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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
- ----------------------------- --------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
Voting Common Stock $0.01 par value OTCBB
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b-2 of the Act)
Yes _ No X
The aggregate market value of the Voting Common Stock held by non-affiliates of
the Registrant at March 18, 2003 was approximately $20,104,399 based on a per
share price of $2.20, the closing market price of the Voting Common Stock on the
OTCBB.
Indicate the number of outstanding shares of each of the Registrant's classes of
common stock as of the latest practicable date.
11,932,338 Voting Common Stock of $0.01 each as at March 18, 2003
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business ........................................................................ 3
2. Properties ...................................................................... 11
3. Legal Proceedings ............................................................... 11
4. Submission of Matters to a Vote of Security Holders.............................. 11
PART II
5. Market For Registrant's Common Equity and Related Stockholder Matters............ 12
6. Selected Financial Data ......................................................... 16
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk....................... 28
8. Financial Statements and Supplementary Data ..................................... 29
9. Changes in and disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................... 52
PART III
10. Directors and Executive Officers of the Registrant............................... 53
11. Executive Compensation .......................................................... 54
12. Security Ownership of Certain Beneficial Owners and Management................... 58
13. Certain Relationships and Related Transactions .................................. 59
14. Controls and Procedures ......................................................... 60
PART IV
15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................ 61
PART I
ITEM 1. BUSINESS
INTRODUCTION
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global Contract Research Organization, offering worldwide
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.
As the Company continues to build on improving fundamentals, the Company has the
following strategy and goals:
o To grow to significant profitability and improved return on investment for
our shareholders.
o To be appreciated as the listening, understanding and reliable partner in
creative compound development and safety assessment; to be the first choice
for the industries we serve.
o To provide our employees with the opportunity for individual development in
a caring, rewarding and safe working environment.
o To be recognized positively in the local communities in which we operate.
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. LSR 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. The equity of LSR is the historical equity of
Huntingdon, retroactively restated to reflect the number of shares issued in the
Exchange Offer.
LSR's executive office is based at the Princeton Research Center in New Jersey,
US.
HISTORY
Huntingdon was originally incorporated in the UK in 1951 as a limited liability
company to provide contract research services to the UK pharmaceutical,
agrochemical and food industries. In 1964 it was acquired by the US company,
Becton Dickinson. Over the next 20 years it successfully established itself as a
leading CRO with business across a number of sectors and with a number of
leading pharmaceutical and agrochemical companies. In April 1983, Huntingdon was
re-registered as a public limited company and in 1988 it was floated on the
London Stock Exchange. In early 1989 Huntingdon obtained a listing for its ADR's
on the New York Stock Exchange.
In 1995, it acquired the toxicology business of APBI, which included
laboratories near Princeton, New Jersey and Newcastle and Eye, Suffolk in the UK
for a total consideration of $43 million. Immediately upon acquisition, the
toxicology business of APBI in the UK was merged with that of Huntingdon
Research Center Limited and the name of that company changed to Huntingdon Life
Sciences Limited. The US business acquired operates as Huntingdon Life Sciences
Inc.
In the first half of 1997 allegations were made relating to animal care and Good
Laboratory Practice (GLP) against Huntingdon's operating subsidiaries in the UK
and US. Those allegations and the UK Government's subsequent statement in the
House of Commons in July 1997 about its investigation into those allegations
caused the cancellation of booked orders and a decline in new orders.
Significant trading losses and cash outflows resulted during the period from mid
1997 through 1998. Given the medium to long term element of many of Huntingdon's
activities and the reluctance of clients to place new work until it's finances
were stabilized, Huntingdon required a substantial injection of finance to both
initially restore confidence and then to fund operations during the period until
it returned to profitability.
On September 2, 1998 a group of new investors subscribed (pound)15 million ($25
million) for 120 million ordinary shares while existing shareholders and
institutional investors took up a further 57 million shares, contributing
(pound)7.1 million ($11.8 million). After expenses of (pound)1.7 million ($2.9
million), the issue of shares raised (pound)20.4 million ($33.9 million). On the
same date Huntingdon's bankers agreed to confirm Huntingdon's facilities at
(pound)24.5 ($40.8 million) million until August 31, 2000 and this amount was
fully drawn down. This debt was refinanced on January 20, 2001 by means of a
loan from HLSF LLC, a subsidiary company of the Stephens Group Inc., a related
party at the time, which has since transferred the debt to an unrelated third
party. It is now repayable on June 30, 2006.
Since the involvement of the new investor group in 1998, the management team,
led by Brian Cass, believes that LSR has successfully addressed many of the
Company's past difficulties. Relationships with customers have been restored and
sales are growing at an encouraging rate.
In November 1999, a new so called "animal rights" group known as "Stop
Huntingdon Animal Cruelty" (SHAC) was formed in the UK with Huntingdon as its
target. Since then, the activists have continued focusing on Huntingdon (now
LSR), its staff and directors, but also many other stakeholders in the business,
including shareholders, financial institutions, other suppliers and customers.
For further details see Other Information Pertaining to the Company - Animal
Rights Activism, below.
In October 2001, LSR commenced the Offer for Huntingdon, which was completed in
March 2002 with Huntingdon becoming a wholly owned subsidiary of LSR. The effect
of the Offer was to effectively re-domicile Huntingdon's corporate and legal
existence to the US. As a US and Maryland company, LSR benefits from a more
hospitable corporate environment, including corporate governance and privacy
rules and regulations that benefit LSR security holders. Moreover, the
investment community in the US is more familiar with the CRO industry, since
most publicly traded CRO's are domiciled in the US. Additionally, the companies
responsible for developing new pharmaceutical, agrochemical and industrial
compounds are increasingly concentrated in the US and as a result, LSR's US
operations have enjoyed substantial growth in the last few years.
In March 2002, LSR completed a private placement of approximately 5.1 million
shares of Voting Common Stock at a per share subscription price of $1.50 per
share.
In June 2002, LSR began trading its common stock on the US Over the Counter
Bulletin Board (OTCBB).
DESCRIPTION OF BUSINESS
LSR provides pre-clinical and non-clinical biological safety evaluation research
services to most of the world's leading pharmaceutical, biotechnology,
agrochemical and industrial chemical companies. The purpose of this safety
evaluation is to identify risks to humans, animals or the environment resulting
from the use or manufacture of a wide range of chemicals, which are essential
components of our clients' products. LSR's services are designed to meet the
regulatory requirements of governments around the world.
The Company's aim is to develop its business within these markets, principally
through organic growth. In doing so, LSR will benefit from strong drug pipelines
in the pharmaceutical industry, a growing trend towards outsourcing as clients
focus more internal resources on research in the search for new compounds, and
the growing amount of legislation concerning the safety and environmental impact
of agrochemicals and industrial chemicals.
The Company's sales and marketing functions are specifically focused on two main
groups, pharmaceutical and non-pharmaceutical customers. As much of the research
activity conducted for these two customer groups is similar, LSR believes it is
appropriate, operationally, to view this as one business.
Pharmaceuticals and Biopharmaceuticals
The Pharmaceutical research and development pathway is shown below:
- ----------------------------- ---------------------------------------------------------------------- ----------------
DRUG DISCOVERY DRUG DEVELOPMENT MARKETING
- ----------------------------- ---------------------------------------------------------------------- ----------------
NON-CLINICAL CLINICAL
Pre-Clinical
Toxicology
Pharmacology
Drug Metabolism
Pharmacokinetics
Chemical Synthesis Phase I Phase II Phase III Phase IV
Safety Efficacy Long Term Post marketing
efficacy surveillance
------------------ --------------- -------------
LONG TERM SAFETY STUDIES
----------------------------------------------------------------------
LSR performs non-clinical testing in support of the drug development process.
This primarily consists of pre-clinical outsourcing from the pharmaceutical
industry, as well as further longer term non-clinical safety testing that is
performed in parallel to human clinical testing (such as carcinogenicity studies
and safety studies relating to reproductive implications). Essentially all of
this work is performed as a result of regulatory requirements that seek to
minimize the risks associated with the ultimate testing and use of these
compounds in humans. Pre-clinical testing includes studies conducted prior to
the compound exposure to humans. This helps to evaluate both how the drug
affects the body as well as how the body affects the drug. Utilizing advanced
laboratory and toxicological evaluations, this work helps assess safe and
appropriate dose regimens. Non-clinical testing, which includes longer term
studies often conducted concurrently with clinical (human) testing, can focus on
identifying and avoiding the longer term cancer implications of exposure to the
compound, or relating to the potential of possible reproductive implications.
Approximately two thirds of the Company's orders are derived from this
pharmaceutical sector. The Company views its non-clinical market as extending to
"proof of concept" in man (Phase 2A) and to analytical chemistry support for
clinical trials. Since 1999, LSR has had collaborative relationships with a
number of Phase I clinical trial units and offers centralized clinical
laboratory services in support of clinical trials.
LSR has also actively pursued opportunities to extend its range of capabilities
supporting late stage drug discovery, focused around invitro and invivo models
for lead candidate drug characterization and optimization. This growing range of
biological services is intended to position the Company to take advantage of the
knowledge arising from the Human Genome Project as the identification of new
molecular disease targets is expected to lead to the development of increased
numbers of potential therapies which will require evaluation.
The outsourced market for the late stage clinical trials (Phase 3 and beyond) is
relevant to LSR, but the margins are less attractive and it is subject to a
greater degree of volatility driven by the size of individual contracts. While
LSR does not preclude entering this market in the future, it has no plan to do
so in the foreseeable future, as it is a very different business and one in
which a number of major companies are already firmly established.
Market Growth
It is estimated that the pharmaceutical industry annual research and development
(R & D) spending is over $30 billion per year and is growing at around 6-8% per
annum. Approximately one quarter of this is devoted solely to pre-clinical
testing. The Company believes that approximately 20-25% of this is outsourced
which means that the Company is today competing in a market which exceeds $1.3
billion. It is widely believed that the percent, as well as the absolute dollar
that is outsourced should continue to grow.
The market for these services is growing, among other things, due to the
following:
o The Company estimates that new drug discovery is growing at 10-15% per
annum, fueled by new technologies and strong profits. Use of techniques
like combinatorial chemistry and high throughput screening are dramatically
increasing the efficiency and effectiveness of the discovery process for
new molecules.
o Preclinical development services should experience the higher growth first,
as they are at the front end to receive the anticipated wave of new drug
candidates generated by advances in drug discovery technologies.
o The need to replace earnings from drugs coming off patent is driving
increases in the number of drugs being put into development.
o It is estimated there has been a 50% increase in the numbers of projects in
the R & D pipeline versus five years ago.
o There is also a growing trend towards the outsourcing of development work
as clients focus more internal resource on discovery research in the search
for new lead compounds.
o The biotechnology industry has become a significant source of business for
the Company. The number of drugs produced by the biotechnology industry,
which require US Food and Drug Administration (FDA) approval has grown
substantially over the past decade. Many biotechnology companies have
strategically chosen not to invest in asset intensive development and
regulatory safety evaluation, but rather to outsource major areas of R & D
and utilize contract research organizations to perform these services. This
frees them from the inefficient utilization of in-house capabilities due to
their sporadic and varied demand for these capabilities.
o The process of consolidation within the pharmaceutical industry is also
accelerating the move towards outsourcing. While there is a short-term
negative impact from mergers with development pipelines being rationalized
and a focus on integration rather than development, longer-term resources
are increasingly invested in in-house facilities for discovery and lead
optimization rather than development and regulatory safety evaluation. The
outsourcing of development and safety evaluation is the Company's core
business.
As a result of these, amongst other factors, it is believed that the overall
market for outsourced services is estimated to be growing at an annual rate of
in the range of 10-15%.
Non-Pharmaceuticals
LSR has historically generated one third or more of its orders from safety and
efficacy testing of compounds for the agrochemical, industrial chemical,
veterinary and food industries. The work involved has many similarities and
often uses many of the same facilities, equipment, and scientific disciplines to
those employed in pre-clinical testing of pharmaceutical compounds.
LSR's business in these areas is again driven by governmental regulatory
requirements. The Company's services address safety concerns surrounding a
diverse range of products, spanning such areas as agricultural herbicides and
other pesticides, medical devices, veterinary medicines, and specialty chemicals
used in the manufacture of pharmaceutical intermediates, and manufactured
foodstuffs and products. The Company believes it is a clear market leader in
programs designed to assess the safety, environmental impact and efficacy of
agricultural chemicals as well as in programs to take new specialty chemicals to
market.
Market Growth
It is estimated that the worldwide market for outsourced contract research from
non-pharmaceutical industries is around $300 million. The growth in the
non-pharmaceutical business is driven both by the introduction of novel
compounds and increasingly by legislation concerning the safety and
environmental impact of existing products.
The Company believes that many market segments included in this broad area of
business have the potential for substantial growth in coming years, due to the
following:
o Recent introduction of new testing requirements for `high production
volume' (HPV) chemical products in the US, and similar programs in Europe
and Japan.
o Increasing scrutiny of any compound, which is used in the manufacture of
products to which members of the public, especially children are exposed,
either infrequently or on a day-to-day basis (e.g. phthalates used in the
plastic of children's toys).
o More stringent regulations affecting compounds, which have the potential to
adversely, effect the environment, e.g. biocides and endocrine disrupters.
o Growth in concerns over food safety, e.g. additives and genetically
modified foods, and the introduction of `nutraceuticals'.
o The requirement to register or re-register pesticides on lists 2 and 3 to
meet the European Directive 91/414/EEC. The Company has unrivalled
experience with the chemicals which were included on list 1 of the
Directive.
Safety testing in these industries is also more likely to be outsourced as,
unlike the pharmaceutical industry, fewer companies have comprehensive internal
laboratory facilities. While overall R & D is growing at approximately 3%, we
believe that this coupled with increased outsourcing could provide market growth
of up to 5% per annum over the next five years.
COMPETITION
Competition in both the pharmaceutical and non-pharmaceutical market segments
ranges from the in-house R&D divisions of large pharmaceutical, agrochemical and
industrial chemical companies who perform their own safety assessments, to "full
service" providers - contract research organizations like LSR, who provide a
full range of services to the industries (such as Covance Inc., Inveresk,
Quintiles Transnational Corp., Charles River Laboratories International, Inc.)
and "niche" suppliers focussing on specific services or industries (such as
Bioreliance Corporation).
GOVERNMENT REGULATION OF OPERATIONS
Regulatory agencies
Since the services provided by LSR are used to support pharmaceutical,
biotechnological, chemical or agrochemical product approval applications, its
laboratories are subject to both formal and informal inspections by appropriate
regulatory and supervisory authorities, as well as by representatives from
client companies. The Company is regularly inspected by US, Japan and UK
governmental agencies because of the number and complexities of the studies it
undertakes. In 1979, the US Food and Drug Administration (FDA) promulgated the
Good Laboratory Practice (GLP) regulations, defining the standards under which
biological safety evaluations are to be conducted. Other governmental agencies
such as the Environmental Protection Agency (EPA), the Japanese Ministry Of
Health and Welfare, the Japanese Ministry of Agriculture, Forestry and
Fisheries, and the UK Department of Health, have introduced
compliance-monitoring programs with similar GLP standards. During 2002, the
Company had two inspections in the UK and one inspection in the US, and overall,
35 such inspection visits and audits since 1985.
LSR's laboratory in the US is subject to the United States Department of
Agriculture (USDA) Animal Welfare Regulations (Title 9, Code of Federal
Regulations, Subchapter A). The laboratory is regularly inspected by USDA
officials for compliance with these regulations. Compliance is assured through
an Institutional Animal Care and Use Committee, comprising staff from a broad
range of disciplines within the Company and including external representation.
