduction in the income tax benefit of $0.6 million.
Income per share was 24 cents, compared to a loss per share of 28 cents last
year, on the weighted average common shares outstanding of 11,932,338 (2001,
5,870,205).
b) Six months ended June 30, 2002 compared with the six months ended June 30,
2002.
Net revenues for the six months ended June 30, 2002 were $54.7 million, an
increase of 17% on net revenues of $46.7 million for the six months ended June
30, 2001. The effect of exchange rate movements was minimal. UK net revenues
increased by 23%. This reflected the growth in orders, orders in the UK for the
six months ended June 30, 2002 were 18% over the same period last year. The
growth was particularly strong in toxicology. In the US, net revenues reduced by
1% reflecting a reduction in revenues derived from the analysis of samples from
clinical trials in the first quarter. Orders in the US for the six months ended
June 30, 2002 though were 38% up on the same period last year also due to the
strength of the toxicology business.
Cost of sales for the six months ended June 30, 2002 were $44.8 million, an
increase of 8% on cost of sales of $41.4 million for the six months ended June
30, 2001. The effects of exchange rate movements were minimal. This increase was
driven by the improvement in net revenues though it was lower than the increase
in net revenues as the business is characterized by a high level of fixed costs.
UK cost of sales increased by 10% reflecting the increase in volumes. US cost of
sales increased by 2% as a result of inflationary increase in the fixed cost
element of cost of sales.
Selling and administration expenses rose by 5% to $8.6 million for the six
months ended June 30, 2002 from $8.2 million in the corresponding period in
2001. The increase was due to higher labor costs $0.3 million, higher travel
costs of $0.2 million, and partially offset by lower other miscellaneous costs
of $0.1 million. UK selling and administration expenses increased by 5%. This
increase was due to the factors outlined above. US costs increased by 7% also
due to the factors outlined above.
Other operating expenses rose from $5 thousand in the six months to June 30,
2001 to $1.5 million in the six months to June 30, 2002. The $1.5 million in
2002 relates to costs incurred in connection with the Exchange Offer discussed
in Note 1 to the condensed financial statements and the issue of shares
discussed in Note 4 to the condensed financial statements. In 2001, the $5
thousand related to refinancing expenses.
Net interest expense for the six months ended June 30, 2002 was $3.1 million,
$0.1 million lower than the net interest expense for the six months ended June
30, 2001, due to lower interest rates.
The unrealized non-cash gain on exchange of $2.1 million arose on net
liabilities at our UK subsidiary denominated in US dollars (primarily the
Convertible Capital Bonds of $50 million) with the weakening of the dollar
against sterling. In the same period of 2001, the dollar strengthened against
sterling resulting in a $2.4 million loss on exchange.
The tax benefit on losses for the six months ended June 30, 2002, was $0.8
million, and represents a tax benefit at a rate of 66%. The charge arising from
the treatment of exchange gains and losses on the Convertible Capital Bonds
increased this credit by $0.7 million while the Exchange Offer and share
issuance costs reduced it by $0.5 million. In addition, adjustments to tax
losses brought forward increased this benefit by $0.2 million. The foreign rate
differential between the US and the UK accounted for the balance of the
difference between the credit of 66% and the US corporate tax rate of 40% of
$0.1 million. The tax benefit for the six months ended June 30, 2001 was $2.5
million.
The overall net loss for the six months ended June 30, 2002 was $0.4 million
compared to $6.0 million for the six months ended June 30, 2001. The reduction
in the net loss of $5.6 million is due to a reduction in the operating loss of
$2.7 million and exchange gains compared to exchange losses of $4.6 million;
offset by a reduction in the income tax benefit of $1.7 million.
Loss per share was $0.04, compared to $1.02 last year, on the weighted average
common shares outstanding of 9,427,868 (2001, 5,866,637).
2. LIQUIDITY & CAPITAL RESOURCES
On January 20, 2001, the Company's bank loan of $32.9 million was refinanced and
it is now repayable on June 30, 2006 and interest is payable quarterly at LIBOR
plus 1.75%. At the same time the Company was required to take all reasonable
steps to sell off such of its real estate assets through sale/leaseback
transactions and/or obtaining mortgage financing secured by the Company's real
estate assets to discharge this loan. The loan is held by Huntingdon Life
Sciences Group plc and is secured by guarantees from LSR, Huntingdon Life
Sciences Group plc, Huntingdon Life Sciences Ltd and Huntingdon Life Sciences
Inc., collateralized by all the assets of these companies. The loan was
transferred from Stephens Group Inc. to another third party effective February
11, 2002 and has been reclassified from related party loans to long-term debt in
the condensed consolidated balance sheets.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc., in
January 2001. In accordance with APB Opinion No. 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants ("APB 14") the bank loan and
warrants were recorded at their pro rata fair values in relation to the proceeds
received on the date of issuance. As a result, the value of the bank loan and
the warrants were $23,249,000 and $430,000 respectively.
