UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-10173
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LIFE SCIENCES RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649 9961
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes _ No X
At August 1, 2003: 11,932,338 Voting Common Stock of $0.01 each
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2003 and
2002. 3
Condensed Consolidated Balance Sheets at June 30, 2003 and
December 31,2002. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk. 15
Item 4 Control and Procedures 15
PART II OTHER INFORMATION
Item 6 Exhibits and reports on Form 8-K 16
Signatures 16
Certifications 17
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
June 30 June 30
Unaudited Unaudited
(Dollars in thousands, except per share data) 2003 2002 2003 2002
Net revenues $32,663 $28,590 $64,564 $54,725
Cost of revenue (25,442) (23,069) (50,815) (44,665)
------------ ------------ ------------- -------------
Gross profit 7,221 5,521 13,749 10,060
Selling , general and administrative expenses (5,527) (4,375) (10,448) (8,727)
------------- ------------ ------------ -------------
Operating income 1,694 1,146 3,301 1,333
Interest income 23 27 39 33
Interest expense (1,444) (1,524) (3,152) (3,151)
Other income 2,179 3,241 1,729 618
------------ ------------ ------------- -------------
Income/(loss) before income taxes 2,452 2,890 1,917 (1,167)
Income tax (expense)/benefit (592) 26 (415) 768
------------ ------------ ------------- -------------
Net income/(loss) $1,860 $2,916 $1,502 $(399)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Net income/(loss) per common share
- - Basic $0.16 $0.24 $0.13 $(0.04)
- - Diluted $0.15 $0.24 $0.12 $(0.04)
Weighted average common shares outstanding
- - Basic (000's) 11,932 11,932 11,932 9,428
- - Diluted (000's) 12,244 12,053 12,754 9,428
See Notes to Condensed Consolidated Financial Statements
Certain 2002 figures have been reclassified to be consistent with the 2003
presentation.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) June 30, December 31,
2003 2002
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents $10,645 $14,644
Accounts receivable, net of allowance of $415 and $287 in
2003 and 2002 respectively 20,349 20,176
Unbilled receivables 10,873 9,108
Inventories 1,619 1,556
Prepaid expenses and other current assets 2,897 3,075
---------------- ----------------
Total current assets $46,383 $48,559
---------------- ----------------
Property and equipment, net 96,358 94,574
Investments 245 248
Unamortized capital bonds issue costs 479 563
Deferred income taxes 4,668 4,466
---------------- ----------------
Total assets $148,133 $148,410
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $9,669 $8,574
Accrued payroll and other benefits 1,867 1,773
Accrued expenses and other liabilities 12,952 12,990
Fees invoiced in advance 24,202 26,066
--------------- ----------------
Total current liabilities $48,690 $49,403
--------------- ----------------
Long-term debt 83,192 83,717
Related party loans - 358
Pension liabilities 17,492 17,712
Deferred income taxes 5,648 5,024
--------------- ----------------
Total liabilities $155,022 $156,214
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Commitments and contingencies
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized 50,000,000
Issued and outstanding at June 30, 2003: 11,932,338 (December
31, 2002: 11,932,338) 119 119
Non-Voting Common Stock, $0.01 par value. Authorized 5,000,000 - -
Issued and oustanding: None
Preferred Stock, $0.01 par value. Authorized 5,000,000 - -
Issued and outstanding: None
Paid in capital 75,098 75,098
Less Promissory notes for the issuance of common stock (636) (684)
Accumulated comprehensive loss (19,211) (18,576)
Accumulated deficit (62,259) (63,761)
--------------- ----------------
Total shareholders' equity /(deficit) $(6,889) $(7,804)
--------------- ----------------
Total liabilities and shareholders' equity /(deficit) $148,133 $148,410
--------------- ----------------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six months ended June 30
(Dollars in thousands) 2003 2002
Cash flows from operating activities:
Net income/(loss) $1,502 $(399)
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
Depreciation and amortization 4,271 3,793
Foreign exchange transaction (gain) on Convertible Capital Bonds (1,127) (2,285)
Gain on repurchase of Convertible Capital Bonds (602) -
Deferred income taxes 413 (768)
Provision for losses on accounts receivable 128 29
Amortization of warrants 242 78
Amortization of Convertible Capital Bonds issue costs 84 78
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (2,049) 860
Inventories (10) (260)
Accounts payable, accrued expenses and other liabilities 1,036 (2,670)
Fees invoiced in advance (2,493) 3,769
---------------- ----------------
---------------- ----------------
Net cash provided by operating activities $1,395 $2,225