Furthermore, in the US there is a voluntary certification program run by an
independent and internationally recognized organization, the Association for
Assessment and Accreditation of Laboratory Animal Care (AAALAC). The Company's
laboratory in the US is accredited under this program. LSR's pre-clinical
services are subject to industry standards for the conduct of research and
development studies that are embodied in the regulations for GLP. The FDA and
other regulatory authorities require the test results submitted to such
authorities be based on studies conducted in accordance with GLP. The Company
must also maintain reports for each study for specified periods for auditing by
the study sponsor and by FDA or limited regulatory authorities.
LSR's operations in the UK are regulated by the Animals (Scientific Procedures)
Act 1986. This legislation, administered by the UK Home Office, provides for the
control of scientific procedures carried out on animals and regulation of their
environment. Personal licenses (the Company has approximately 250 licensees) are
issued by the UK Home Office to personnel who are competent to perform regulated
procedures and each program of work must be authorized in advance by a Project
Licensee. Premises where procedures are carried out must also be formally
designated by the UK Home Office. Consultations and inspections are regularly
undertaken in order to ensure continued compliance with regulatory and
legislative requirements. Typically, the Company has 20 such inspections
annually.
At each of its research centers, the Company ensures the availability of
suitably experienced and qualified veterinary staff backed by a 24-hour call out
system.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
While the Company conducts its business to comply with certain environmental
regulations, compliance with such regulations does not impact significantly on
its earnings or competitive position. Management believes that its operations
are currently in material compliance with all applicable environmental
regulations.
OTHER INFORMATION PERTAINING TO THE COMPANY
Human Resources
LSR's most important resource is its people, they have created the Company's
knowledge base, its expertise and its excellent scientific reputation.
Scientists from the Company are represented at the highest levels in several US,
UK and international committees on safety and toxicity testing. Several staff
members are considered leaders in their respective fields. They frequently
lecture at scientific seminars and regularly publish articles in scientific
journals. This recognition has resulted in frequent assignments from clients for
consultation services. Some of the Company's staff serve by invitation or
election on a number of scientific and industrial advisory panels and groups of
certain organizations and agencies such as the FDA, the EPA, the UK Department
of Health, and the World Health Organization.
To ensure that this experience and expertise is transmitted throughout the
organization, the Company conducts training programs. For example, the Company's
Introductory and Advanced Graduate Training Programs train graduate staff in all
phases of toxicology. Also, in conjunction with the Institute of Animal
Technology, the Company maintains what it believes to be one of the largest
animal technician training programs in the world. The Company employs
approximately 250 licensed personnel.
The number of employees in the Company at December 31, 2002 and 2001 were as
follows:
2002 2001
US .............................. 224 216
UK............................... 1,205 1,161
Japan............................ 10 10
----------- -----------
1,439 1,387
----------- -----------
Management and Labor Relations
The Company's labor force is non-union and there has never been any disruption
of the business through strikes or other employee action. The Company regularly
reviews its pay and benefits packages and believes that its labor relations,
policies and practices and management structure are appropriate to support its
competitive position.
Research and Development
In addition to experience gained through research activities performed for
clients, the Company engages in research in order to respond to the changing
needs of clients and to maintain competitiveness within the industries in which
it operates. Most of the research undertaken, however, is an inherent part of
the research carried out on behalf of clients in completing studies and as such
it is not identified separately.
Know-how and Patents
The Company believes that its proprietary know-how plays an important role in
the success of its business. Where the Company considers it appropriate, steps
are taken to protect its know-how through confidentiality agreements and
protection through registration of title or use. However the Company has no
patents, trademarks, licenses, franchises or concessions, which are material and
upon which any of the services offered is dependent.
Quality Assurance
The Company maintains extensive quality assurance programs, designed to ensure
that all testing programs meet client requirements, as well as all relevant
codes, standards and regulations. Based on a Master Schedule, periodic
inspections are conducted as testing programs are performed to assure adherence
to project specifications or protocols and final reports are extensively
inspected to ensure consistency with data collected.
Animal Rights Activism
In parallel with an increase in so called "animal rights" activity
internationally targeting organizations in the CRO, academic, and medical
research community, a new campaign group (Stop Huntingdon Animal Cruelty or
SHAC) was formed in the UK during November 1999 with Huntingdon as its target.
SHAC's broad aim is to end all animal research, while its immediate and publicly
stated goal at that time was to "shut HLS down within three years". During 2000,
this campaign intensified with any stakeholder in Huntingdon becoming a
potential target; this included staff, directors, institutional and personal
shareholders, customers, financial institutions and other suppliers. The
protests took many forms, including demonstrations outside the Company's
facilities and in local towns; distribution of propaganda; abuse, intimidation
and threats directed at many of the stakeholders listed above; and in some cases
violence. The worst acts of violence have been targeted at members of staff of
the Company. These have taken the form of nighttime arson attacks on employees'
cars outside their homes and physical attacks on two of the Company's senior
managers as they returned home from work.
During 2001 and 2002 the incidents of violent protest in the UK appeared to
partly diminish. However, activists increased the focus of protest activities on
the Company's financial institutions, in unsuccessful attempts to deprive
Huntingdon of its bank financing and to defeat the re-domiciling transaction to
the US. During the same period, in large part due to the successful US
re-domiciling, animal rights activities of SHAC and the other groups expanded to
the US, with a focus on the Company's stakeholders and suspected stakeholders,
market makers and senior staff and directors.
To counter this "animal rights" campaign, LSR has adopted a strategy of openness
and direct cooperation with all its stakeholders, the media and the local
communities. The Company has taken every opportunity to promote the value of the
work it does in helping its customers bring to market safe and effective
products. Members of the media, schools, local groups and national bodies have
visited the Company's facilities, toured the animal facilities and laboratories,
and talked with staff. These visitors have been consistently impressed with the
Company's ethics, standards of animal welfare and the professionalism of its
staff. As a consequence of the Company's high profile public relations
activities and the irrationality of the "animal rights" messages, the media
coverage has become increasingly positive throughout the duration of the
campaign, particularly in the US where the media coverage, when it even exists,
has consistently condemned the actions of the SHAC campaign.
As a result of and in conjunction with the Company's leadership on this issue,
there has been a marked increase in communication campaigns to educate the
general population about the invaluable benefits of animal based research, the
commitment to and progress in development of non-animal based alternatives, and
the high standard of animal welfare in which this work is conducted. Our
clients' recognition for our scientific and professional integrity and
leadership was evident in the granting in October 2001 of the prestigious UK
Pharma Industry Individual Achievement Award to Brian Cass, the Company's
President and Managing Director. In June 2002, in further recognition of his
contribution to science and professional achievements, Mr. Cass was appointed as
a Commander in the Most Excellent Order of the British Empire (CBE). The highly
prestigious CBE is awarded on merit, for exceptional achievement or service;
they are recommended by the Prime Minister of England but decided by the Queen
of England.
In the UK the Company has successfully lobbied politicians and the British
parliament, with great support from industry trade bodies such as the
Association of the British Pharmaceutical Industry, Bioindustry Association,
Chemical Industry Association and Research Defence Society. As a result, the
British Government has made very positive statements in support of the Company
and has been extremely critical of the illegal acts of some "animal rights"
supporters. The Government has introduced legislation to offer more protection
to those targeted and is encouraging the police and courts to ensure the law is
enforced. This national initiative continues to develop, particularly as the
government and police deal with protecting other animal rights targets,
including academic institutions, in England.
Although the animal rights movement is more recent and undeveloped in the US and
appears to enjoy less public support than in the UK, the Company is addressing
it proactively with actions similar to those it has utilized in the UK. These
steps include a strategy of openness and media cooperation; legislative and
regulatory lobbying in association with industry trade bodies such as Americans
for Medical Progress, National Association for Biomedical Research and the
Foundation for Biomedical Research; and legal actions including close
cooperation with law enforcement authorities at all levels. For example,
following incidents of vandalism at or following home protests against the
Company's US employees, the Company obtained orders of the New Jersey Superior
Court and the New York Supreme Court, placing restrictions on home protests by
animal rights activists as well as limits on the scope of protests at the
Company's Princeton Research Center. In recent months, criminal indictments have
been brought against SHAC extremists in New York City and Boston. In the New
York prosecution, felony convictions, including prison terms, have been handed
down. In Washington D.C., legislation was enacted in May 2002 which
significantly increased the penalties under the Animal Enterprise Terrorism Act
for acts of vandalism against medical research and animal based research
facilities.
Management recognizes that there has long been, and expects that there will
continue to be, individuals with strong views that animals should not be used
under any circumstances for the betterment of humanity, including for animal
based research. Regardless of whether there continues to be a direct impact from
this political issue on the Company's business, LSR remains committed to
continuing its initiatives to educate the community to the value of animal based
medical research, to advancing the important strides our industry has made in
animal welfare, and to supporting with state of the art science and techniques
our clients' desire to maximize the safety of vital new compounds being
developed for the betterment of society.
ITEM 2. PROPERTIES
The Company's head office is situated within the Princeton Research Center in
New Jersey.
The Company believes that its facilities, described below, are adequate for its
operations and that suitable additional space will be available if and when
needed.
The following table shows the location of the facilities of the Company,
approximate size, based on occupancy, and the principal activities conducted at
such facilities each of which is owned by the Company.
Laboratories
Location and Offices Size Principal Activities
- -------- ----------- ---- --------------------
Princeton Research Center, East 135,000 sq.ft. 53.5 acres Laboratories, animal accommodation and
Millstone, NJ, US offices
Huntingdon Research Center, 559,000 sq.ft. 80 acres Laboratories, animal accommodation and
Huntingdon, England offices
Eye Research Center, Eye, England 257,000 sq.ft. 28 acres Laboratories, animal accommodation and
offices
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LSR's Voting Common Stock trades on the Over the Counter Bulletin Board (OTCBB)
Market under the symbol "LSRI". The closing market price of the Voting Common
Stock on March 18, 2003 was $2.20 per share.
On July 10, 2000 the Company changed its ADS ratio from one ADS representing
five Ordinary Shares to one ADS representing twenty-five Ordinary Shares. The
ratio change was implemented to ensure compliance with the New York Stock
Exchange's listing requirement that ADS's trade at a minimum price of $1.00 per
share.
Until January 24, 2002 Huntingdon's Ordinary Shares were listed on the London
Stock Exchange Ltd., under the Stock Exchange Automated Quotation symbol "HTD".
The company completed its re-domiciling from the UK to the US on March 26, 2002
and commenced trading of LSR common stock on the OTCBB on April 8, 2002.
The Company's common stocks traded on the OTCBB and/or the Other OTC Market
(Pink Sheets) between January 24, 2002 and July 8, 2002 and on the OTCBB since
July 8, 2002.
The high and low quarterly sales price of LSR's common stock on the OTCBB or the
Other OTC Market as applicable from April 8, 2002 to December 31, 2002 were as
follows:
HIGH SALES LOW SALES
PERIOD AND QUARTER ENDED PRICE PRICE
- ------------------------ ------------------ -----------------
$ $
June 30, 2002 (A) 2.25 0.50
September 30, 2002 2.85 1.80
December 31, 2002 2.35 1.40
(A): Until April 8, 2002, no information is publicly available for trades, if
any, that were executed for the LSR stock.
The high and low sales price of Huntingdon ordinary shares on the London Stock
Exchange between January 1, 2002 and January 24, 2002 (when the ordinary shares
ceased trading on the London Stock Exchange) were as follows:
HIGH SALES LOW SALES
DATE PRICE PRICE
- ---- ------------------ -----------------
(pound) (pound)
January 1, 2002 to January 24, 2002 0.045 ($0.064) 0.0325 ($0.047)
The Company has not paid any cash dividends in the two most recent fiscal years
and does not expect to declare or pay cash dividends on the Company's Voting
Common Stock in the near future. The Board of Directors will determine the
extent to which legally available funds will be used to pay dividends. In making
decisions regarding dividends, the Board will exercise its business judgment and
will take into account such matters as results of operations and financial
condition and any then-existing or proposed commitments for the use of available
funds.
See Item 7 for discussion of restrictions impacting the export or import of
capital or that affect the remittance of dividends or other payments to
non-resident holders of the Company's equity.
As of March 18, 2003, LSR had 2,039 holders of record of Voting Common Stock.
Warrants to purchase shares of LSR Voting Common Stock
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. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc.,
(Stephens' Loan) in January 2001. In accordance with APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
("APB 14") the 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
warrants were $430,000. Stephens Group Inc. subsequently sold the warrants to
independent third parties.
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. The LSR warrants
are exercisable at any time and will expire on June 11, 2012. 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 warrants were $250,000.
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. $222,000 of such promissory notes were repaid during
2002.
Equity Incentive Plans
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR Board has adopted the LSR 2001 Equity Incentive Plan. Adoption of the
LSR 2001 Equity Incentive Plan will enable LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key personnel.
This stock option plan was approved by the shareholders of LSR, prior to the
acquisition of Huntingdon.
Awards under the LSR 2001 Equity Incentive Plan may be granted by a committee
designated by the LSR Board pursuant to the terms of the LSR 2001 Equity
Incentive Plan and may include: (i) options to purchase shares of LSR Voting
Common Stock, including incentive stock options ("ISOs"), non-qualified stock
options or both; (ii) stock appreciation rights ("SARs"), whether in conjunction
with the grant of stock options or independent of such grant, or stock
appreciation rights that are only exercisable in the event of a change in
control or upon other events; (iii) restricted stock consisting of shares that
are subject to forfeiture based on the failure to satisfy employment-related
restrictions; (iv) deferred stock, representing the right to receive shares of
stock in the future; (v) bonus stock and awards in lieu of cash compensation;
(vi) dividend equivalents, consisting of a right to receive cash, other awards,
or other property equal in value to dividends paid with respect to a specified
number of shares of LSR Voting Common Stock or other periodic payments; or (vii)
other awards not otherwise provided for, the value of which are based in whole
or in part upon the value of the LSR Voting Common Stock. Awards granted under
the LSR 2001 Equity Incentive Plan are generally not assignable or transferable
except pursuant to a will and by operation of law.
The flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among
other things, permit the stock option committee to impose performance conditions
with respect to any award, thereby requiring forfeiture of all or part of any
award if performance objectives are not met or linking the time of
exercisability or settlement of an award to the attainment of performance
conditions. For awards intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the United States Internal Revenue Code
such performance objectives shall be based solely on (i) annual return on
capital; (ii) annual earnings or earnings per share; (iii) annual cash flow
provided by operations; (iv) changes in annual revenues; (v) stock price; and/or
(vi) strategic business criteria, consisting of one or more objectives based on
meeting specified revenue, market penetration, geographic business expansion
goals, cost targets, and goals relating to acquisitions or divestitures.
LSR's stock option committee, which will administer the 2001 LSR Equity
Incentive Plan, will have the authority, among other things, to: (i) select the
directors, officers and other employees and independent contractors entitled to
receive awards under the 2001 LSR Equity Incentive Plan; (ii) determine the form
of awards, or combinations of awards, and whether such awards are to operate on
a tandem basis or in conjunction with other awards; (iii) determine the number
of shares of LSR Voting Common Stock or units or rights covered by an award; and
(iv) determine the terms and conditions of any awards granted under the 2001 LSR
Equity Incentive Plan, including any restrictions or limitations on transfer,
any vesting schedules or the acceleration of vesting schedules, any forfeiture
provision or waiver of the same and including any terms and conditions necessary
or desirable to ensure the optimal tax result for participating personnel and
the Company including by way of example to ensure that there is no tax on the
grant of the rights and that such tax only arises on the exercise of rights or
otherwise when the LSR Voting Common Stock unconditionally vests and is at the
disposal of such participating personnel. The exercise price at which shares of
LSR Voting Common Stock may be purchased pursuant to the grant of stock options
under the 2001 LSR Equity Incentive Plan is to be determined by the option
committee at the time of grant in its discretion, which discretion includes the
ability to set an exercise price that is below the fair market value of the
shares of LSR Voting Common Stock covered by such grant at the time of grant.
