LIFE SCIENCES RESEARCH, IN. AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 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
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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 __
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At October 31, 2002: 11,932,338 Voting Common Stock of $0.01 each
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2002 and 2001. 3
Condensed Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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. 15
Item 4 Controls & Procedures 15
PART II OTHER INFORMATION
Item 6 Exhibits and reports on Form 8-K 16
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands, except per share data) 2002 2001 2002 2001
Net revenues $ 29,951 $ 25,707 $ 84,676 $ 72,408
Cost of revenue (24,122) (21,648) (68,887) (63,017)
------------ ------------ ------------ -------------
Gross profit 5,829 4,059 15,789 9,391
Selling, general and administrative expenses (4,538) (3,786) (13,165) (11,970)
------------- ------------ ------------ -------------
Operating income/(loss) 1,291 273 2,624 (2,579)
Interest income 20 14 53 89
Interest expense (1,522) (1,621) (4,672) (4,905)
Foreign exchange transaction gain/(loss) on
capital bonds 1,573 2,164 3,858 (815)
Other (expense)/income 174 (1,078) (1,494) (521)
------------ ------------ ------------- -------------
Income/(loss) before income taxes 1,536 (248) 369 (8,731)
Income tax (expense)/ benefit (34) 300 734 2,775
------------ ------------ ------------- -------------
Net income/(loss) $ 1,502 $ 52 $ 1,103 $ (5,956)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Income/(loss) per common share
- - Basic 0.13 0.09 0.11 (1.02)
- - Diluted 0.12 0.09 0.10 (1.02)
Weighted average common shares outstanding
- - Basic (000's) 11,932 5,870 10,256 5,868
- - Diluted (000's) 12,224 5,870 10,642 5,868
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands) September 30, December 31,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 7,376 $ 2,240
Accounts receivable, net of allowance of $62 and $150 in
2002 and 2001 respectively 21,361 18,257
Unbilled receivables 9,628 13,920
Inventories 1,358 1,275
Prepaid expenses and other current assets 4,437 2,777
Deferred income taxes - 73
---------------- ----------------
Total current assets 44,160 38,542
---------------- ----------------
Property and equipment, net 93,217 90,353
---------------- ----------------
Investments 236 202
Unamortized capital bonds issue costs 621 691
Deferred income taxes 5,004 4,176
---------------- ----------------
Total assets $ 143,238 $ 133,964
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $ 8,928 $ 9,899
Accrued payroll and other benefits 1,512 2,323
Accrued expenses and other liabilities 7,278 10,336
Fees invoiced in advance 23,755 17,722
Short-term debt 1,723 158
--------------- ----------------
Total current liabilities 43,196 40,438
--------------- ----------------
Long-term debt 85,151 59,302
Related party loans 552 28,821
Other long-term liabilities - 174
Deferred income taxes 10,310 9,953
--------------- ----------------
Total liabilities 139,209 138,688
--------------- ----------------
Commitments and contingencies - -
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value
Authorized 50,000,000
Issued and outstanding at September 30, 2002: 11,932,338
(December 31, 2001: 5,870,305) 114 59
Non-Voting Common Stock, $0.01 par value
Authorized 5,000,000
Issued and oustanding: None - -
Preferred Stock, $0.01 par value
Authorized at 5,000,000
Issued and outstanding: None - -
Paid in capital 74,312 66,035
Foreign currency translation adjustments (5,042) (4,360)
Accumulated deficit (65,355) (66,458)
--------------- ----------------
Total shareholders' equity /(deficit) 4,029 (4,724)
--------------- ----------------
Total liabilities and shareholders' equity /(deficit) $ 143,238 $ 133,964
--------------- ----------------
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended September 30
(Dollars in thousands) 2002 2001
Cash flows from operating activities:
Net income/(loss) $ 1,103 $ (5,956)
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in) operating activities:
Depreciation and amortization 5,992 6,298
Foreign exchange transaction (gain)/loss on Capital Bonds (3,858) 815
Deferred income taxes (755) (2,775)
Provision for losses on accounts receivable 32 64
Amortization of warrants 117 -
Amortization of Capital Bonds issue costs 120 118
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses 2,271 (4,573)
Inventories 35 (247)
Accounts payable, accrued expenses and other liabilities (6,597) 2,732
Fees invoiced in advance 4,300 963
---------------- ----------------
---------------- ----------------
Net cash provided by/(used in) operating activities 2,760 (2,561)
---------------- ----------------
---------------- ----------------
Cash flows used in investing activities:
Purchase of property and equipment (2,632) (2,493)
---------------- ----------------
---------------- ----------------
Net cash provided used in investing activities (2,632) (2,493)
---------------- ----------------
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from issue of Voting Common Stock 4,432 84
Proceeds from issue of Non Voting Common Stock 1,500 -
Proceeds from long-term borrowings - 4,321
Repayments of short term borrowings (1,678) (53)
---------------- ----------------
---------------- ----------------
Net cash provided by financing activities 4,254 4,352
---------------- ----------------
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 754 449
---------------- ----------------
---------------- ----------------
Increase/(decrease) in cash and cash equivalents 5,136 (253)
Cash and cash equivalents at beginning of period 2,240 3,286
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period $ 7,376 $ 3,033
---------------- ----------------
Supplementary disclosures
Non cash transactions:
Equity issued in exchange for debt conversion $ 2,400 $ -
Equity issued in exchange for promissory notes $ 792 $ -
$ 4,659
Interest paid $ 5,017
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
Unaudited
1. THE COMPANY AND ITS OPERATIONS
Business
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global 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 nine
month periods ended September 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 information and footnotes disclosures
related thereto normally included in the financial statements prepared in
accordance with the US GAAP have been omitted in accordance with Rule 10-01 of
Regulation S-X.