---------------- ----------------
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (3,835) (1,501)
---------------- ----------------
---------------- ----------------
Net cash from investing activities $(3,835) $(1,501)
---------------- ----------------
---------------- ----------------
Cash flows from financing activities:
Proceeds from issue of Voting Common Stock 48 4,423
Proceeds from issue of Non Voting Common Stock - 1,500
Repayments of long-term borrowings (1,328) -
Repayments of short term borrowings (177) (83)
---------------- ----------------
---------------- ----------------
Net cash from financing activities $(1,457) $5,840
---------------- ----------------
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (102) 478
---------------- ----------------
---------------- ----------------
(Decrease)/increase in cash and cash equivalents (3,999) 7,042
Cash and cash equivalents at beginning of period 14,644 2,240
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period $10,645 $9,282
---------------- ----------------
Supplementary disclosures
Non cash transactions:
Equity issued in exchange for debt conversion $- $2,400
Equity issued in exchange for promissory notes $- $801
---------------- ----------------
---------------- ----------------
$2,798
Interest paid $2,775
---------------- ----------------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
Unaudited
1. THE COMPANY AND ITS OPERATIONS
Business
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global Contract Research Organization, offering world-wide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that man uses, eats, and is
otherwise exposed to. In addition, it tests the effect of such compounds on the
environment and also performs work on assessing the safety and efficacy of
veterinary products.
Organization
LSR was incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer (the
"Offer") for Huntingdon Life Sciences Group plc ("Huntingdon"). The Offer was
made on October 16, 2001 and was declared unconditional on January 10, 2002, at
which time LSR acquired approximately 89% of the outstanding ordinary shares of
Huntingdon in exchange for approximately 5.3 million shares of LSR Voting Common
Stock. The subsequent offer period expired on February 7, 2002, by which time
approximately 92% of the outstanding ordinary shares had been offered for
exchange. The Company completed its compulsory purchase under UK law of the
remaining outstanding ordinary shares of Huntingdon on March 26, 2002 at which
time Huntingdon became a wholly owned subsidiary of LSR, in exchange for a total
of approximately 5.9 million shares of LSR Voting Common Stock (the "Exchange
Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the Company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly,
the Exchange Offer is accounted for as a reverse acquisition for financial
reporting purposes. The reverse acquisition is deemed a capital transaction and
the net assets of Huntingdon (the accounting acquirer) are carried forward to
LSR (the legal acquirer and the reporting entity) at their carrying value before
the combination. Although Huntingdon was deemed to be the acquiring corporation
for financial accounting and reporting purposes, the legal status of LSR as the
surviving corporation does not change. The relevant acquisition process utilizes
the capital structure of LSR and the assets and liabilities of Huntingdon are
recorded at historical cost. In these financial statements, Huntingdon is the
operating entity for financial reporting purposes and the financial statements
for all periods presented represent Huntingdon's financial position and results
of operations. The equity of LSR is the historical equity of Huntingdon,
retroactively restated to reflect the number of shares issued in the Exchange
Offer and all other stock offerings subsequent to the Exchange Offer.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with US GAAP and under the same accounting principles as the
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. Certain information and footnotes
disclosures related thereto normally included in the financial statements
prepared in accordance with the US GAAP have been omitted in accordance with
Regulation S-X.
The unaudited condensed consolidated financial statements reflect all
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The condensed consolidated financial statements are
unaudited, are subject to such year-end adjustments as may be considered
appropriate and should be read in conjunction with the historical consolidated
financial statements of LSR years ended December 31, 2002, 2001 and 2000
included in LSR's Annual Report on Form 10-K for the fiscal year ended December
31, 2002. Operating results for the three and six month periods ended June 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States. The Company has one continuing activity,
non-clinical Contract Research.