The number of shares of LSR Voting Common Stock that may be subject to
outstanding awards granted under the 2001 LSR Equity Incentive Plan (determined
immediately after the grant of any award) may not exceed 20 per cent of the
aggregate number of shares of LSR Voting Common Stock then outstanding.
The 2001 LSR Equity Incentive Plan may be amended, altered, suspended,
discontinued, or terminated by the LSR Board without LSR Voting Common
Stockholder approval unless such approval is required by law or regulation or
under the rules of any stock exchange or automated quotation system on which LSR
Voting Common Stock is then listed or quoted. Thus, LSR Voting Common
Stockholder approval will not necessarily be required for amendments, which
might increase the cost of the plan or broaden eligibility. LSR Voting Common
Stockholder approval will not be deemed to be required under laws or regulations
that condition favorable tax treatment on such approval, although the LSR Board
may, in its discretion, seek LSR Voting Common Stockholder approval in any
circumstances in which it deems such approval advisable.
No awards were granted during 2001 pursuant to the 2001 LSR Equity Incentive
Plan. The LSR Board has designated the Compensation Committee of the Board to
serve as the stock option committee.
LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to
certain directors as of that date, and employees, including the Named Executive
Officers:
Grants to Directors
Name Number Granted
- ---- --------------
Gabor Balthazar 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
- ----------------------------------
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted to employees and directors, on the terms set forth above,
are listed as follows:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted to employees and directors, on the terms set forth above,
are listed as follow:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
Shares Wtd Avg. Ex Price
(000)
Outstanding at start of period - $-
Granted 1,177 1.53
------------ -----------------------------
December 31, 2002 1,177 $1.53
------------ -----------------------------
Exercisable at end of year 589 $1.53
Weighted average fair value of
options granted $901
Huntingdon Life Sciences Group plc Stock Option Plans
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and are
considered to have no value.
Share purchase loan
Brian Cass, President and Managing Director of LSR, acquired 400,000 shares of
LSR Common Stock in the Private Placement. Mr. Cass acquired such shares through
the delivery of two promissory notes. Both such promissory notes, each in the
amount of (pound)211,679 ($335,998), are due on March 28, 2007; bear interest at
the rate of 5% per annum; and are secured by the 200,000 shares of LSR Common
Stock purchased with the proceeds of each such loan. The due date of each
promissory note would be accelerated if Mr. Cass voluntarily resigned from his
employment with LSR or had his employment terminated. Repayment of one of the
promissory notes will be made by automatic deduction of (pound)44,000 ($69,840)
per year from the (pound)66,000 ($104,762) per year pension contribution made by
the Company to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($340,476) accrued in such pension account.
In addition, one-third of any yearly bonus received by Mr. Cass will be used to
reduce principal of the promissory notes. Total amount of this loan as of
December 31, 2002 is (pound)400,680 ($645,000 at year-end foreign exchange
rates).
Julian Griffiths, a director of LSR and Finance Director of Huntingdon, acquired
50,000 shares of LSR Common Stock in the Private Placement. Mr. Griffiths
acquired such shares through the delivery of a promissory note in the principal
amount of (pound)52,817 ($83,837), which is due on March 28, 2007; bears
interest at the rate of 5% per annum; and is secured by the 50,000 shares of LSR
Common Stock purchased with the proceeds of the loan. Repayment of the
promissory note will be made by automatic monthly deduction of (pound)943.56
($1,498) from Mr. Griffith's salary. Total amount of this loan as of December
31, 2002 is (pound)24,230 ($39,000 at year-end foreign exchange rates).
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included elsewhere in this report. For the
purpose of this report, it is assumed that LSR is the ultimate parent company
for periods prior to July 19, 2001, since before this date, LSR had no
substantive operations on a stand-alone basis.
The selected consolidated financial information as of December 31, 2001 and 2000
and for each of the two years in the period ended December 31, 2001 has been
derived from Huntingdon's audited consolidated financial statements and the
related notes included in this Annual Report on Form 10-K beginning on page 28.
Such financial statements and the selected consolidated financial information as
of December 31, 2002 of LSR have been prepared in accordance with US GAAP.
The selected consolidated financial information as of December 31, 1999 and 1998
and for each of the two years ended December 31, 1999 and 1998 have been derived
from Huntingdon's consolidated financial statements which are not included in
this Annual Report on Form 10-K; such financial statements were presented in
pounds sterling and were prepared in accordance with US GAAP. These financial
statements have been translated into US dollars as follows:
As of and for the year ended December 31
------------- --------------- -------------- ------------- --------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
($000, except per share data)
Statement of Operations Data
Revenues 115,742 99,206 95,964 94,186 87,196
Operating income/(loss) 4,264 (1,643) 84 (2,482) (34,622)
Net income/(loss) 2,697 (9,628) (9,763) (6,605) (38,301)
Income/(loss per share)
- Basic 0.25 $(1.64) $(1.68) $(1.13) $(6.58)
- Diluted 0.24 $(1.64) $(1.68) $(1.13) $(6.58)
Weighted average number of shares
outstanding ('000) 10,679 5,868 5,824 5,820 5,820
Dividends per share - - - - -
Book value per share $(0.73) $(0.81) $0.70 $2.55 $3.80
As of and for the year ended December 31
------------- --------------- -------------- ------------- --------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
($000)
Balance Sheet Data
Total assets 148,410 133,964 146,107 158,970 183,107
Long term debt and related party loans
84,075 88,123 50,209 50,000 90,853
Total shareholders deficit (7,804) (4,724) 4,066 14,850 22,144
Common stock and paid in capital 74,614 66,094 65,330 65,242 65,242
Other Financial Data
Depreciation and amortization 8,108 8,307 9,093 9,675 17,719
Capital expenditures 4,177 3,295 3,648 4,893 4,025
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following should be read in conjunction with the consolidated financials
statements of LSR as presented in "Item 8, Financial Statements and Supplemental
Data".
LSR is one of the world's leading providers of pre-clinical and non-clinical
safety testing services to the pharmaceutical, agrochemical and industrial
chemical industries. The Company provides those services under contracts, which
may range from one day to three years. Income from these contracts is recognized
as services are rendered towards the preparation of the final report. Contracts
are generally terminable upon notice by the client with the client being
responsible for reimbursing the Company for the value of work performed to the
date of cancellation plus the value of work required to wind down a study on an
orderly basis.
The Company's business is characterized by high fixed costs, in particular staff
and facility related costs. Such a high proportion creates favorable conditions
for the Company as excess capacity is utilized, such as has been the case during
the last two years. However, during periods of declining revenue, careful
planning is required to reduce costs without impairing revenue-generating
activities.
RESULTS OF OPERATIONS
Year ended December 31, 2002 compared with the year ended December 31, 2001
Revenues in the year ended December 31, 2002 were $115.7 million, an increase of
17% on revenues of $99.2 million for the year ended December 31, 2001. The
underlying increase, after adjusting for the impact of the movement in exchange
rates was 13%; with the UK showing a 15% increase and the US a 7% increase. The
year 2002 saw a record growth in orders, representing an increase of 25% over
last year. At December 31, 2002, backlog amounted to approximately $95 million.
Cost of sales in the year ended December 31, 2002 were $93.4 million, an
increase of 11% on cost of sales of $84.1 million for the year ended December
31, 2001. This increase was partly due to exchange rate movements, which
increased cost of sales in the year by $3.0 million. Without these movements
cost of sales would have increased by 8%. In the UK cost increases in sterling
were only 8%, which is lower than the revenue growth as capacity is filled
without the corresponding increase in fixed costs. The main increase was in
labor costs reflecting actions taken to adjust salaries to allow retention and
recruitment of key employees. Increases in costs in the US were only 3%, mainly
due to lower increases in direct materials costs compared to the UK.
Selling and administrative expenses rose by 13% to $18.1 million for the year
ended December 31, 2002 from $16.0 million in the year ended December 31, 2001.
Of this increase, $0.6 million related to exchange rate movements. This growth
was due to a continuation of the build-up of the sales activity during the year
and higher labor costs.
There were no other operating expenses in the year ended December 31, 2002,
compared with $0.75 million in the year ended December 31, 2001. In the year
ended December 31, 2001, other operating expenses comprised $0.4 million in
connection with specific legal actions taken against animal rights groups and
$0.35 million in connection with the write off of foreign exchange dealings
resulting from the bankruptcy of an exchange broker.
Interest expense declined by 5% to $6.3 million for the year ended December 31,
2002 from $6.6 million in the year ended December 31, 2001. The main reasons for
the reduction are the repayment of the former Stephens' loan and Baker loan, the
repurchase of $2.4 million (principal amount) of the bonds, together with lower
interest rates on the non-bank debt (down from an average in 2001 of 7.13% to
5.77% in 2002).
Other income of $4.9 million for the year ended December 31, 2002 comprised $5.0
million from the non-cash foreign exchange remeasurement gain on the Capital
Bonds denominated in US dollars (the functional currency of the financing
subsidiary that holds the bonds is UK sterling); a $1.2 million gain was made on
the partial repurchase of the Capital Bonds; offset against these was a $1.3
million charge relating to the finalization of the Exchange Offer. In the year
ended December 31, 2001 there were other operating expenses of $4.5 million
which comprised of non-cash foreign exchange remeasurement loss on the Capital
Bonds of $1.4 million; $2.9 million relating to the Exchange Offer; and $0.2
million to the write off of the unamortized refinancing costs.
Taxation charge on income for the year ended December 31, 2002 was $0.3 million
representing a charge at 8% compared to a taxation benefit of $3.0 million
representing benefit at 26% for the year ended December 31, 2001. A
reconciliation between the US statutory tax rate and the effective rate of
income tax benefit on losses before income taxes for the year ended December 31,
2002 and December 31, 2001 is shown below:
% of income/(loss)
before income taxes
2002 2001
% %
US statutory rate 35 (35)
Foreign rate differential (9) 6
Non-deductible items including foreign exchange loss (31) 3
State taxes 2 -
Prior year adjustments 11 -
---------------- -------------
Effective tax rate 8 (26)
---------------- --------------
The overall net income for the year ended December 31, 2002 was $2.7 million
compared to a loss of $9.6 million in the year ended December 31, 2001. The
diluted income per share for the year ended December 31, 2002 was $0.24 compared
to a diluted loss per share of $(1.64) for the year ended December 31, 2001.
Excluding other income and expense, net of income tax, the income/(loss) per
share would have been a net loss per share of $(0.20) for the year ended
December 31, 2002 and $(0.96) for the year ended December 31, 2001.
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues for the year ended December 31, 2001 at $99.2 million were just over 3%
above the revenues for the year ended December 31, 2000 of $96.0 million,
continuing the improvement shown in the prior year. The underlying increase,
after adjusting for the impact of the movement in exchange rates, was nearly 9%.
2001 saw a 9% growth in orders with the return of client confidence after the
refinancing in January 2001. The backlog at the end of the year was
approximately $73 million.
Cost of sales for the year ended December 31, 2001 of $84.1 million compared
with $80.7 million for the year ended December 31, 2000, an increase of just
over 4%. Again, after allowing for the impact of the movement in exchange rates,
the underlying increase was approximately 10%. The main reasons for the increase
in costs relate to the increase in business volume, salary increases,
particularly in the UK, to reflect market rates, and recruitment costs
reflecting the shortage of qualified staff in the market place.
Selling and administration costs for the year ended December 31, 2001 at $16.0
million were 6% up on the costs for the year ended December 31, 2000 of $15.1
million. After allowing for the impact of exchange rate movements the underlying
cost increase was 11%. The increase was mainly due to increased sales activity
with additional staff of $0.4 million ; increases in insurance costs of $0.2
million; and banking costs of $0.1 million. Excluding these items, the increase
was just over 1%.
In 2001, other operating expenses comprised a write off in connection with
foreign exchange dealings resulting from the bankruptcy of an exchange broker of
$0.35 million and specific legal and other costs incurred in connection with the
Animal Rights campaign of $0.4 million.
Net interest costs for the year ended December 31, 2001 were $6.5 million
compared with $7.2 million for the year ended December 31, 2000. The effect of
exchange rates movements reduced the charge for the year by $0.4 million; a
reduction in the facility renewal fees once the refinancing had been completed
in January 2001 reduced the charge by a further $0.6 million. These were offset
by an increase in interest costs of $0.3 million resulting from the increase in
borrowings from $85.5 million to $88.1 million.
Other expense of $4.5 million for the year ended December 31, 2001 comprised of
non-cash foreign exchange remeasurement losses on the Capital Bonds denominated
in US dollars of $1.4 million. The functional currency of the financing
subsidiary that holds the bonds is the UK pound sterling. In addition, it
includes $2.9 million relating to the Exchange Offer and $0.2 million relating
to the write off of the unamortized refinancing costs. This expense compares
with other expense of $5.4 million for the year ended December 31, 2000, which
comprised costs of $1.8 million incurred in the refinancing of the Company's
bank debt, and $3.6 million, which was the result of non-cash foreign exchange
remeasurement losses on the Capital Bonds.
Taxation benefit on loss for the year ended December 31, 2001 was $3.0 million
representing benefit at 26% compared to $2.7 million representing benefit at 22%
in the previous year. A reconciliation between the US statutory tax rate and the
effective rate of tax benefit on losses before taxes for the year ended December
31, 2001 and December 31, 2000 is shown below.
% of loss before
income taxes
2001 2000
% %
US statutory rate 35 35
Foreign rate differential (6) (5)
Non deductible foreign exchange loss (3) (4)
Prior year adjustments - (4)
------------ -----------
26 22
------------ -----------
The resultant net loss for the year ended December 31, 2001 was $9.6 million
compared with $9.8 million the previous year. Diluted loss per share for the
year ended December 31, 2001 was $1.64 compared with $1.68 in the year ended
December 31, 2000.
SEGMENT ANALYSIS
The analysis of the Company's revenues and operating loss between segments for
the three years ended December 31, 2002 is as follows:
Company 2002 2001 2000
$000 $000 $000
Revenues
UK 90,851 75,705 73,035
US 24,891 23,501 22,929
----------- ------------- -------------
$115,742 $99,206 $95,964
----------- ------------- -------------
Operating income/(loss) before other
operating expenses
UK 3,963 (784) (1,615)
US 301 (109) 1,699
----------- ------------- -------------
$4,264 $(893) $84
----------- ------------- -------------
Other operating expense
UK - (750) -
US - - -
----------- ------------- -------------
$- $(750) $-
----------- ------------- -------------
Operating income/(loss)
UK 3,963 (1,534) (1,615)
US 301 (109) 1,699
----------- ------------- -------------
$4,264 $(1,643) $84
----------- ------------- -------------
The performance of each segment is measured by revenues and by operating
income/(loss) before other operating expenses.
UK
Revenues increased by 20% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. After allowing for the effect of exchange rate
movements the increase was over 15%. This was a result of continued growth in
orders.
The operating income before other operating (expenses)/income for the year ended
December 31, 2002 was $4.0 million compared to an operating loss of $0.8 million
in the year to December 31, 2001. The increase in revenues had the major impact
on the improvement in operating income, with the filling of capacity without the
corresponding increase in fixed costs. There were some additional costs,
including salary increases both to reflect market rates and additional staff
($2.6 million); and a reduction in exchange gains ($0.2 million).
Revenues increased by 4% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. After allowing for the effect of exchange rate
movements, revenues increased by 9%.
The operating loss before other operating expenses for the year ended December
31, 2001 was $0.8 million compared to $1.6 million in the year ended December
31, 2000. The increase in revenues reduced the losses, but this was partially
offset by additional costs. These included salary increases to reflect market
rates; recruitment costs reflecting the shortage of qualified staff in the
market place; increased sales activity with additional staff ($0.35 million) and
a reduction in exchange gains ($0.9 million).