Other finance has been provided by a $2.9 million loan facility made available
on September 25, 2000 by a director, Mr Baker, and a $2.8 million facility from
the Stephens Group Inc. made available on July 19, 2001. Effective February 11,
2002 the Stephens Group Inc. debt is held by a third party. Both facilities have
been fully drawn down. $550,000 of the loan from Mr Baker was transferred to and
assumed by Focused Healthcare Partners ("FHP") in March 2001. These loans from
Mr Baker and FHP are repayable on demand although they are subordinated to the
bank debt, they are unsecured and interest is payable monthly at a rate of 10%
per annum. On March 28, 2002, $2.1 million of Mr Baker's loan was converted into
1,400,000 shares of LSR Voting Common Stock and $300,000 of FHP's loan was
converted into 200,000 shares of LSR Voting Common Stock, in each case as part
of LSR's private placement of approximately 5.1 million shares of Voting Common
Stock. As a result of such conversions, approximately $302,000 remains payable
to Mr Baker and $250,000 remains payable to FHP. The former Stephens Group Inc.
facility was repayable on July 19, 2002, and is secured but as it is
subordinated to the bank debt has not been repaid. Interest is payable monthly
at a rate of 10% per annum.
On June 11, 2002 LSR issued to FHP warrants to purchase up to 410,914 shares of
LSR Voting Common Stock at a purchase price of $1.50 per share. These warrants
arose out of negotiations regarding the provision of the $2.9 million loan
facility made available to the Company on September 25, 2000 by Mr Baker, who
controls FHP. In accordance with APB 14 the loan and warrants were recorded at
their pro rata fair values in relation to the proceeds received. As a result,
the value of the loan and the warrants were $2,660,800 and $250,000
respectively.
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in 2006. These bonds, totaling $50 million, were issued
in 1991 and remain outstanding as at March 31, 2002. They carry interest at a
rate of 7.5% per annum, payable biannually in March and September. At the
current conversion rate, the number of shares of Voting Common Stock to be
issued on conversion and exchange of each unit of $10,000 comprised in a Bond
would be 49. The conversion rate is subject to adjustment in certain
circumstances.
During the six months ended June 30, 2002, funds generated were $7.0 million,
increasing cash and cash equivalents from $2.2 million at December 31, 2001 to
$9.2 million at June 30, 2002. The funds were generated as follows (Dollars in
millions):
2002 2001
Operating profit/(loss) before other operating expense 1.3 (2.9)
Depreciation and amortization 3.8 4.2
Changes in working capital 1.4 2.9
Interest paid (2.8) (2.9)
Capital expenditure (1.5) (2.0)
Other operating expense (1.5) -
Loan (repayments)/receipts (0.1) 0.9
Shares issued 5.9 0.1
Effect of exchange rate changes on cash 0.5 (0.5)
------------ ---------
7.0 (0.2)
------------ ---------
Net days sales outstanding ("DSOs") at June 30, 2002 were 31 days, down from 46
days at December 31, 2001. Since January 1999, DSOs at the quarter end have
varied from 26 days to 47 days so they are currently at a relatively low level.
The impact on liquidity from a one-day change in DSO is approximately $290,000.
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5million).
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr Baker ($2.1
million) and FHP ($0.3 million) and $825,000 was paid with promissory notes.
3. CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The Company considers the following accounting policies to be
critical accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts
which generally range in duration from a few months to two years. Revenue from
these contracts is generally recognized under either the percentage of
completion method of accounting or as services are rendered or products are
delivered. Contracts may contain provisions for renegotiation in the event of
cost overruns due to changes in the level of work scope. Renegotiated amounts
are included in net revenue when earned and realization is assured. 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. Most service contracts may be terminated for a variety
of reasons by the Company's customers either immediately or upon notice. The
contracts generally require payments to the Company to recover costs incurred,
including costs to wind down the study, and payment of fees earned to date, and
in some cases to provide the Company with a portion of the fees or profits that
would have been earned under the contract had the contract not been terminated
early. Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of milestones or in
accordance with predetermined payment schedules. Unbilled receivables are
billable to customers within one year from the respective balance sheet date.