The analysis of the Company's net revenues and operating income/(loss) by
segment for the three and six month periods ended June 30, 2003 and June 30,
2002 is as follows:
Three months ended Six months ended
June 30 June 30
(Dollars in thousands) 2003 2002 2003 2002
Net revenues
UK 25,873 22,126 51,248 42,710
US 6,790 6,464 13,316 12,015
-------------- ------------- ------------- -------------
$32,663 $28,590 $64,564 $54,725
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Operating income/(loss)
UK 1,507 866 2,937 1,596
US 187 280 364 (263)
-------------- ------------- ------------- -------------
$1,694 $1,146 $3,301 $1,333
-------------- ------------- ------------- -------------
4. REFINANCING
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and Focused Healthcare Partners ("FHP") ($0.3 million) and $825,000 was
paid with promissory notes. $141,000 of such promissory notes was repaid during
2002, and a further $48,000 was repaid in the first six months of 2003.
5. CONTINGENCIES
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. RESULTS OF OPERATIONS
a) Three months ended June 30, 2003 compared with three months ended June 30,
2002.
Net revenues for the three months ended June 30, 2003 were $32.7 million, an
increase of 14% on net revenues of $28.6 million for the three months ended June
30, 2002. Excluding the effect of exchange rate movements, the increase was 7%.
UK net revenues increased by 17%, at constant exchange rates the increase was
7%. This reflected the growth in orders, particularly in toxicology, in 2002 and
2003, although 2003 has been affected by certain cancellations and delays
associated with our clients' compounds. New signings in the UK in the quarter
were 3% down as compared to the same period in 2002, reflecting the high value
of orders won in 2002. In the US, net revenues increased by 5%. Orders in the US
for the three months ended June 30, 2003 were 3% up on the same period last year
due to the strength of the toxicology business.
Cost of revenue for the three months ended June 30, 2003 were $25.5 million, an
increase of 10% on cost of sales of $23.1 million for the three months ended
June 30, 2002. Excluding the effects of exchange rate movements, the increase
was 3.5%. This increase was driven by the improvement in net revenues though it
was lower than the increase in net revenues as a high level of fixed costs
characterizes the business. UK cost of revenue increased by 14%, at constant
exchange rates the increase was 5%, reflecting the increase in volumes. US cost
of revenue increased by 5.5%, also as a result of the increase in volumes.
Selling, general and administrative expenses rose by 26% to $5.5 million for the
three months ended June 30, 2003 from $4.4 million in the corresponding period
in 2002. Excluding the effects of exchange rate movements, the increase was 17%.
The increase was due to an increase in sales resources resulting in higher labor
costs of $0.2 million, higher commission costs of $0.1m, and higher other costs
of $0.2m; in addition, insurance costs increased by $0.2 million. UK selling,
general and administrative expenses increased by 17%; at constant exchange rates
the increase was 6%. This increase was due to the factors outlined above. US
selling, general and administrative expenses increased by 11.5% also due to
factors outlined above.
Net interest expense for the three months ended June 30, 2003 was $1.4 million,
$0.1 million lower than the net interest expense for the three months ended June
30, 2002. At constant exchange rates the reduction was $0.2 million, due to the
repayment of loans and lower interest rates.
Other income in the three months ended June 30, 2003 was $2.2 million. This
comprises a non-cash foreign exchange remeasurement gain of $2.0 million which
arose on the Convertible Capital Bonds denominated in US dollars (the functional
currency of the financial subsidiary that holds the Convertible Capital Bonds in
UK sterling), with the weakening of the dollar against sterling; together with
$0.2 million gain on the repurchase of Convertible Capital Bonds. In the three
months ended June 30, 2002 other income of $3.2 related to a non-cash foreign
exchange remeasurement gain that arose on the Convertible Capital Bonds with the
weakening of the dollar against sterling.
The income tax expense on profits for the three months ended June 30, 2003, was
$0.6 million as a change in the UK tax laws meant that the foreign exchange
gains and losses on the Convertible Capital Bonds are brought into the tax
charge from January 1, 2003. The income tax benefit for the three months ended
June 30, 2002 was $26 thousand when the exchange gains and losses on the
Convertible Capital Bonds were non-taxable. The disallowance of this gain for
income tax purposes increased the benefit by $1.0 million.
The overall net income for the three months ended June 30, 2003 was $1.9 million
compared to a net income of $2.9 million for the three months ended June 30,
2002. The decrease in the net income of $1.0 million is due to an decrease in
other income of $1.1 million and an increase in the tax expense of $0.6 million;
offset by an increase in operating profit of $0.6 million and a reduction in
interest expense of $0.1 million.