US
Revenues increased by 5.9% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. This increase in the rate of growth of revenues
was due to a recovery in orders after the reduction level last year. Revenues
from the US toxicology operations remained constant, but revenues derived from
the analysis of samples from clinical trials returned to their more normal
levels following the decrease last year.
Operating (loss)/income before other operating expense improved from a loss of
$0.1 million in the year ended December 31, 2001 to a income of $0.3 million in
the year ended December 31, 2002. This was as a result of the increased
revenues.
Revenues increased by 2.5% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. This reduction in the rate of growth of revenues
was due to a decline in orders after two years of rapid growth. Revenues from
the US toxicology operations continued to grow, but revenues derived from the
analysis of samples from clinical trials declined with the completion of a
number of major studies.
Operating (loss)/income before other operating expense declined from a income of
$1.7 million in the year ended December 31, 2000 to a loss of $0.1 million in
the year ended December 31, 2001. Apart from inflationary cost increases,
additional security expenses of $0.5 million were incurred in the year ended
December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's net non-bank loan of (pound)22.4 million
($36.0 million approximately), was refinanced by Stephens' Group Inc. and other
parties. 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 the guarantees of the
wholly owned subsidiaries of the Company including, Huntingdon Life Sciences
Group plc, Huntingdon Life Sciences Ltd., and Huntingdon Life Sciences Inc., and
collateralized by all the assets of these companies. The loan was transferred
from Stephens Group Inc., to an unrelated third party effective February 11,
2002.
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. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. 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 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 warrants was $430,000. The
warrants were subsequently transferred to an unrelated third party.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par. They carry interest at a rate of 7.5% per
annum, payable biannually in March and September. During the year, the Company
repurchased and cancelled $2,410,000 principal amount of such bonds resulting in
a $1.2 million gain recorded in other income/expense. Subsequent to the
year-end, the Company further repurchased and cancelled $945,000 principal
amount of such bonds resulting in a gain of $0.5 million. 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.
Related Party Loans
Other financing has been provided by a $2.952 million loan facility made
available on September 25, 2000 by a director, Mr. Baker. In connection with
this financing, the company authorized, subject to shareholder approval, the
issuance of warrants to purchase 410,914 shares of LSR Voting Common Stock at
purchase price of $1.50 per share to FHP, a company controlled by Mr. Baker.
Such shareholder approval was granted on June 12, 2002. Additionally, other
financing also includes 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 was transferred to an unrelated third party. Both facilities have been
fully drawn down. $550,000 of the loan from Mr. Baker was transferred to and
assumed by 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, $302,000 remains payable to Mr. Baker and $250,000 remains payable
to FHP. Net of warrants, as discussed below, the corresponding amount payable on
the FHP loan is $56,000. The former Stephens Group Inc. secured facility is
subordinated to the bank loan. Interest was 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.
As noted above, 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. The LSR warrants are exercisable at any time and will expire on June 11,
2012. 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 warrants was $250,000.
Common Shares
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 FHP ($0.3 million) and $825,000 was paid with promissory notes.
$222,000 of such promissory notes were repaid during 2002.
Cash flows
During the year ended December 31, 2002 funds generated were $12.4 million,
increasing cash in hand and on short-term deposit from $2.2 million at December
31, 2001 to $14.6 million at December 31, 2002. The cash generated from
operating, investing and financing activities were generated as follows (in
millions):
2002 2001 2000
Operating income/(loss) before
other operating (expense)/income $4.3 $(0.9) $(0.1)
Depreciation 8.1 8.3 9.1
Working capital movement 9.0 0.2 (2.7)
Interest (6.1) (6.5) (7.2)
Capital expenditure (4.2) (3.3) (3.6)
Other (expense)/income (1.2) (3.1) (1.8)
Shares issued net of loan repayments 1.7 5.0 1.8
Effect of exchange rate changes on cash 0.8 (0.7) (0.7)
-------------- ------------- --------------
$12.4 $(1.0) $(5.2)
-------------- ------------- --------------
Net days sales outstanding (DSOs) at December 31, 2002 were 9 days, down from 46
days at December 31, 2001. DSO is calculated as a sum of accounts receivable,
unbilled receivables and fees in advance over total revenue. The improvement is
in part due to a dedicated initiative at the Company throughout this past year
to improve the processes that affect this. The impact on liquidity from a
one-day change in DSO is approximately $350,000.
At December 31, 2002, the Company had a working capital deficiency of $844,000.
The Company believes that projected cash flow from operations will satisfy its
contemplated cash requirements for at least the next 12 months.
Commitment and Contingencies
Operating leases
Operating lease expenses were as follows:
2002 2001 2000
$000 $000 $000
Hire of plant and equipment 904 924 1184
Other operating leases 392 127 69
The Company has commitments payable under operating leases as follows:
Year ended December 31 $000
2003 956
2004 417
2005 95
2006 51
2007 1
-----------------
$1,520
-----------------
Capital Leases
$000
2003 225
2004 100
------------------
$325
------------------
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 government agency.
ORDERS
The year 2002 saw order growth of over 25% over the prior year. The increase in
orders was driven by the Company's pharmaceutical business, which was 35% up on
2001. Non-pharmaceutical orders also grew in 2002 (5% ahead of 2001 orders), but
declined as a percent of total company sales to 30%.
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The Company operates on a worldwide basis and generally invoices its clients in
the currency of the country in which the Company 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 has decided not to hedge against this exposure.
Also, exchange rate fluctuations may have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars. Such fluctuations also have an impact on the
translation of the 7.5% convertible capital bonds payable in September 2006.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pound 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 has 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 Average rate (1)
2000 0.6760 0.6520
2001 0.6800 0.6950
2002 0.6212 0.6664
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On March 18, 2003 the noon buying rate for sterling was $1.00 = (pound)0.64.
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.
While 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
December 31, 2002:
Expected Maturity Date
2002 2003 2004 2005 2006 Thereafter Total Fair Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 8,051 8,051 8,051
- Euro 731 731 731
Accounts
receivable - Pound Sterling 14,103 14,103 14,103
- Euro 629 629 629
Debt - Pound Sterling (36,385) (36,385) (36,385)
COMPETITION
Competition in both the pharmaceutical and non-pharmaceutical market segments
ranges from in-house research and development divisions of large pharmaceutical,
agrochemical and industrial chemical companies, who perform their own safety
assessments to contract research organizations like the Company, who provide a
full range of services to the industries and niche suppliers focusing on
specific services or industries.
This competition could have a material adverse effect on LSR's net revenues and
net income, either through in-house research and development divisions doing
more work internally to utilize capacity or through the loss of studies to other
competitors. As the Company operates on an international basis, movements in
exchange rates, particularly against sterling, can have a significant impact on
its price competitiveness.
CONSOLIDATION WITHIN PHARMACEUTICAL INDUSTRY
The process of consolidation within the pharmaceutical industry continues to
accelerate the move towards outsourcing work to contract research organizations
in the longer term as resources are increasingly invested in in-house facilities
for discovery and lead optimization, rather than development and regulatory
safety evaluation. However, in the short-term, there is a negative impact with
development pipelines being rationalized and a focus on integration rather than
development. This can have a material adverse impact on the Company's net
revenues and net income.
ANIMAL RIGHTS ACTIVISM
Refer to the detailed discussion under Item 1, on pages 9 to 10.
INFLATION
While most of the Company's net revenues are earned under fixed price contracts,
the effects of inflation do not generally have a material adverse effect on its
operations or financial condition as only a minority of the contracts have
duration in excess of one year.
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 US GAAP. The Company considers the following
accounting policies to be significant 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 three years. Revenue from
these contracts is generally recognized over the term of the contracts as
services are rendered. 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 of a
future date. 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 income 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 certain aspects of the
contract 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 authorization, but prior to the actual
commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company's results of
operations.
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. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. 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
carry forwards. 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.
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 fiscal years beginning after May 15,
2002. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" (SFAS 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 Company early adopted the
provisions of this statement, resulting in the inclusion of a $1.2 million gain
in other income/(expense) in 2002.
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 costs 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.
In June 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). This statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
amendments to Statement 123 of this statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of this
statement had no impact on LSR's results of operations, financial position or
cash flows.
In November 2002, the FASB issued FASB interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others". In the normal course of business, the
Company does not issue guarantees to third parties; accordingly, this
interpretation has no effect on the Company's financial statements. In January
2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities". The Company has no arrangements that would be subject to
this interpretation.
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 Annual
Report on Form 10-K (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 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 set
forth in the Company's filings with the Securities and Exchange Commission,
including without limitation this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LSR is subject to market risks arising from changes in interest rates and
foreign currency exchange rates.
Non-Bank Loans
The Company's $36.0 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, approximately 5.77% per annum for the year ended December 31, 2002. At
December 31, 2002 this credit facility was fully drawn down.
In the year ended December 31, 2002, a 1% change in LIBOR would have resulted in
a fluctuation in interest expense of $365,000.
Revenue
For the year ended December 31, 2002, approximately 68% of the Company's net
revenues were from outside the US. The Company does not engage in derivative or
hedging activities related to its potential foreign exchange exposures.
Convertible Capital Bonds
The Company's $47.6 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Independent Auditors' Report 30
Consolidated Statements of Operations-
Years ended December 31, 2002, 2001 and 2000 31
Consolidated Balance Sheets - December 31, 2002 and 2001 32
Consolidated Statements of Shareholders' (Deficit)/Equity and
Comprehensive Loss - Years ended December 31, 2002, 2001 and 2000 34
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000 35
Notes to Consolidated Financial Statements 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Life Sciences Research, Inc. and
Subsidiaries, East Millstone, New Jersey
We have audited the accompanying consolidated balance sheets of Life Sciences
Research, Inc. and Subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
(deficit)/equity and comprehensive loss, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Life Sciences Research, Inc. and
Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Princeton, New Jersey
March 26, 2003
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Operations
Dollars in (000's), except per share amounts
Year Ended December 31,
2002 2001 2000
Revenues $115,742 $99,206 $95,964
Cost of sales (93,403) (84,133) (80,740)
------------------- ----------------- ---------------
Gross profit 22,339 15,073 15,224
Selling and administrative expenses (18,075) (15,966) (15,140)
Other operating expense - (750) -
------------------- ----------------- ---------------
Operating income/(loss) 4,264 (1,643) 84
Interest income 66 104 181
Interest expense (6,304) (6,614) (7,385)
Other income/(expense) 4,922 (4,471) (5,363)
------------------- ----------------- ---------------
Income/(loss) before income taxes 2,948 (12,624) (12,483)
Income tax (expense)/benefit (251) 2,996 2,720
------------------- ----------------- ---------------
Net income/(loss) $2,697 $(9,628) $(9,763)
=================== ================= ===============
Income/(loss) per share
-basic $0.25 $(1.64) $(1.68)
-diluted $0.24 $(1.64) $(1.68)
Weighted average number of common stock outstanding
-basic 10,678,890 5,868,421 5,824,121
-diluted 11,083,416 5,868,421 5,824,121
The accompanying notes are an integral part of these consolidated financial
statements.
Life Sciences Research Inc. & Subsidiaries
Consolidated Balance Sheets
Dollars in (000's), except per share amounts
December 31,
ASSETS 2002 2001
Current assets:
Cash and cash equivalents $14,644 $2,240
Accounts receivable, net of allowance of $287
and $164 in 2002 and 2001, respectively 20,176 18,257
Unbilled receivables 9,108 13,920
Inventories 1,556 1,275
Prepaid expenses and other current assets 3,075 2,850
------------- --------------
------------- --------------
Total current assets $48,559 $38,542
------------- --------------
------------- --------------
Property and equipment, net 94,574 90,353
Investments 248 202
Unamortized capital bonds issue costs 563 691
Deferred income taxes 4,466 4,176
------------- --------------
Total assets $148,410 $133,964
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $8,574 $9,899
Accrued payroll and other benefits 1,773 2,323
Accrued expenses and other liabilities 12,990 10,494
Fees invoiced in advance 26,066 17,722
------------- --------------
------------- --------------
Total current liabilities $49,403 $40,438
------------- --------------
Long-term debt 83,717 59,302
Related party loans 358 28,821
Pension liabilities 17,712 174
Deferred income taxes 5,024 9,953
------------- --------------
Total liabilities $156,214 $138,688
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Commitments and contingencies
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized: 50,000,000
Issued and outstanding at December 31, 2002: 11,932,338
(December 31, 2001: 5,870,305) 119 59
Non-Voting Common Stock, $0.01 par value. Authorized: 5,000,000
Issued and outstanding: None - -
Preferred Stock, $0.01 par value. Authorized: 5,000,000
Issued and outstanding: None - -
Paid in capital 75,098 66,035
Less: Promissory notes for issuance of common stocks (684) -
Accumulated comprehensive loss, including minimum pension
liability of $(13,507) in 2002 ($0 in 2001) - deficiency on UK
defined benefit pension plan, net of (18,576) (4,360)
deferred tax
Accumulated deficit (63,761) (66,458)
------------- -------------
------------- -------------
Total shareholders' (deficit) $(7,804) $(4,724)
------------- -------------
------------- -------------
Total liabilities and shareholders' equity/(deficit) $148,410 $133,964
------------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Shareholders' (Deficit)/Equity and Comprehensive Loss
(000's) Common Common Promissory Additional Accum-ulateAccum-ulated Total
Stock Stock Notes for Paid in Deficit Other
at Par Issuance of Capital Compre-hensive
Common Stock Loss
Balance, January 1, 2000 5,833 $58 $- $65,184 $(47,067) $(3,325) $14,850
Issue of shares - - - 88 - - 88
Accumulated
comprehensive loss:
- - Net loss for the year - - - - (9,763) -
- - Translation adjustments - - - - - (1,109)
Total Comprehensive Loss (10,872)
------------------------------------------------------------------------------------
Balance, December 31, 2000 5,833 $58 $- $65,272 $(56,830) $(4,434) $4,066
Issues of shares 14 1 - 83 - - 84
Issue of warrants (note 5) - - - 680 - - 680
Accumulated
comprehensive loss:
- - Net loss for the year - - - - (9,628) -
- - Translation adjustments - - - - - 74
Total Comprehensive Loss (9,554)
------------------------------------------------------------------------------------
Balance, December 31, 2001 5,847 $59 $- $66,035 $(66,458) $(4,360) $(4,724)
Issue of Shares 5,585 55 - 8,384 - - 8,439
Promissory notes for issuance
of common stock 500 5 (684) 679 - - -
Accumulated
comprehensive loss:
- - Net income for the year - - - - 2,697 -
- - Minimum pension (13,507)
liability, net of $5,903
tax -Deficiency on UK
defined benefit pension
plan, net of deferred tax - - - - -
- - Translation - - - - - (709)
adjustments
Total Comprehensive Loss (11,519)
------------------------------------------------------------------------------------
Balance, December 31, 2002 11,932 $119 $(684) $75,098 $(63,761) $(18,576) $(7,804)
------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Dollars in (000's)
Year Ended December 31,
2002 2001 2000
Cash flows from operating activities:
Net income/(loss) $2,697 $(9,628) $(9,763)
Adjustments to reconcile net income/(loss) to net cash from
operating activities
Depreciation 8,108 8,307 9,093
Foreign exchange (gain)/loss on Capital Bonds (4,977) 1,272 3,713
Deferred income taxes/(benefits) 188 (2,996) (2,720)
Gain on repurchase of Capital Bonds (1,191) - -
Provision for losses on accounts receivable 123 80 108
Amortization of capital bonds issue costs 191 157 163
Amortization of warrants 156 - -
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses 4,605 (8,329) (2,909)
Inventories (127) 44 (157)
Accounts payable, accrued expenses and other liabilities (1,728) 7,131 (2,479)
Fees invoiced in advance 5,988 1,898 2,337
------------ ------------ ------------
Net cash provided by/(used in) operating activities $14,033 $(2,064) $(2,614)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,177) (3,295) (3,648)
------------ ------------ ------------
Net cash used in investing activities $(4,177) $(3,295) $(3,648)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issue of common shares 6,039 84 88
Proceeds from issue of warrants - 680 -
Proceeds from long-term borrowings 334 4,321 1,728
Repayments of long-term borrowings (4,627) (93) -
------------ ----------- -----------
Net cash provided by financing activities $1,746 $4,992 $1,816
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 802 (679) (743)
------------ ------------ ------------
Increase/(decrease) in cash and cash equivalents 12,404 (1,046) (5,189)
Cash and cash equivalents at beginning of year 2,240 3,286 8,475
------------ ------------ ------------
Cash and cash equivalents at end of year $14,644 $2,240 $3,286
------------ ------------ ------------
------------ ------------ ------------
Supplementary disclosures:
Interest paid $(6,110) $(6,267) $(6,797)
Non-cash transactions:
Conversion of debt to equity $2,400 $- $-
Issuance of common stocks for promissory notes $684 $- $-
The accompanying notes are an integral part of these consolidated financial
statement.