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 nine month periods ended September 30, 2002 and
September 30, 2001 is as follows:
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands) 2002 2001 2002 2001
Net revenues
UK $ 23,314 $ 19,934 $ 66,024 $ 54,527
US 6,637 5,773 18,652 17,881
------------- ------------ ------------ -------------
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$ 29,951 $ 25,707 $ 84,676 $ 72,408
============= ============ ============ =============
Operating income/(loss)
UK $ 945 $ 642 $ 2,566 $ (2,411)
US 346 (369) 58 (168)
------------- ------------ ------------ -------------
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$ 1,291 $ 273 $ 2,624 $ (2,579)
============= ============ ============ =============
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). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
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 September 30, 2002 compared with three months ended
September 30, 2001.
Net revenues for the three months ended September 30, 2002 were $30.0 million,
an increase of 16.5% on net revenues of $25.7 million for the three months ended
September 30, 2001. Excluding the effect of exchange rate movements, the
increase was 10.6%. UK net revenues increased by 17%, at constant exchange rates
the increase was 10.1%. In the US, net revenues increased by 15.0%. These both
reflect the continued growth in orders, particularly in the volume of toxicology
orders. Orders for the three months ended September 30, 2002 were 12.5% up on
the same period last year at constant exchange rates, with the UK up 16% and the
US at the same level.
Cost of revenue for the three months ended September 30, 2002 were $24.1
million, an increase of 11.4% on cost of revenue of $21.6 million for the three
months ended September 30, 2001. Excluding the effects of exchange rate
movements, the increase was 5.8%. 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 generally by a high level of fixed costs. UK cost of
revenue increased by 14.8%, at constant exchange rates the increase was 11.4%,
reflecting the increase in volumes, mainly due to labor cost increases. US cost
of revenue increased by 0.6%, also as a result of the increase in volumes,
mainly due to labor cost increases offset by lower subcontract costs.
Selling, general and administrative expenses (S G & A) rose by 19.9% to $4.5
million for the three months ended September 30, 2002 from $3.8 million in the
corresponding period in 2001. Excluding the effects of exchange rate movements,
the increase was 14.1%. The increase was due to higher labor costs of $0.2
million, higher depreciation charge of $0.1 million, and higher insurance costs
of $0.2 million. UK S G & A increased by 22.6%, at constant exchange rates the
increase was 15.8%. This increase was due to the factors outlined above. US
costs increased by 12.0% mainly due to higher labor costs of $0.1 million.
Net interest expense for the three months ended September 30, 2002 was $1.5
million, $0.1 million lower than the net interest expense for the three months
ended September 30, 2001, due to lower interest rates and lower borrowings.
The unrealized foreign exchange transaction gains on exchange of $1.6 million
arose on the Convertible Capital Bonds of $50 million with the weakening of the
dollar against sterling. In the third quarter of 2001, the dollar also weakened
against sterling resulting in a $2.2 million gain on exchange.
Other income in the three months to September 30, 2002 of $0.2 million relates
to a reduction in merger/offer costs. In the three months to September 30, 2001,
other expense of $1.1 million also relates to merger/offer costs together with
other exchange losses.