Fees in advance are recorded for amounts billed to customers for which revenue
has not been recognized at the balance sheet date (such as upfront payments upon
contract authorisation, but prior to the actual commencement of the study).
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted 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 as of the dates of the financial
statements and the results of operations during the reporting periods. Although
these estimates are based upon management's best knowledge of current events and
actions, actual results could differ from those estimates.
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events 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
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment date changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
4. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." ("SFAS 141"). SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 had no
impact on LSR's results of operations, financial position or cash flows.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement applies to intangibles and goodwill acquired after
September 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This Statement is effective for LSR for the
first quarter of the fiscal year ended December 31, 2002. As of March 31, 2002
LSR had no goodwill or intangible assets on its balance sheet so the adoption of
this statement had no impact on LSR's results of operations, financial position
or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When a 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 present value 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 statement
had no impact on LSR's results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived" Assets. This statement is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
These new rules on asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
portions of APB Opinion 30, "Reporting the Results of Operations". This
statement provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value or carrying amount. This statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The adoption of this statement had no
impact on LSR's results of operations, financial position or cash flows.
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 145"). SFAS 145 rescinds Statement 4, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. SFAS 145 also
amends Statement 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. LSR does not believe that the
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 eliminates the definition and requirement for
recognition of exit costs in Emerging Issues Task Force (EITF) Issue No. 94-3
where a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. This statement is effective for exit or disposal
activities initiated after December 31, 2002. LSR does not believe that the
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
5. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
6. FORWARD LOOKING STATEMENTS
Statements in this management's discussion and analysis of financial condition
and results of operations, as well as in certain other parts of this Quarterly
Report on Form 10-Q (as well as information included in oral statements or other
written statements made or to be made by the Company) that look forward in time,
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, expectations, predictions, and assumptions and other
statements which are other than statements of historical facts. Although the
Company believes such forward-looking statements are reasonable, it can give no
assurance that any forward-looking statements will prove to be correct. Such
forward-looking statements are subject to, and are qualified by, known and
unknown risks, uncertainties and other factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by those statements. These risks, uncertainties and other factors include, but
are not limited to the Company's ability to estimate the impact of competition
and of industry consolidation and risks, uncertainties and other factors more
fully described in the Company's Registration Statement on Form S-1, dated July
12, 2002, and Form 10-K for the year ended December 31, 2001, each as filed with
the Securities and Exchange Commission.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's $33 million credit facility is sterling denominated and is not
subject to transaction exposure. Interest on all outstanding borrowings under
this credit facility is based upon LIBOR plus a margin and approximated 5.83%
per annum for the six months ended June 30, 2002. At June 30, 2002 this credit
facility was fully drawn down.
In the six months to June 30, 2002, a 1% change in LIBOR would have resulted in
a fluctuation in interest expense of $164,000.
For the six months ended June 30, 2002, approximately 67% of the Company's net
revenues were from outside the United States. The Company does not engage in
derivative or hedging activities related to its potential foreign exchange
exposures. The Company's $50 million principal amount of Convertible Capital
Bonds are US dollar denominated, but are held by a non-US subsidiary of the
Company. The Company experiences exchange-related gains and losses with respect
to these bonds and does not take any actions to hedge against such risks. The
Company is unable to predict whether it will experience future gains or future
losses from such exchange-related risks on the bonds.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 11, 2002, the
Company's stockholders voted upon the following proposals:
Election of Directors
Andrew Baker For: 7,304,846
Against: 131,942
Abstain: 133,607
Gabor Balthazar For: 7,428,452
Against: 8,335
Abstain: 0
John Caldwell For: 7,428,452
Against: 8,335
Abstain: 0
Brian Cass For: 7,428,445
Against: 8,342
Abstain: 7
Kirby Cramer For: 7,428,452
Against: 8,335
Abstain: 0
Grant of Warrants to Focused Healthcare Partners LLC
For: 6,081,787
Against: 23,587
Abstain: 211,271
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated July 31, 2002, announcing second
quarter earnings results.
(B) Reports on Form 8-K
Current Report on Form 8-K dated June 17, 2002 with respect to Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorised.
LIFE SCIENCES RESEARCH, INC.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: Chief Financial Officer
Date: July 31, 2002