Life Sciences Research Inc. and Subsidiaries
Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000
1. THE COMPANY AND ITS OPERATIONS
Life Sciences Research Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a leading contract research organization, offering worldwide
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies, is set out below:
Basis of Presentation
These financial statements are prepared in conformity with the accounting
principles generally accepted in the United States of America ("US GAAP"). Under
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 Life Sciences Group plc
("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. Certain reclassifications and eliminations have been recorded in the
current year presentation to retroactively consolidate Huntingdon and LSR.
Principles of consolidation
The consolidated financial statements incorporate the accounts of LSR and each
of its subsidiaries. All inter-company balances have been eliminated upon
consolidation.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with an original
maturity date of three months or less at the date of purchase and consist
principally of amounts temporarily invested in money market funds.
Inventories
Inventories are valued on a FIFO (first-in, first out) method at the lower of
cost, or market value. They comprise materials and supplies.
Property and Equipment
Property and equipment, stated at cost, is depreciated over the estimated useful
lives of the assets on a straight-line basis. Estimated useful lives are as
follows:
Buildings and facilities 15 - 50 years
Plant and equipment 4 - 25 years
Vehicles 5 years
Computers and software 3 - 5 years
Income Taxes
The Company accounts for income taxes under the provisions of 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 carry forwards. 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.
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 three years. Revenue from
these contracts is recognized over the term of the contracts as services are
rendered. 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 at a
future date. 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
certain aspects of the contract 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 authorization, but prior to
the actual commencement of the study).
Foreign currencies
Transactions in currencies other than the functional currency of the entity are
recorded at the rates of exchange at the date of the transaction. Monetary
assets and liabilities in currencies other than the functional currency are
translated at the rates of exchange at the balance sheet date and the related
transaction gains and losses are reported in the statements of operations.
Exchange gains and losses on foreign currency transactions are recorded as other
income or expense. Certain intercompany loans are determined to be of a
long-term investment nature. The Company records gains and losses from
remeasuring such loans as a component of other comprehensive income.
Upon consolidation, the results of operations of subsidiaries and associates
whose functional currency is other than the US dollar are translated into US
dollars at the average exchange rate and assets and liabilities are translated
at year-end exchange rates and shareholders' equity is translated at historical
exchange rate. Translation adjustments are presented as a separate component of
other accumulated comprehensive loss in the financial statements.
Leased assets
Assets held under the terms of capital leases are included in property and
equipment and are depreciated on a straight-line basis over the lesser of the
useful life of the asset or the term of the lease. Obligations for future lease
payments, less attributable finance charges are shown within liabilities and are
analyzed between amounts falling due within and after one year. Operating lease
rentals are charged to the Consolidated Statement of Operations as incurred.
Pension costs
During the year the Company had a defined benefit pension plan and two defined
contribution plans. One of the defined contribution plans covers all employees
in the US; the other, those employees in the UK not eligible to join the defined
benefit plan. The defined benefit pension plan provided benefits to employees
based on their final pensionable salary. As of December 31, 2002, the defined
benefit pension plan was curtailed. The gain on curtailment is recognized in the
Statement of Operations according to SFAS No. 88, "Employees' Accounting for
Settlements and Curtailments of Deferred Benefit Pension Plan and for
Termination Benefits". The pension cost of the plan is accounted for in
accordance with SFAS No. 87, "Employers' Accounting For Pensions". Pension
information is presented in accordance with SFAS No. 132, "Employers'
Disclosures About Pensions And Other Post Retirement Benefits". The net asset at
transition, prior service cost and net (loss)/gain subject to amortization,
outside the corridor, are being amortized on a straight-line basis over periods
of 15 years, 10 years and 10 years respectively. The Company recognized all
actuarial gains and losses immediately for the purposes of its minimum pension
liability.
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.
Income/(loss) per share
Income/(loss) per share is computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic income/(loss) per share is computed by dividing net
income/(loss) available to common stockholders by the weighted average number of
common shares outstanding during the year. The computation of diluted
income/(loss) per share is similar to the computation of basic income/(loss) per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Diluted income/(loss) per share
reflects the potential dilution that could occur if dilutive securities and
other contracts to issue common stock were exercised or converted into common
shares or resulted in the issuance of common shares that then shared in the
losses of the Company.
Segment analysis
In accordance with the Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
131), the Company discloses financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Loans and Warrants
In accordance with Accounting Principles Board ("APB") Opinion No. 14
"Accounting for Convertible Debt and Debt issued with Share Purchase Warrants",
loans and warrants are recorded at their pro-rata fair values in relation to the
proceeds received with the portion allowable to the warrants accounted for as
paid-in-capital. The costs of raising long-term financing are capitalized as an
asset and are amortized, using the effective interest method, over the term of
the debt.
Stock-based compensation
The Company accounts for its stock option and stock-based compensation
arrangements plans using the intrinsic-value method. Under the intrinsic value
method, the difference between the amount the employee will pay the Company for
stock acquired under the Company's incentive plans and the stock's fair value on
the date of grant Is charged to expense. Since employees must pay the Company
the grant date fair value for stock options, no expense is recorded for stock
options. Alternatively, since employees do not pay for stock issued for deferred
stock units granted, their grant date fair value is recorded as expense.
The following table reconciles net income and earnings per common stock (EPS),
as reported, to pro forma net income and EPS, as if the Company had expensed the
grant date fair value of both stock options and deferred stock units as
permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). These pro forma amounts may not be representative of the initial impact
of adopting SFAS 123 since, as amended, it permits alternative methods of
adoption.
Year ended Year Ended Year Ended December
December 31, 2002 December 31, 2001 31, 2000
------------------------ --------------------- ----------------------
$000 $000 $000
Net income/(loss) As Reported $2,697 $(9,628) $(9,763)
Less: Pro forma expense as
if stock options were
charged against net
income, net of tax
(59) (1,108) (1,573)
Pro forma 2,638 (10,736) (11,336)
Basic and Diluted EPS: As Reported $0.25 and $0.24 $(1.64) and $(1.64) $(1.68) and $(1.68)
Pro forma $0.25 and $0.24 $(1.83) and $(1.83) $(1.95) and $(1.95)
The weighted average fair value of options granted in 2002 was $728,419. The
options granted prior to that are considered to have no value. These fair values
were estimated using the Black-Scholes option-pricing model, based on the
following assumptions:
2002
Dividend yield 0%
Volatility 40%
Risk-free interest rate 3.72%
Expected term of options (in years) 10 years
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 ("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 fiscal years beginning after May 15,
2002. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" ("SFAS 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 Company early adopted the
provisions of this statement resulting in the inclusion of a $1.2 million gain
in other income/(expense) in 2002.
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 costs 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.
In June 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). This statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
amendments to Statement 123 of this statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of this
statement had no impact on LSR's results of operations, financial position or
cash flows.
In November 2002, the FASB issued FASB interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others". In the normal course of business, the
Company does not issue guarantees to third parties; accordingly, this
interpretation has no effect on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities". The Company has no arrangements that would be
subject to this interpretation.
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consisted of the following:
2002 2001
$000 $000
Property and equipment at cost:
Building and facilities 105,635 95,967
Plant, equipment, vehicles, computers and software 93,686 87,518
Assets in the course of construction 47 283
--------------- --------------
199,368 183,768
Less: Accumulated depreciation (104,794) (93,415)
--------------- --------------
Property and equipment, net $94,574 $90,353
--------------- --------------
Depreciation expense aggregated $8,108,000, $8,307,000, and $9,093,000 for 2002,
2001 and 2000 respectively.
The net book value of assets held under capital leases and included above is as
follows:
Cost Depreciation Net book
Value
$000 $000 $000
At December 31, 2002 848 362 486
At December 31, 2001 514 198 316
4. INCOME TAXES
The components of income/(loss) before taxes and the related (expense)/benefit
for tax for the years ended December 31 are as follows:
Income/(loss) before taxes 2002 2001 2000
$000 $000 $000
United Kingdom 4,110 (11,036) (14,182)
United States (1,162) (1,588) 1,699
------------- ------------- -------------
$2,948 $(12,624) $(12,483)
------------- ------------- -------------
The (expense)/benefit for income taxes by location 2002 2001 2000
of the taxing jurisdiction for the years ended $000 $000 $000
December 31, consisted of the following:
Current Taxation:
- - State Taxes - US (63) - -
Deferred taxation:
- - United Kingdom (45) 2,886 3,108
- - United States (143) 110 (388)
------------- ------------- -------------
$(251) $2,996 $2,720
------------- ------------- -------------
Reconciliation between the US statutory rate and the effective rate is as
follows:
% of income/(loss) before income
taxes
2002 2001 2000
% % %
US statutory rate 35 (35) (35)
Foreign rate differential (9) 6 5
Non-deductible items including
foreign exchange loss (31) 3 4
State taxes 2 - -
Prior year adjustments 11 - 4
------------ ---------- ----------
Effective tax rate 8 (26) (22)
------------ ---------- ----------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31 are as follows:
2002 2001
$000 $000
Current deferred tax assets:
Accrued liabilities - 73
---------- ----------
$- $73
---------- ----------
Non-current deferred tax assets:
Net operating losses - US 4,466 4,176
Net operating losses - UK 12,576 12,295
Net pension plan minimum liability adjustment - UK 5,789 -
Capital losses - UK 13,729 12,411
Valuation allowance - UK (13,729) (12,411)
---------- ----------
Net non-current deferred tax assets $22,831 $16,471
---------- ----------
Non-current deferred tax liabilities:
Property and equipment 23,389 22,248
---------- ----------
Total $23,389 $22,248
---------- ----------
Net current deferred tax assets $ - $73
Net non-current deferred tax assets $4,466 $4,176
Net non-current deferred tax liabilities $5,024 $9,953
In accordance with SFAS No. 109, the Company nets all current and non-current
assets and liabilities by tax jurisdiction.
Of the gross amount of net operating losses in the US of $11,165,000, $3,954,000
expires in 2017, $6,163,000 expires in 2018, and $1,048,000 expires in 2021. The
gross amount of net operating losses in the UK of $41,920,000, have no
expiration date. The Company has not provided a valuation allowance on the net
operating loss carry forwards because it believes that it is more likely than
not that those amounts will be realized through taxable income from future
operations. A full valuation allowance has been recorded for the total benefit
of capital losses incurred in prior years, as the Company does not anticipate
that the benefit will be realized in the foreseeable future through the
recognition of capital gains.
5. LONG-TERM DEBT AND RELATED PARTY LOANS
2002 2001
$000 $000
Bank loans - 9,192
Non bank loans 36,027 -
Capital leases 100 110
Convertible Capital Bonds 47,590 50,000
----------------- ---------------
83,717 59,302
Related party loans 358 28,821
----------------- ---------------
----------------- ---------------
$84,075 $88,123
----------------- ---------------
Bank Loans and Non-Bank Loans
On January 20, 2001, the Company's non-bank loan of (pound)22.4 million ($36.0
million approximately), was refinanced by Stephens' Group Inc. and other
parties. 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 Company is taking all
reasonable steps to conduct these transactions. The loan is held by Huntingdon
Life Sciences Group plc and is secured by the guarantees of the wholly owned
subsidiaries of the Company including, Huntingdon Life Sciences Group plc,
Huntingdon Life Sciences Ltd and Huntingdon Life Sciences Inc., and
collateralized by all the assets of these companies. The loan was transferred
from Stephens Group Inc. to an unrelated third party effective February 11,
2002.
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. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. 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 warrants were
recorded at their pro rata fair values in relation to the proceeds received on
the date of issuance and treated as a debt discount. The value of the warrants
was $430,000. The warrants were subsequently transferred to an unrelated third
party.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par. They carry interest at a rate of 7.5% per
annum, payable biannually in March and September. During 2002, the Company
repurchased and cancelled $2,410,000 principal amount of such bonds resulting in
a $1.2 million gain recorded in other income/expense. In January 2003, the
Company further repurchased and cancelled $945,000 principal amount of such
bonds resulting in a gain of $0.5 million. 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.
Related Party Loans
Other financing has been provided by a $2.9 million loan facility made available
on September 25, 2000 by a director, Mr. Baker. In connection with this
financing, the company authorized, subject to shareholder approval, the issuance
of warrants to purchase 410,914 shares of LSR Voting Common Stock at purchase
price of $1.50 per share to FHP, a company controlled by Mr. Baker. Such
shareholder approval was granted on June 12, 2002. Additionally, other financing
also includes 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 was transferred to an unrelated third party. Both facilities have been
fully drawn down. $550,000 of the loan from Mr. Baker was transferred to and
assumed by 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, $302,000 remains payable to Mr. Baker and $250,000 remains payable
to FHP. Net of warrants, as discussed below, the corresponding amount payable on
the FHP loan is $56,000. The former Stephens Group Inc. secured facility is
subordinated to the bank loan. Interest was 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.
As noted above, 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. The LSR warrants are exercisable at any time and will expire on June 11,
2012. 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 warrants was $250,000.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instruments comprise cash and cash
equivalents, accounts receivables, unbilled receivables and long-term debt. The
Company does not hold financial instruments for trading purposes.
The estimated fair value of the Company's financial instruments as of December
31, 2002 and 2001 is summarized below. Certain estimates and judgments were
required to develop the fair value amounts. The fair value amounts shown below
are not necessarily indicative of the amounts that the Company would realize
upon disposition nor do they indicate the Company's intent or ability to dispose
of the financial instrument.
2002 2001
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
$000 $000 $000 $000
Primary financial instruments held or
issued to finance the Company's operations:
Cash and cash equivalents 14,644 14,644 2,240 2,240
Accounts receivable 20,176 20,176 18,257 18,257
Capital leases - short-term 225 225 158 158
Accounts payable 8,574 8,574 9,899 9,899
Fees invoiced in advance 26,066 26,066 17,722 17,722
Long-term debt (excluding the Convertible Capital
Bond) 36,485 36,485 38,123 38,123
Convertible Capital Bond 47,590 23,500 50,000 17,000
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
Cash and cash equivalents, capital leases - short term, accounts payable and
fees invoiced in advance: The estimated fair value of these financial
instruments approximates their carrying values due to their short maturities.
Accounts receivables: The estimated fair value of these financial instruments
approximates their carrying value due to their short maturities, less any
provision for bad debt.
Long-term debt: The carrying value of these financial instruments approximates
to the fair value due to their variable interest rates.
Convertible Capital Bond: The estimates fair values of the Company's Convertible
Capital Bond is based on market prices at year-end.