Income per share was 16 cents, compared to an income per share of 24 cents last
year, on the weighted average common shares outstanding of 11,932,338 (2002,
11,932,338).
b) Six months ended June 30, 2003 compared with the six months ended June 30,
2003.
Net revenues for the six months ended June 30, 2003 were $64.6 million, an
increase of 18% on net revenues of $54.7 million for the six months ended June
30, 2002. Excluding the effect of exchange rate movements, the increase was 9%.
UK net revenues increased by 20%, at constant exchange rates the increase was
9%. This reflected the growth in orders in 2002 and 2003, although 2003 has been
affected by certain cancellations and delays associated with our clients'
compounds. New signings in the UK in the year to date were 4% down on the same
period in 2002, reflecting the high value of orders won in 2002. In the US, net
revenues increased by 11% also reflecting a growth in orders. Orders in the US
for the six months ended June 30, 2003 were 13% up on the same period last year
also due to the strength of the toxicology business.
Cost of revenue for the six months ended June 30, 2003 were $50.8 million, an
increase of 14% on cost of revenue of $44.7 million for the six months ended
June 30, 2002. Excluding the effects of exchange rate movements, the increase
was 5.5%. This increase was driven by the improvement in net revenues though it
was lower than the increase in net revenues as a high level of fixed costs
characterizes the business. UK cost of revenue increased by 17.0%. At constant
exchange rates, the increase was 6%, reflecting the increase in volumes. US cost
of revenue increased by 2%, as a result of general inflationary increases in the
fixed cost element of cost of revenue.
Selling, general and administrative expenses rose by 20% to $10.4 million for
the six months ended June 30, 2003 from $8.7 million in the corresponding period
in 2002. Excluding the effects of exchange rate movements, the increase was 10%.
The increase was due to an increase in sales resources resulting in higher labor
costs $0.4 million, and higher commission of $0.2 million; in addition insurance
costs increased by $0.3 million,. UK selling, general and administrative
expenses increased by 18%. At constant exchange rates, the increase was 6%. This
increase was due to the factors outlined above. US selling, general and
administrative expenses increased by 25% also due to the factors outlined above.
Net interest expense for the six months ended June 30, 2003 was $3.2 million,
the same as the net interest expense for the six months ended June 30, 2002. At
constant exchange rates there was a reduction in interest if $0.3 million, due
to the repayment of loans and lower interest rates.
Other income in the six months ended June 30, 2003 was $1.7 million. This
comprises a non-cash foreign exchange remeasuremenet gain of $1.1 million which
arose on the Convertible Capital Bonds denominated in US dollars (the functional
currency of the financial subsidiary that holds the Convertible Capital Bonds in
UK sterling), with the weakening of the dollar against sterling; together with
gains on the repurchase of Convertible Capital Bonds of $0.6 million. In the six
month ended June 30, 2002, other income of $0.6 comprised a non-cash foreign
exchange remeasurement gain of $2.1 million that arose on the Convertible
Capital Bonds with the weakening of the dollar against sterling; offset by
merger/offer costs of $1.5 million.
The income tax expense on profits for the six months ended June 30, 2003 was
$0.4 million, as a change in the UK tax laws meant that the foreign exchange
gains and losses on the Convertible Capital Bonds are brought into the tax
charge from January 1, 2003. The income tax benefit for the six months ended
June 30, 2002 was $0.8 million when the exchange gains and losses on the
Convertible Capital Bonds were non-taxable. The disallowance of this gain for
tax purposes increased the benefit by $0.6 million.
The overall net income for the six months ended June 30, 2003 was $1.5 million
compared to a net loss of $0.4 million for the six months ended June 30, 2002.
The increase in the net income of $1.9 million is due to an increase in the
operating income of $2.0 million and higher exchange gains of $1.1 million;
offset by an increase in the income tax expense of $1.2 million.
Income per share for the six months ended June 30, 2003 was 13 cents, compared
to a loss of 4 cents last year, on the weighted average common shares
outstanding of 11,932,338 (2002, 9,427,868).