The tax charge on profits for the three months ended September 30, 2002, was
$0.03 million. The exchange gains and losses on the Convertible Capital Bonds
are non-taxable and thus reduced the expense by $0.6 million. The tax benefit
for the three months ended September 30, 2001 was $0.3 million.
Net operating losses for tax purposes carried forward at September 30, 2002 were
$102.9 million, of which $58.2 million is for trading losses and $44.7 million
is for capital losses.
The overall net income for the three months ended September 30, 2002 was $1.5
million compared to a $0.1 million for the three months ended September 30,
2001. The improvement in the net income of $1.4 million is due to an increase in
the operating income of $1.0 million and a reduction in merger/offer costs of
$1.2m offset by a reduction in foreign exchange transaction gains of $0.5
million.
Basic income per common share was 13 cents, compared to 9 cents last year.
b) Nine months ended September 30, 2002 compared with the nine months ended
September 30, 2001.
Net revenues for the nine months ended September 30, 2002 were $84.7 million, an
increase of 16.9% on net revenues of $72.4 million for the nine months ended
September 30, 2001. Excluding the effect of exchange rate the increase was
15.1%. UK net revenues increased by 21.1% (19.0% excluding the effect of
exchange rate movements). The growth was particularly strong in toxicology. In
the US, net revenues increased by 4.3% reflecting an improvement in the volume
of toxicology orders. Orders for the nine months to September 30, 2002 were
18.6% above the same period last year at constant exchange rates, with the UK up
17% and the US up 25%.
Cost of revenue for the nine months ended September 30, 2002 were $68.9 million,
an increase of 9.3% on cost of revenue of $63.0 million for the nine months
ended September 30, 2001. Excluding the effects of exchange rate movements, the
increase was 7.6%. 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 generally by a high level of fixed costs. UK cost of revenue
increased by 11.7% reflecting the increase in volumes (9.6% excluding the effect
of exchange rate movements) with increases in labor, subcontract and material
costs. US cost of revenue increased by 1.7% as a result of inflationary increase
in the fixed cost element of cost of revenues and higher labor costs.
S G & A rose by 10.0% to $13.2 million for the nine months ended September 30,
2002 from $12.0 million in the corresponding period in 2001. Excluding the
effects of exchange rate movements the increase was 8.3%. The net increase was
due to higher labor costs of $0.6 million, higher travel costs of $0.2 million,
higher insurance costs of $0.3 million, and partially offset by lower other
miscellaneous costs of $0.1 million. UK S G & A increased by 10.9% (8.8%
excluding the effect of exchange rate movements). This increase was due to the
factors outlined above. US costs increased by 9.7% also due to the factors
outlined above.
Net interest expense for the nine months ended September 30, 2002 was $4.7
million, $0.2 million lower than the net interest expense for the nine months
ended September 30, 2001, due to lower interest rates and lower borrowings.
The unrealized foreign exchange transaction gains of $3.9 million arose on net
liabilities as the Company's UK subsidiary denominated in US dollars (primarily
the Convertible Capital Bonds of $50 million), due to the weakening of the
dollar against sterling. In the same period of 2001, the dollar strengthened
against sterling resulting in a $0.8 million loss on exchange.
Other expenses rose from $0.5 million in the nine months to September 30, 2001
to $1.5 million in the nine months to September 30, 2002. These costs were
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, together with other exchange gains.
The tax benefit for the nine months ended September 30, 2002, was $0.7 million.
The exchange gains and losses on the Convertible Capital Bonds are non-taxable
and thus increased this benefit by $1.1 million while the Exchange Offer and
share issuance costs are also non-taxable and thus reduced it by $0.4 million.
In addition, adjustments to tax losses brought forward reduced this benefit by
$0.2 million. The foreign rate differential between the US and the UK accounted
for the balance of the difference of $0.1 million. The tax benefit for the nine
months ended September 30, 2001 was $2.8 million.
Net operating losses for tax purposes carried forward at September 30, 2002 were
$102.9 million, of which $58.2 million is for trading losses and $44.7 million
is for capital losses.
The overall net income for the nine months ended September 30, 2002 was $1.1
million compared to a net loss of $6.0 million for the nine months ended
September 30, 2001. The reduction in the net loss of $7.1 million is due to a
reduction in the operating loss of $5.2 million, a reduction in interest of $0.2
million, and an increase in exchange gains of $4.7 million; offset by an
increase in other expenses of $1.0 million and a reduction in the income tax
benefit of $2.0 million.