7. OTHER INCOME/(EXPENSE)
2002 2001 2000
$000 $000 $000
Exchange gain/(loss) on capital bonds 4,977 (1,386) (3,544)
Gain on partial repurchase of Capital Bonds 1,191 - -
Exchange offer costs (1,246) (2,868) -
Refinancing costs - (217) (1,819)
--------------- ----------- -----------
$4,922 $(4,471) $(5,363)
--------------- ----------- -----------
8. COMMITMENTS AND CONTINGENCIES
Operating leases
Operating lease expenses were as follows:
2002 2001 2000
$000 $000 $000
Plant and equipment 904 924 1184
Other operating leases 392 127 69
The Company has commitments payable under operating leases as follows:
Year ended December 31 $000
2003 956
2004 417
2005 95
2006 51
2007 1
-----------------
$1,520
-----------------
Capital Leases
$000
2003 225
2004 100
------------------
$325
------------------
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 government agency.
9. SHAREHOLDERS' EQUITY
Common Stock
As of December 31, 2002 and 2001, LSR had 11,932,338 and 5,870,305 respectively,
of Voting Common Stock of par value of $0.01 each.
Warrants issued in conjunction with long-term debt and related party loans
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. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. 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 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 warrants was $430,000. The
warrants were subsequently transferred to an unrelated third party.
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. The LSR warrants
are exercisable at any time and will expire on October 9, 2011. 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 warrants was $250,000.
Share option plans
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR 2001 Equity Incentive Plan was adopted effective October 4, 2001.
Adoption of the LSR 2001 Equity Incentive Plan will enable LSR to use stock
options (and other stock-based awards) as a means to attract, retain and
motivate key personnel. This stock option plan was approved by the shareholders
of LSR, prior to the acquisition of Huntingdon.
Awards under the LSR 2001 Equity Incentive Plan may be granted by a committee
designated by the LSR Board pursuant to the terms of the LSR 2001 Equity
Incentive Plan (which has designated the Compensation Committee for such
purpose) and may include: (i) options to purchase shares of LSR Voting Common
Stock, including incentive stock options ("ISOs"), non-qualified stock options
or both; (ii) stock appreciation rights ("SARs"), whether in conjunction with
the grant of stock options or independent of such grant, or stock appreciation
rights that are only exercisable in the event of a change in control or upon
other events; (iii) restricted stock consisting of shares that are subject to
forfeiture based on the failure to satisfy employment-related restrictions; (iv)
deferred stock, representing the right to receive shares of stock in the future;
(v) bonus stock and awards in lieu of cash compensation; (vi) dividend
equivalents, consisting of a right to receive cash, other awards, or other
property equal in value to dividends paid with respect to a specified number of
shares of LSR Voting Common Stock or other periodic payments; or (vii) other
awards not otherwise provided for, the value of which are based in whole or in
part upon the value of the LSR Voting Common Stock. Awards granted under the LSR
2001 Equity Incentive Plan are generally not assignable or transferable except
pursuant to a will and by operation of law.
The flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among
other things, permit the stock option committee to impose performance conditions
with respect to any award, thereby requiring forfeiture of all or part of any
award if performance objectives are not met or linking the time of
exercisability or settlement of an award to the attainment of performance
conditions. For awards intended to qualify as "performance-based compensation"
within the meaning of Section 162 (m) of the United States Internal Revenue Code
such performance objectives shall be based solely on (i) annual return on
capital; (ii) annual earnings or earnings per share; (iii) annual cash flow
provided by operations; (iv) changes in annual revenues; (v) stock price; and/or
(vi) strategic business criteria, consisting of one or more objectives based on
meeting specified revenue, market penetration, geographic business expansion
goals, cost targets, and goals relating to acquisitions or divestitures.
LSR's Compensation Committee, which administers the 2001 LSR Equity Incentive
Plan, has the authority, among other things, to: (i) select the directors,
officers and other employees and independent contractors entitled to receive
awards under the 2001 LSR Equity Incentive Plan; (ii) determine the form of
awards, or combinations of awards, and whether such awards are to operate on a
tandem basis or in conjunction with other awards; (iii) determine the number of
shares of LSR Voting Common Stock or units or rights covered by an award; and
(iv) determine the terms and conditions of any awards granted under the 2001 LSR
Equity Incentive Plan, including any restrictions or limitations on transfer,
any vesting schedules or the acceleration of vesting schedules, any forfeiture
provision or waiver of the same and including any terms and conditions necessary
or desirable to ensure the optimal tax result for participating personnel and
the Company including by way of example to ensure that there is no tax on the
grant of the rights and that such tax only arises on the exercise of rights or
otherwise when the LSR Voting Common Stock unconditionally vests and is at the
disposal of such participating personnel. The exercise price at which shares of
LSR Voting Common Stock may be purchased pursuant to the grant of stock options
under the 2001 LSR Equity Incentive Plan is to be determined by the Compensation
Committee at the time of grant in its discretion, which discretion includes the
ability to set an exercise price that is below the fair market value of the
shares of LSR Voting Common Stock covered by such grant at the time of grant.
The number of shares of LSR Voting Common Stock that may be subject to
outstanding awards granted under the 2001 LSR Equity Incentive Plan (determined
immediately after the grant of any award), may not exceed 20 percent of the
aggregate number of shares of LSR Voting Common Stock then outstanding.
The 2001 LSR Equity Incentive Plan may be amended, altered, suspended,
discontinued, or terminated by the LSR Board without LSR Common Stockholder
approval unless such approval is required by law or regulation or under the
rules of any stock exchange or automated quotation system on which LSR Voting
Common Stock is then listed or quoted. Thus, LSR Common Stockholder approval
will not necessarily be required for amendments, which might increase the cost
of the plan or broaden eligibility. LSR Common Stockholder approval will not be
deemed to be required under laws or regulations that condition favorable tax
treatment on such approval, although the LSR Board may, in its discretion, seek
LSR Common Stockholder approval in any circumstances in which it deems such
approval advisable.
LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to
certain directors as of that date, and employees, including the Named Executive
Officers:
Grants to Directors
Name Number Granted
- ---- --------------
Gabor Balthazer 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted to employees and directors, on the terms set forth above,
are listed as follow:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
Shares Wtd Avg. Ex Price
(000)
Outstanding at start of period - $-
Granted 1,177 1.53
----------------------------------
December 31, 2002 1,177 $1.53
----------------------------------
Exercisable at end of year 589 $1.53
Weighted average fair value of
options granted $901
Huntingdon Life Sciences Group plc Stock Option Plan
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and are
considered to have no value.
10. EMPLOYEE BENEFITS
During the year, the Company operated the Huntingdon Life Sciences Pension and
Life Assurance Scheme (the "HLS Defined Benefit Pension Plan") a funded pension
plan providing benefits, based on final pensionable salary, for certain Company
employees in the UK. This Plan was closed to new entrants from April 5, 1997. As
of December 31, 2002 management decided to permanently suspend the accumulation
of plan benefits of vested employees in the plan, and therefore, the HLS Defined
Benefit Pension Plan was curtailed. This suspension of benefits resulted in a
gain on curtailment of $8.41 million at December 31, 2002, which has been
recorded as a reduction of the Company's unrecognized net actuarial loss.
The components of the net periodic benefit cost of the HLS Defined Benefit
Pension Plan for the years ended December 31, are as follows:
2002 2001 2000
$000 $000 $000
Service cost, benefits earned during the year 1,466 1,493 1,548
Interest cost on projected benefit obligation 5,581 5,720 5,823
Expected return on plan assets (6,455) (7,071) (7,757)
Amortization of prior service cost - 44 90
Amortization of transition asset (238) (230) (237)
------------- ------------ -------------
Net periodic benefit/(cost) $354 $(44) $(533)
------------- ------------ -------------
The major assumptions used in calculating
the pension expense were:
2002 2001 2000
Discount rate 5.75% 6.00% 6.00%
Rate of increase of future compensation N/A 3.75% 3.75%
Long-term rate of return on plan assets 8.25% 7.25% 7.25%
A reconciliation of the projected benefit obligation for the HLS Defined Benefit
Pension Plan to the accrued pension expense recorded as of December 31 is as
follows:
2002 2001 2000
$000 $000 $000
Projected benefit obligation (99,068) (91,467) (99,003)
Plan assets at market value 81,356 86,492 100,083
------------ ------------- --------------
------------ ------------- --------------
Funded status (17,712) (4,975) 1,080
Unrecognized net actuarial loss/(gain) 19,678 5,712 (1,733)
Adjustment for minimum liability - pretax (19,296) - -
Unrecognized prior service cost - - 45
Unrecognized net asset at transition (382) (563) (826)
------------ ------------- --------------
(Accrued)/prepaid pension expense $17,712 $174 $(1,434)
------------ ------------- --------------
------------ ------------- --------------
Change in plan assets
Fair value of assets, beginning of year 86,492 100,083 110,740
Foreign currency changes 8,238 (2,573) (8,101)
Actual loss on plan assets (13,299) (10,571) (2,571)
Employer contributions 1,654 1,517 1,622
Employee contributions 752 728 708
Benefit payments (2,481) (2,692) (2,315)
------------ ------------ --------------
------------ ------------ --------------
Fair value of assets, end of year $81,356 $86,492 $100,083
------------ ------------ --------------
------------ ------------ --------------
Change in projected benefits obligation
Projected benefit obligation, beginning of year 91,467 99,003 101,755
Foreign currency changes 10,013 (2,545) (7,445)
Service cost 1,466 1,493 1,548
Interest cost 5,581 5,720 5,823
Actuarial (gains)/losses 681 (10,240) (1,071)
Gain on curtailment (8,411) - -
Employee contributions 752 728 708
Benefit payments (2,481) (2,692) (2,315)
------------ ------------ --------------
------------ ------------ --------------
Projected benefit obligation, end of year $99,068 $91,467 $99,003
------------ ------------ --------------
On April 6, 1997 the Company established a defined contribution plan, the Group
Personal Pension Plan, for Company employees in the UK. Additionally, a defined
contribution plan (401-K plan) is also available for employees in the US. The
retirement benefit expense for these plans for the year ended December 31, 2002
was $1.3 million (2001, $1.3 million and 2000, $0.8 million).
11. GEOGRAPHICAL ANALYSIS
During each of the years ended December 31, 2002, 2001 and 2000, the Company
operated from within two segments based on geographical markets, the United
Kingdom and the United States. The Company had one continuing activity, Contract
Research, throughout these periods.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Transactions
between segments, which are immaterial, are carried out on an arms-length basis.
Interest income, interest expense and income taxes are also not reported on an
operating segment basis because they are not considered in the performance
evaluation by the Company's chief operating decision-maker.
Geographical segment information is as follows:
US UK Total
$000 $000 $000
2002 Revenues 24,891 90,851 115,742
Operating income before other
operating expense 301 3,963 4,264
Operating income 301 3,963 4,264
Long-lived assets (A) 20,437 112,776 133,203
Property and equipment, net 9,615 84,959 94,574
Depreciation & amortization 1,335 6,773 8,108
Capital expenditure
996 3,181 4,177
Total assets 23,483 124,927 148,410
2001 Revenues 23,501 75,705 99,206
Operating (loss) before other
expense/income (109) (784) (893)
Other operating expense - (750) (750)
Operating (loss) (109) (1,534) (1,643)
Long-lived assets (A) 19,693 111,138 130,831
Property and equipment, net 10,132 80,221 90,353
Depreciation & amortization 1,416 6,891 8,307
Capital expenditure 1,151 2,144 3,295
Total assets 20,929 113,035 133,964
2000 Revenues 22,929 73,035 95,964
Operating income/(loss) before other
expense/ income 1,699 (1,615) 84
Operating income/(loss) 1,699 (1,615) 84
Long-lived assets (A) 20,324 121,395 141,719
Property and equipment, net 10,403 87,257 97,660
Depreciation & amortization 1,598 7,495 9,093
Capital expenditure 1,752 1,896 3,648
Total assets 21,950 124,157 146,107
(A) Long-lived assets exclude cash and cash equivalents and unamortized costs
of raising long-term debt.
Revenues from customers (based on location of customers)
2002 2001 2000
$000 $000 $000
United States 37,316 34,705 39,733
Europe 51,551 39,082 32,919
Rest of World 26,875 25,419 23,312
------------- -------------- ------------
$115,742 $99,206 $95,964
------------- -------------- ------------
12. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Balance as of Exchange Charged to Accounts Balance as
beginning of Adjustment operations written off of end of
period period
$000 $000 $000 $000 $000
Allowance for uncollectible accounts
deducted from trade debtors
December 31, 2002 164 17 294 (188) 287
December 31, 2001 86 (2) 80 0 164
December 31, 2000 186 (14) 108 (194) 86
13. OTHER RELATED PARTY TRANSACTIONS
Share purchase loan
Brian Cass, President and Managing Director of LSR, acquired 400,000 shares of
LSR Common Stock in the Private Placement. Mr. Cass acquired such shares through
the delivery of two promissory notes. Both such promissory notes, each in the
amount of (pound)211,679 ($335,998), are due on March 28, 2007; bear interest at
the rate of 5% per annum; and are secured by the 200,000 shares of LSR Common
Stock purchased with the proceeds of each such loan. The due date of each
promissory note would be accelerated if Mr. Cass voluntarily resigned from his
employment with LSR or had his employment terminated. Repayment of one of the
promissory notes will be made by automatic deduction of (pound)44,000 ($69,840)
per year from the (pound)66,000 ($104,762) per year pension contribution made by
the Company to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($340,476) accrued in such pension account.
In addition, one-third of any yearly bonus received by Mr. Cass will be used to
reduce principal of the promissory notes. Total amount of this loan as of
December 31, 2002 is (pound)400,680 ($645,000 at year-end foreign exchange
rates).
Julian Griffiths, a director of LSR and Finance Director of Huntingdon, acquired
50,000 shares of LSR Common Stock in the Private Placement. Mr. Griffiths
acquired such shares through the delivery of a promissory note in the principal
amount of (pound)52,817 ($83,837), which is due on March 28, 2007; bears
interest at the rate of 5% per annum; and is secured by the 50,000 shares of LSR
Common Stock purchased with the proceeds of the loan. Repayment of the
promissory note will be made by automatic monthly deduction of (pound)943.56
($1,498) from Mr. Griffith's salary. Total amount of this loan as of December
31, 2002 is (pound)24,230 ($39,000 at year-end foreign exchange rates).
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for the
12 months ended December 31, 2002 and December 31, 2001.
Year ended December 31, 2002 Quarter Ended
March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues 26,135 28,590 29,951 31,066
Cost of sales (21,646) (23,120) (24,122) (24,515)
--------------------------------------------------------------------------
Gross profit 4,489 5,470 5,829 6,551
Selling and administrative expenses (4,302) (4,324) (4,538) (4,911)
--------------------------------------------------------------------------
Operating income 187 1,146 1,291 1,640
Interest income 6 27 20 13
Interest expense (1,627) (1,524) (1,522) (1,631)
Other (expense)/income (2,623) 3,241 1,747 2,557
--------------------------------------------------------------------------
(Loss)/income before taxes (4,057) 2,890 1,536 2,579
Income tax benefit/(expense) 742 26 (34) (985)
--------------------------------------------------------------------------
Net (loss)/income $(3,315) $2,916 $1,502 $1,594
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Loss)/earnings per share $(0.48) $0.24 $0.13 $0.13
Quarter Ended
Year ended December 31, 2001 March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues 22,689 24,012 25,707 26,798
Cost of sales (20,915) (20,454) (21,648) (21,116)
--------------------------------------------------------------------------
Gross profit 1,774 3,558 4,059 5,682
Selling and administrative costs (4,006) (4,178) (3,786) (3,996)
Other operating (loss)/income (174) 169 - (745)
--------------------------------------------------------------------------
Operating (loss)/income (2,406) (451) 273 941
Interest income 39 36 14 15
Interest expense (1,668) (1,616) (1,621) (1,709)
Other (expense)/income (2,071) (346) 1086 (3,140)
--------------------------------------------------------------------------
Loss before taxes (6,106) (2,377) (248) (3,893)
Income tax benefit 1,770 705 300 221
--------------------------------------------------------------------------
Net (loss)/income $(4,336) $(1,672) $52 $(3,672)
--------------------------------------------------------------------------
(Loss)/earnings per share $(0.74) $(0.28) $0.09 $(0.63)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i) LSR announced on February 28, 2003, that its independent auditors, Deloitte
& Touche LLP ("D&T"), would not stand for reelection following completion
of the 2002 audit. D&T advised LSR that their decision was made as a result
of harassment they received from animal rights extremists and not as a
result of any accounting dispute, disagreement or concern with LSR as of
the date of such announcement. There have not been any such disputes or
disagreements between LSR and D&T as of the date of such announcement.
(ii) The reports of D&T on LSR's financial statements for each of the past two
fiscal years did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
(iii)D&T advised LSR of its determination that following completion of its 2002
audit D&T would not stand for reappointment.
(iv) In connection with the audits of the Company's financial statements for
each of its two most recent fiscal years and through the date of this
report, there were no disagreements with D&T on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements, if not resolved to the satisfaction of
D&T, would have caused D&T to make reference to the matter in connection
with its report.
(v) During LSR's two most recent fiscal years and through the date of this
report, there were no "reportable events" as defined in Item 304(a)(1)(v)
of Regulation S-K.
D&T has furnished LSR with a letter addressed to the Securities and Exchange
Commission stating that it agrees with the above statements.
LSR has not yet engaged new auditors to replace D&T.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth certain information with respect to the current
directors and executive officers of LSR.
Name Age Office Held
Andrew Baker 54 Director
Chairman of the Board & Chief Executive Officer
Gabor Balthazar 61 Director
Brian Cass 55 Director, Managing Director/President
Afonso Junqueiras 46 Director, appointed January 15, 2003.
Richard Michaelson 51 Chief Financial Officer & Secretary
Yaya Sesay 60 Director, appointed January 10, 2003
(a) Identification of Directors
Andrew Baker became a director and Chairman and Chief Executive Officer of LSR
on January 10, 2002. He was appointed to the Board of Huntingdon as Executive
Chairman in September 1998. He is a chartered accountant and has operating
experience in companies involved in the delivery of healthcare ancillary
services. He spent 18 years until 1992 with Corning Incorporated ("Corning") and
held the posts of President and CEO of MetPath Inc., Corning's clinical
laboratory subsidiary, from 1985 to 1989. He became President of Corning
Laboratory Services Inc. in 1989, which at the time controlled MetPath Inc. (now
trading as part of Quest Diagnostics Inc.), and Hazleton Corporation,
G.H.Besselaar Associates and SciCor Inc., all three now trading as part of
Covance Inc. Since leaving Corning in 1992, Mr. Baker has focused on investing
in and developing companies in the healthcare sector including Unilab
Corporation, a clinical laboratory services provider in California, and Medical
Diagnostics Management, which is a US based provider of radiology and clinical
laboratory services to health care payers. In 1997, he formed Focused Healthcare
Partners ("FHP"), an investment partnership that acts as general partner for
healthcare startup and development companies.
Gabor Balthazar became a director of LSR on January 10, 2002. He was appointed
to the Board of Huntingdon as the Senior Independent Non-Executive Director in
March 2000. He has been active in international marketing and management
consulting for almost 30 years. He was a founding Board member of Unilab
Corporation, serving as President from 1989 to 1992, and continuing to sit on
Unilab's Board until November 1999. From 1985 to 1997, Mr. Balthazar served as a
consultant to Frankfurt Consult, the merger/acquisition subsidiary of BHF-Bank,
Frankfurt, Germany and to Unilabs Holdings SA, a Swiss clinical laboratory
testing holding company, from 1987 to 1992. He is a graduate of the Columbia Law
School and the Columbia Business School in New York City.
Brian Cass, FCMA, CBE, became a director and Managing Director/President of LSR
on January 10, 2002. He was appointed to the Board of Huntingdon as Managing
Director/Chief Operating Officer in September 1998. Prior to joining Huntingdon
he was a Vice President of Covance Inc. and Managing Director of Covance
Laboratories Ltd., (previously Hazleton Europe Ltd) for nearly 12 years, having
joined the company in 1979 as Controller. Brian Cass worked at Huntingdon
Research Center between 1972 and 1974 and has previous experience with other
companies in the electronics and heavy plant industries. He has also held
directorships with North Yorkshire Training & Enterprise Council Ltd and
Business Link North Yorkshire Ltd. In June 2002, Mr. Cass was also appointed as
a Commander in the Most Excellent Order of the British Empire (CBE).
Afonso Junqueiras became a director of LSR on January 15, 2003. He is a civil
engineer and has been President and a director of a South American private civil
engineering firm since 1997.
Richard Michaelson became Chief Financial Officer and Secretary of LSR effective
January 10, 2002. Mr. Michaelson was Director of Strategic Finance of Huntingdon
from September 1998 to December 2001. He served as Senior Vice President of
Unilab Corporation, a clinical laboratory testing company based in Los Angeles,
California, from September 1997 to December 1997, Senior Vice President-Finance,
Treasurer and Chief Financial Officer of Unilab from February 1994 to September
1997, and Vice President-Finance, Treasurer and Chief Financial Officer of
Unilab from November 1993 to February 1994. Mr. Michaelson also served as Vice
President of Unilab beginning in October 1990. Mr. Michaelson joined MetPath,
Inc., the clinical laboratory subsidiary of Corning Incorporated, in 1980 and
served as Vice President of MetPath from 1983 and Treasurer of Corning Lab
Services, Inc. from 1990 through, in each case, September 1992.
Yaya Sesay, 60, served as a senior government official of an African nation for
approximately 25 years, culminating in his service as Financial Secretary of the
Ministry of Finance for three years. For the past five years, Mr. Sesay has been
an international businessman with an interest in the development of
pharmaceutical products.
The Articles of Amendment and Restatement of LSR provide that the directors
shall be not less than one in number and there shall be no maximum number of
directors. Any director appointed by the board of directors holds office only
until the next following annual meeting, at which time he shall be eligible for
re-election by the stockholders. Directors may be removed from office only for
cause.
No director or executive officer has a family relationship with any other
director or executive officer.
ITEM 11. EXECUTIVE COMPENSATION
In the 12 months ended December 31, 2002 the aggregate compensation of the
Executive Officers as a group, paid or accrued, was $1,254,750.
Employment Agreements
Andrew Baker
The services of Mr. Baker are provided for not less than 100 days per year
through a management services contract between Huntingdon and FHP. Mr. Baker
controls FHP. Under the contract, FHP agrees to provide the services of Mr.
Baker as Chairman and CEO of the Company. The management services contract will
continue until terminated on 12 months' written notice from either party.
Under the management services contract FHP is paid an annual fee of
(pound)200,000. Mr. Baker receives contributions to his private pension
arrangements, equivalent to 33 percent of this basic annual fee. The management
services contract may be terminated if either FHP or Mr. Baker is guilty of
serious misconduct or is in material breach of the terms of the contract, among
other reasons. In the event of termination without "cause" following a "change
in control", as defined, FHP would receive a payment equal to 2.99 times this
annualized fee plus an amount equal to 2.99 times all incentive compensation
earned or received by FHP or Mr. Baker during the 12 months prior to
termination.
Both FHP and Mr. Baker are bound by confidentiality restrictions and a
restriction preventing Mr. Baker from holding any interests conflicting with
those of the Company, without the Company's consent. Mr. Baker has undertaken to
the Company that, during the continuance of the management services contract, he
will not without the prior consent of the Company, be concerned or interested in
any business, which competes, or conflicts with the business of the Company.
Brian Cass
The services of Mr. Cass are provided through a service agreement between
Huntingdon Life Sciences Limited (a wholly owned subsidiary of Huntingdon) and
Mr. Cass, which appoints Mr. Cass as President/Managing Director of the Company.
Mr. Cass' service agreement can be terminated on two years' written notice from
either party.
Mr. Cass receives a gross salary of (pound)200,000 per annum. Under the service
agreement, Mr. Cass is also entitled to health insurance, life insurance,
personal accident insurance and medical expenses insurance. Mr. Cass receives
contributions to his private pension arrangements, equivalent to 33 percent of
his basic annual salary. He is also entitled to a non-pensionable car allowance
of (pound)1,000 gross per month and (pound)2,000 per month as relocation
allowance. Mr. Cass' service agreement also provides for payment to Mr. Cass of
a bonus, at the absolute discretion of the Company's Board. In the event of
termination without "cause" following a "change in control", as defined, Mr.
Cass would receive a payment equal to 2.99 times his annual salary plus an
amount equal to 2.99 times all incentive compensation earned or received by Mr.
Cass during the 12 months prior to termination.
Mr. Cass' service agreement may be terminated if Mr. Cass is guilty of serious
misconduct or is in material breach of the terms of the service agreement or is
in breach of the model code for securities transactions by directors of listed
companies, among other reasons.
Mr. Cass is bound by confidentiality restrictions and a restriction preventing
him from being engaged, concerned or interested in any business that conflicts
with the business of the Company or any subsidiary unless either the Company's
Board otherwise consents or the interest is limited to a holding or other
interest of no more than 5 percent of the total amount of shares or securities
of any company quoted on a recognized investment exchange.
Richard Michaelson
The services of Mr. Michaelson are provided through a service agreement between
him and Huntingdon Life Sciences Inc. (a wholly owned subsidiary of Huntingdon).
The service agreement appoints Mr. Michaelson as Chief Financial Officer and
Secretary of the Company. Mr. Michaelson's service agreement will continue until
terminated by Mr. Michaelson on thirty days' written notice or by Huntingdon
Life Sciences Inc. on 12 months' written notice. In the event of termination
without "cause" following a "change in control", as defined, Mr. Michaelson
would receive a payment equal to 2.99 times his annual salary plus an amount
equal to 2.99 times all incentive compensation earned or received by Mr.
Michaelson during the 12 months prior to termination.
Mr. Michaelson receives an annual salary of $200,000 gross and is entitled to
health insurance, life insurance, personal accident insurance, medical expenses
insurance and participation in the 401(k) Plan of Huntingdon Life Sciences Inc.
Mr. Michaelson's service agreement also provides for the payment of a bonus to
Mr. Michaelson in the absolute discretion of the Company's Board.
In addition, Mr. Michaelson is entitled to a car allowance of $1,000 gross per
month.
The agreement may be terminated if Mr. Michaelson is guilty of serious
misconduct or is in material breach of the terms of the service agreement,
amongst other reasons.
Mr. Michaelson is bound by confidentiality restrictions and a restriction
preventing him from being engaged, concerned or interested in any business
conflicting with the business of the Company or any subsidiary unless the Board
otherwise consents or the interest is limited to a holding or other interest of
no more than 5 percent of the total amount of shares or securities of any
company quoted on a recognized investment exchange.
Discretionary bonus plan
The Company operates a discretionary bonus plan for executive officers and key
managers based upon improvements to operating income and achievement of
pre-defined targets. No bonus awards were made in respect of 2000, 2001 or 2002.
The following table shows the remuneration of Executive Officers in the 12
Months ended December 31, 2002, 2001, and 2000;
Annual Compensation Long Term Compensation
Awards
Name And Principal Year Salary Bonus Other Annual Number Of Shares
Position Compensation Underlying Options
Mr. A H Baker 2002 300,780 - 100,160 200,000
Chairman and Chief 2001 288,006 - 95,990 -
Executive Officer 2000 288,000 - 95,040 -
Dr F W Bonner 2002 221,073 - 20,053 30,000
Director of Science & 2001 211,680 - 20,395 10,000
Technology of Huntingdon 2000 211,680 - 19,367 7,500
Mr. B Cass 2002 300,780 - 160,327 200,000
Managing Director 2001 280,741 - 153,311 -
2000 288,800 - 153,936 -
Mr K Cramer 2002 36,898 - - 40,000
2001 60,000 - - -
2000 60,000 - - -
Mr. J T Griffiths 2002 187,988 - 54,547 60,000
Financial Director 2001 120,960 - 40,229 10,000
Company Secretary of 2000 120,960 - 44,070 7,500
Huntingdon
Mr. Richard A. Michaelson 2002 196,923 - 11,917 90,000
Messrs. Baker, Bonner, Cass and Griffiths are paid in UK pounds sterling. The
amounts have been converted at the rate of $1.5039 to (pound)1.00 for the
purposes of the above table.
Dr. Bonner and Mr. Griffiths did not stand for re-election as directors of LSR
at the June 10, 2002 Annual Meeting of Stakeholders and accordingly ceased being
directors of LSR as of that date. Mr. Cramer resigned as a director effective
January 19, 2003.
One Director is a member of the Group Personal Pension Plan. The other
Directors' pension contributions are privately invested.
EQUITY INCENTIVE PLANS
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR Board has adopted the LSR 2001 Equity Incentive Plan. Adoption of the
LSR 2001 Equity Incentive Plan will enable LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key personnel.
This stock option plan is approved by the shareholders.
Awards under the LSR 2001 Equity Incentive Plan may be granted by a committee
designated by the LSR Board pursuant to the terms of the LSR 2001 Equity
Incentive Plan and may include: (i) options to purchase shares of LSR Voting
Common Stock, including incentive stock options ("ISOs"), non-qualified stock
options or both; (ii) stock appreciation rights ("SARs"), whether in conjunction
with the grant of stock options or independent of such grant, or stock
appreciation rights that are only exercisable in the event of a change in
control or upon other events; (iii) restricted stock consisting of shares that
are subject to forfeiture based on the failure to satisfy employment-related
restrictions; (iv) deferred stock, representing the right to receive shares of
stock in the future; (v) bonus stock and awards in lieu of cash compensation;
(vi) dividend equivalents, consisting of a right to receive cash, other awards,
or other property equal in value to dividends paid with respect to a specified
number of shares of LSR Voting Common Stock or other periodic payments; or (vii)
other awards not otherwise provided for, the value of which are based in whole
or in part upon the value of the LSR Voting Common Stock. Awards granted under
the LSR 2001 Equity Incentive Plan are generally not assignable or transferable
except pursuant to a will and by operation of law.
The flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among
other things, permit the stock option committee to impose performance conditions
with respect to any award, thereby requiring forfeiture of all or part of any
award if performance objectives are not met or linking the time of
exercisability or settlement of an award to the attainment of performance
conditions. For awards intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the United States Internal Revenue Code
such performance objectives shall be based solely on (i) annual return on
capital; (ii) annual earnings or earnings per share; (iii) annual cash flow
provided by operations; (iv) changes in annual revenues; (v) stock price; and/or
(vi) strategic business criteria, consisting of one or more objectives based on
meeting specified revenue, market penetration, geographic business expansion
goals, cost targets, and goals relating to acquisitions or divestitures.
LSR's stock option committee, which will administer the 2001 LSR Equity
Incentive Plan, will have the authority, among other things, to: (i) select the
directors, officers and other employees and independent contractors entitled to
receive awards under the 2001 LSR Equity Incentive Plan; (ii) determine the form
of awards, or combinations of awards, and whether such awards are to operate on
a tandem basis or in conjunction with other awards; (iii) determine the number
of shares of LSR Voting Common Stock or units or rights covered by an award; and
(iv) determine the terms and conditions of any awards granted under the 2001 LSR
Equity Incentive Plan, including any restrictions or limitations on transfer,
any vesting schedules or the acceleration of vesting schedules, any forfeiture
provision or waiver of the same and including any terms and conditions necessary
or desirable to ensure the optimal tax result for participating personnel and
the Company including by way of example to ensure that there is no tax on the
grant of the rights and that such tax only arises on the exercise of rights or
otherwise when the LSR Voting Common Stock unconditionally vests and is at the
disposal of such participating personnel. The exercise price at which shares of
LSR Voting Common Stock may be purchased pursuant to the grant of stock options
under the 2001 LSR Equity Incentive Plan is to be determined by the option
committee at the time of grant in its discretion, which discretion includes the
ability to set an exercise price that is below the fair market value of the
shares of LSR Voting Common Stock covered by such grant at the time of grant.