Income per share was 11 cents, compared to a loss per share of $1.02 last year,
on the weighted average common shares outstanding of 10,256,483 (2001,
5,867,826).
2. LIQUIDITY & CAPITAL RESOURCES
On January 20, 2001, the Company's UK pound sterling denominated bank loan of
$32.9 million was refinanced. 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 financing 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.
secured facility is subordinated to the bank loan. Interest is payable monthly
at a rate of 10% per annum. With the consent of the bank lender, one half of the
facility was repaid on July 1, 2002, and the remainder was repaid on October 1,
2002.
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 September 30, 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 nine months ended September 30, 2002, funds generated were $5.1
million, increasing cash and cash equivalents from $2.2 million at December 31,
2001 to $7.4 million at September 30, 2002.
Net days sales outstanding ("DSOs") at September 30, 2002 were 32 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). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
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. SIGNIFICANT 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. Based on the
nature of the study, 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 US GAAP 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.
Exchange rate fluctuations and exchange controls
The Company operates on a world-wide basis and generally invoices its clients in
the currency of the country in which it operates. Thus, for the most part,
exposure to exchange rate fluctuations is limited as sales are denominated in
the same currency as costs. Trading exposures to currency fluctuations do occur
as a result of certain sales contracts, performed in the UK for US clients,
which are denominated in US dollars and contribute approximately 11% of total
revenues. Management have decided not to hedge against this exposure.
Secondly exchange rate fluctuations have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pounds sterling and the US
dollar will affect the translation of the UK subsidiary's financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and equity accounts are translated
at historical exchange rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated other
comprehensive loss account. Management have decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
At December 31 At September 30 9 months to September 30
Average rate (1)
2000 0.6694 0.6760 0.6520
2001 0.6871 0.6800 0.6950
2002 - 0.6300 0.6710
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On October 24, 2002 the noon buying rate for sterling was $1.00 = (pound)0.6439.
The Company has not experienced difficulty in transferring funds to and
receiving funds remitted from those countries outside the US or UK in which it
operates and Management expects this situation to continue.
Whilst the UK has not at this time entered the European Monetary Union, the
Company has ascertained that its financial systems are capable of dealing with
Euro denominated transactions.
The following table summarizes the financial instruments denominated in
currencies other than the US dollar held by LSR and its subsidiaries as of
September 30, 2002:
Expected Maturity Date
2002 2003 2004 2005 2006 Thereafter Total Fair Value
(Amounts in thousands)
Cash - Pound Sterling 2,343 2,343 2,343
- Euro 80 80 80
Accounts
receivable - Pound Sterling 15,302 15,302 15,302
- Euro 1,060 1,060 1,060
Debt - Pound Sterling (37,091) (37,091) (37,091)
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 was effective for LSR for the
first quarter of the fiscal year ended December 31, 2002. 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"). This statement is effective for financial statements
issued for fiscal years beginning on or after June 15, 2002. 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.
LSR does not believe that the adoption of this statement will have a material
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"). This statement is effective for fiscal years beginning after May
15, 2002. 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. The adoption of this statement did
not 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 $32.9 million credit facility is sterling denominated and does not
contribute to transaction gains and losses on the income statement. Interest on
all outstanding borrowings under this credit facility is based upon LIBOR plus a
margin and approximated 5.83% per annum for the nine months ended September 30,
2002. At September 30, 2002 this credit facility was fully drawn down.
In the nine months to September 30, 2002, a 1% change in LIBOR would have
resulted in a fluctuation in interest expense of $164,000.
For the nine months ended September 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. As a result, with respect to these bonds, the Company experiences
exchange related gains and losses which only has a non-cash impact on the
financial statements, based on the movement of exchange rates. Hence, the
Company 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.
ITEM 4 CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated November 1, 2002, announcing third
quarter earnings results.
Exhibit 99.2 - Sarbanes-Oxley Certification.
(B) Reports on Form 8-K
None.
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:
Name: Richard Michaelson
Title: Chief Financial Officer
Date: November 1, 2002
CEO Certification
I, Andrew Baker, as Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly 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 quarterly report,
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report,
4. The registrant's other certifying officers 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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: November 1, 2002 /s/ Andrew H Baker
------------------------
Andrew H Baker
Chief Executive Officer
CFO Certification
I, Richard Michaelson, as Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly 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 quarterly report,
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report,
4. The registrant's other certifying officers 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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: November 1, 2002 /s/ Richard Michaelson
-------------------------
Richard Michaelson
Chief Financial Officer