The number of shares of LSR Voting Common Stock that may be subject to
outstanding awards granted under the 2001 LSR Equity Incentive Plan (determined
immediately after the grant of any award) may not exceed 20 per cent of the
aggregate number of shares of LSR Voting Common Stock then outstanding.
The 2001 LSR Equity Incentive Plan may be amended, altered, suspended,
discontinued, or terminated by the LSR Board without LSR Voting Common
Stockholder approval unless such approval is required by law or regulation or
under the rules of any stock exchange or automated quotation system on which LSR
Voting Common Stock is then listed or quoted. Thus, LSR Voting Common
Stockholder approval will not necessarily be required for amendments, which
might increase the cost of the plan or broaden eligibility. LSR Voting Common
Stockholder approval will not be deemed to be required under laws or regulations
that condition favorable tax treatment on such approval, although the LSR Board
may, in its discretion, seek LSR Voting Common Stockholder approval in any
circumstances in which it deems such approval advisable.
No awards were granted during 2001 pursuant to the 2001 LSR Equity Incentive
Plan. The LSR Board has designated the Compensation Committee of the Board to
serve as the stock option committee.
LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to
certain directors as of that date, and employees, including the Named Executive
Officers:
Grants to Directors
Name Number Granted
- ---- --------------
Gabor Balthazar 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
- ----------------------------------
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted to employees and directors, on the terms set forth above,
are listed as follows:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
Shares Wtd Avg. Ex Price
(000)
Outstanding at start of period - $-
Granted 1,177 1.53
---------------------------------------
December 31, 2002 1,177 $1.53
---------------------------------------
Exercisable at end of year 589 $1.53
Weighted average fair value of
options granted $901
Huntingdon Life Sciences Group plc Stock Option Plan
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and are
considered to have no value.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF
MARCH 18, 2003.
The following table sets forth, as of March 13, 2003, certain information
regarding the beneficial ownership of the shares of LSR common stock, by (a)
each person or entity who is known by LSR to own beneficially 5% or more of its
outstanding shares of Common Stock (none other than Mr. Baker and Mr. Cass, who
are each a Director and Executive Officer of LSR); (b) each Director or
Executive Officer of LSR or principal subsidiary; and (c) all Directors and
Executive Officers as a group.
Percent of
Name Number of Shares Outstanding Shares
Mr. A. Baker 2,710,089 (1) 21.6%
Mr. G. Balthazar 20,000 (2) *
Mr. B. Cass 620,000 (3) 5.1%
Mr. J. Griffiths 110,000 (4) *
Mr. A. Junqueiras -- --
Mr. R. Michaelson 314,800 (5) 2.6%
Mr. Y. Sesay -- --
All Directors and Executive Officers 3,774,889 29.0%
as a Group
* Signifies less than 1%. All percentages calculated on the basis of
11,932,338 outstanding shares of Voting Common Stock. Shares subject to
issuance upon presently exercisable options or Warrants are included in the
number of outstanding shares for purposes of calculating that holder's
percentage interest, as well as the aggregate percentage interest of all
directors and Executive Officers as a group.
(1) Includes presently exercisable options to purchase 200,000 shares and
presently exercisable warrants to purchase 410,914 shares. 1,335,175 of
such shares are beneficially owned by First Investments LLC, a Nevada
limited liability company of which Mr. Baker owns 69% of the membership
interests, with the remaining 31% of the membership interests being owned
by Search for a Cure LLC. 684,000 of such shares are owned by Focused
Healthcare Partners Ltd, a Bahamas corporation that is controlled by Mr.
Baker. 490,914 of such shares (including the 410,914 shares subject to
presently exercisable warrants noted above) are beneficially owned by
Focused Healthcare Partners LLC, a New Jersey limited liability company
that is controlled by Mr. Baker.
(2) Includes presently exercisable options to purchase 20,000 shares.
(3) Includes presently exercisable options to purchase 200,000 shares
(4) Includes presently exercisable options to purchase 60,000 shares, plus
50,000 shares beneficially owned by Morven LLC, a Delaware limited
liability company that is controlled by Mr. Griffiths.
(5) Includes presently exercisable options to purchase 90,000 shares, and
175,000 shares beneficially owned by Hawk Investments LLC, a Delaware
limited liability company that Mr. Michaelson controls and of which he
directly owns 100,000 shares.
From time to time US depositary institutions hold shares on behalf of their
clients to enable a market to be made in the LSR's shares. No holdings of 5% or
more have been reported by those institutions at March 18, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(1) A $2,910,800 ((pound)2,000,000) facility was made available to the Company
on September 25, 2000 by a director. Mr. Baker. This has been drawn down in
full. The loan is repayable on demand, although it is subordinate to the
bank loan, it is unsecured and interest is payable monthly at a rate of 10%
per annum. By Amendment No. 2 to that loan facility, dated March 20, 2001,
FHP became party to the loan and $550,000 of the amount loaned was
transferred to FHP. 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. As
a result of such conversions approximately $302,000 remains payable to Mr.
Baker and $250,000 remains payable to FHP.
(2) On January 20, 2001 the Company's bank loan was refinanced by means of a
loan from HLSF, LLC a subsidiary company of the Stephens Group Inc., a
related party at the time, and the other two banks that were part of the
original loan syndicate. That loan was transferred to another party
effective February 11, 2002. The loan is now repayable on June 30, 2006 and
interest is payable in quarterly breaks at a rate of "LIBOR" plus 1.75% per
annum. The loan is secured by guarantees from LSR, Huntingdon Life Sciences
Group plc, Huntingdon Life Sciences Limited and Huntingdon Life Sciences
Inc., collateralized by all the assets of those companies.
(3) In accordance with the terms of a facility agreement dated July 19 2001 and
as amended on October 52001, the Stephens Group Inc. made $2,910,800
((pound)2,000,000) available to the Company, which was available for a
period of one year from July 19 2001. That loan was transferred to another
party effective February 11, 2002. This amount, which is secured and
subordinated to the bank debt, was drawn down in full. Interest was 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.
(4) In October 2001 the Company issued to Stephen Group Inc., warrants to
purchase up to 704,425 shares of Common Voting Stock at a purchase price of
$1.50 per share. These warrants arose out of the refinancing of the bank
loan by the Stephens Group Inc. in January 2001. These warrants are
exercisable at any time and will expire on October 9, 2011. The warrants
were subsequently transferred to an unrelated third party.
In addition at the June 11, 2002 shareholders meeting, shareholders
approved the issuance to FHP of warrants to purchase up to 410,914 shares
of Common Voting Stock at a purchase price of $1.50 per share. These
warrants arose out of negotiations regarding the provision of the
$2,910,800 ((pound)2,000,000) loan facility made available to the Company
on September 25, 2000 by Mr. Baker who controls FHP.
(5) Brian Cass, President and Managing Director of LSR, acquired 400,000 shares
of LSR Common Stock in the Private Placement. Mr. Cass acquired such shares
through the delivery of two promissory notes. Both such promissory notes,
each in the amount of (pound)211,679 ($335,998), are due on March 28, 2007;
bear interest at the rate of 5% per annum; and are secured by the 200,000
shares of LSR Common Stock purchased with the proceeds of each such loan.
The due date of each promissory note would be accelerated if Mr. Cass
voluntarily resigned from his employment with LSR or had his employment
terminated. Repayment of one of the promissory notes will be made by
automatic deduction of (pound)44,000 ($69,840) per year from the
(pound)66,000 ($104,762) per year pension contribution made by the Company
to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($340,476) accrued in such pension
account. In addition, one-third of any yearly bonus received by Mr. Cass
will be used to reduce principal of the promissory notes. Total amount of
this loan as of December 31, 2002 is (pound)400,680 ($645,000 at year-end
foreign exchange rates).
(6) Julian Griffiths, a director of LSR and Finance Director of Huntingdon,
acquired 50,000 shares of LSR Common Stock in the Private Placement. Mr.
Griffiths acquired such shares through the delivery of a promissory note in
the principal amount of (pound)52,817 ($83,837), which is due on March 28,
2007; bears interest at the rate of 5% per annum; and is secured by the
50,000 shares of LSR Common Stock purchased with the proceeds of the loan.
Repayment of the promissory note will be made by automatic monthly
deduction of (pound)943.56 ($1,498) from Mr. Griffith's salary. Total
amount of this loan as of December 31, 2002 is (pound)24,230 ($39,000 at
year-end foreign exchange rates).
ITEM 14. 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 IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
----------------------------------------------
(1) Index to Financial Statements
Life Sciences Research, Inc.
Independent Auditors' Report
Consolidated Statements of Operations- Years ended
December 31, 2002, 2001, and 2000
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Changes in Shareholders' (Deficit)/Equity
and Comprehensive Loss - Years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001, and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
List of Exhibits
Exhibit
No. Description of Exhibit
2.1 Letter of Intent, dated August 27, 2001, between the Registrant and HLS.
INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON FORM
S-4, REGISTRATION NUMBER 333-71408.
3.1 Articles of Amendment and Restatement of the Registrant adopted on November
7, 2001. INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT
ON FORM S-4, REGISTRATION NUMBER 333-71408.
3.2 Bylaws of the Registrant. INCORPORATED BY REFERENCE TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER 333-71408.
4.1 Subscription Agreement dated August 1, 1991 among HIH Capital Limited
("HCL"), HLS, Chase Manhattan Bank Luxembourg S.A. (the "Custodian"), J
Henry Schroder Wagg & Co. Limited and Others. INCORPORATED BY REFERENCE TO
HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1991.
4.2 Trust Deed, dated August 12, 1991 among HCL, HLS and The Law Debenture
Trust Corporation plc INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1991.
4.3 Deed Poll, dated August 12, 1991, executed by HLS. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1991.
4.4 Custodian Agreement, dated August 1, 1991 among the Custodian, HCL, and
HLS. INCORPORATED BY REFERENCE TO HLS'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1991.
4.5 Deed Poll, dated October 16, 2001, executed by Registrant. INCORPORATED BY
REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION
NO. 333-71408.
10.1 Security Agreement dated April 30, 1998 between Huntingdon Life Sciences
Inc., National Westminster Bank PLC and various other banks. INCORPORATED
BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
10.2 An agreement dated August 7, 1998 between, inter alia, HLS, Huntingdon Life
Sciences Limited, Huntingdon Life Sciences Inc. and National Westminster
Bank PLC replacing the facilities agreement dated November, 1995.
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1998.
10.3 An agreement between HLS, Huntingdon Life Sciences Limited, Huntingdon Life
Sciences Inc. and various banks replacing the third intercreditor agreement
between the parties dated March 17, 1998. INCORPORATED BY REFERENCE TO HLS'
ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.4 A Management Services Agreement dated August 7, 1998 between HLS and
Focused Healthcare Partners. INCORPORATED BY REFERENCE TO HLS' ANNUAL
REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.5 A Deed of Undertaking between HLS and Andrew Baker. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
10.6 Amendment dated January 26, 2000 to the Management Services Agreement dated
August 7, 1999 between HLS and Focused Healthcare Partners. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999.
10.7 Service Contract dated April 29, 1999 between Huntingdon Life Sciences Ltd
and Mr. B Cass INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.8 Service Contract dated April 29, 1999 between Huntingdon Life Sciences Ltd
and Mr. J Griffiths. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON
FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.9 Service Contract dated April 29, 1999 between Huntingdon Life Sciences Ltd
and Dr F Bonner. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM
20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.10A letter of appointment dated March 21, 2000 between HLS and Mr. G
Balthazar. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1999.
10.11Option Deed dated September 2, 1998 between HLS and Andrew Baker
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1998.
10.12Rules of the Huntingdon Life Sciences Group Unapproved Share Option Scheme
as amended on June 3, 1998. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
10.13Rules of the Huntingdon Life Sciences Group Incentive Option Plan
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1999.
10.14Registrant's 2001 Equity Incentive Plan. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER
333-71408.
10.15Loan Facility Letter, dated September 25, 2000, between HLS and Andrew
Baker. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000.
10.16Amendment No. 1 to Loan Facility Letter, dated as of February 22, 2001,
between HLS and Andrew Baker. INCORPORATED BY REFERENCE TO HLS' ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
10.17Amendment No. 2 to Loan Facility Letter, dated as of March 20, 2001, by
and among Andrew Baker, HLS and Focused Healthcare Partners. FILED
HEREWITH.
10.18Amendment Agreement dated February 19, 2001 relating to a Facilities
Agreement dated August 7, 1998 among HLS, Huntingdon Life Sciences Limited
(HLSL), Huntingdon Life Sciences Inc. (HLSI), the Banks (as defined
therein) and Stephens Group Inc. as Agent. INCORPORATED BY REFERENCE TO
HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
2000.
10.19Fifth Intercreditor Agreement, dated February 19, 2001 among Stephens
Group Inc. (as Agent), HLSF LLC, Allfirst Bank, Comerica Bank, the Company,
HLSL, HLSI, Andrew Baker and Stephens Group Inc. (as Funder). INCORPORATED
BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000.
10.20Subscription and Investor Rights Agreement, dated October 9, 2001, between
LSR and Walter Stapfer. INCORPORATED BY REFERENCE TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT NUMBER
333-71408.
10.21Subscription and Investor Rights Agreement, dated October 9, 2001, between
LSR and the persons named therein as Investors. INCORPORATED BY REFERENCE
TO REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT
NUMBER 333-71408.
10.22Warrant, dated October 9, 2001, issued by the Registrant. INCORPORATED BY
REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION
STATEMENT NUMBER 333-71408.
10.23Form of Director's Irrevocable Undertaking. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT
NUMBER 333-71408.
10.24Inducement Agreement, dated October 9, 2001 between the Registrant and
HLS. INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-4, REGISTRATION STATEMENT NUMBER 333-71408.
10.25Warrant, dated June 11, 2002, issued by the Registrant. INCORPORATED BY
REFERENCE TO REGISTRANT'S PROXY STATEMENT ON SCHEDULE 14A, DATED MAY 10,
2002.
10.26Service Agreement, dated as of April 1, 2000, between Huntingdon Life
Sciences, Inc. and Richard Michaelson. FILED HEREWITH.
10.27Amendment No. 1 to Service Agreement between Huntingdon Life Sciences,
Inc. and Richard Michaelson, dated as of April 15, 2002. FILED HEREWITH.
10.28Amendment No. 1 to Service Agreement between Huntingdon Life Sciences
Limited and Brian Cass, dated as of April 15, 2002. FILED HEREWITH.
10.29Amendment No. 1 to Service Agreement between Huntingdon life Sciences
Limited and Julian Griffiths, dated as of April 15, 2002. FILED HEREWITH.
10.30Amendment No. 2 to Management Services Agreement between Huntingdon Life
Sciences Group plc and Focused Healthcare Partners, dated as of April 15,
2002. FILED HEREWITH.
21.1 Subsidiaries FILED HEREWITH
99.1 Press Release, dated March 25, 2003, announcing fourth quarter and full
year 2002 results. FILED HEREWITH.
(b) Reports on Form 8-K
None in the fourth quarter.
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this Annual Report on Form 10-K has been signed below by the
following person on behalf of the Registrant and in the capacities and on the
dates indicated.
Life Sciences Research Inc.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: CFO & Secretary
Date: March 28, 2003
CEO Certification
I, Andrew Baker, as Chief Executive Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Life Sciences Research,
Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report,
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report,
4. The registrant's other certifying 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying 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
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /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 annual report on Form 10-K of Life Sciences Research,
Inc.:
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report,
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report,
4. The registrant's other certifying 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying 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
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Richard Michaelson
-------------------------
Richard Michaelson
Chief Financial Officer