2. LIQUIDITY & CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's current net non-bank loan of (pound)22.6
million (approximately $37.3 million) was refinanced by Stephens' Group Inc. and
other parties. The loan was transferred from Stephens Group Inc., to an
unrelated third party effective February 11, 2002. This loan is now repayable on
June 30, 2006 and interest is payable quarterly at LIBOR plus 1.75%. At the time
of the refinancing, 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.
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 warrants were subsequently transferred to
unrelated third parties. 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.
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. As of December 31, 2002, there
was $47.6 million outstanding. During the six months ending June 30, 2003, the
Company repurchased and cancelled $1,385,000 principal amount of such bonds
resulting in a $0.6 million gain recorded in other income/expense. As a result,
as of June 30, 2003, there was $46.2 million Convertible Capital Bonds
outstanding. 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 of approximately $5.75 million had been provided by related
parties in 2000 and 2001, all of which has now been repaid. It consisted of a
$2.952 million loan facility made available on September 25, 2000 by a director,
Mr. Baker, of which $550,000 was subsequently transferred to FHP, a company
controlled by Mr. Baker. In connection with this financing, the company issued,
with shareholder approval, warrants to purchase 410,914 shares of LSR Voting
Common Stock at purchase price of $1.50 per share. Additionally, other financing
of $2.8 million from the Stephens Group Inc. was made available on July 19,
2001. Effective February 11, 2002 the Stephens Group Inc. debt was transferred
to an unrelated third party. Both facilities had been fully drawn down. These
loans were repayable on demand, subordinated to the bank debt, unsecured, and
earned interest 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. The remainder of the
loans were repaid between July 2002 and April 2003.
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.
$141,000 of such promissory notes was repaid during 2002 and a further $48,000
was repaid in the first six months of 2003.
Cash flows
During the six months ended June 30, 2003, funds used were $4.0 million,
reducing cash and cash equivalents from $14.6 million at December 31, 2002 to
$10.6 million at June 30, 2003.
Net days sales outstanding ("DSOs") at June 30, 2003 were 17 days, up from the 9
days at December 31, 2002. DSO is calculated as a sum of accounts receivables,
unbilled receivables and fees in advance over total revenue. Since January 1999,
DSOs at the quarter end have varied from 9 days to 47 days so they are currently
at a relatively low level. The impact on liquidity from a one-day change in DSO
is approximately $250,000.
3. SIGNIFICANT ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with 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. The Company's customers may terminate most service
contracts for a variety of reasons, 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.
Exchange rate fluctuations and exchange controls
The Company operates on a world-wide basis and generally invoices its clients in
the currency of the country in which 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 8% of
total revenues. Management have decided not to hedge against this exposure.
Secondly, exchange rate fluctuations have an impact on the relative price
competitiveness of the Company vis a vis competitors who do business in
currencies other than sterling or dollars.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pounds sterling and the US
dollar will affect the translation of the UK subsidiary's financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and equity accounts are translated
at historical exchange rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated other
comprehensive loss account. Management have decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
At December 31 At June 30 3 months to June 30 6 months to June 30
Average rate (1) Average rate (1)
2002 1.6099 1.5243 1.4636 1.4453
2003 1.6502 1.6191 1.6111
(1) Based on the average of the exchange rates on the last day of each month during the period.
On August 7, 2003 the noon buying rate for sterling was(pound)1.00 = $1.6165
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 June
30, 2003:
Expected Maturity Date
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(In US Dollars,
amounts in thousands)
Cash - Pound Sterling 3,880 3,880 3,880
- Euro 1,093 1,093 1,093
Accounts
receivable - Pound Sterling 13,428 13,428 13,428
- Euro 779 779 779
Debt - Pound Sterling 37,271 37,271 37,271
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.
4. NEW ACCOUNTING STANDARDS
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 $0.6 million gain
in other income/(expense) in 2003 associated with the repurchase of $1.4 million
of the Company's Convertible Bonds.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the equity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 15, 2003. The Company has no
arrangements that would be subject to this interpretation.
In April 2003, the FASB issued SFAS No. 149 "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities and SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." The changes in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. 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 May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equities" (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
SFAS 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the post interim period beginning after June
15, 2003. LSR does not believe that the adoption of this statement will have a
material impact on its results of operations, financial position or cash flows.
5. SUBSEQUENT EVENTS
On July 1, 2003, the Group reached an agreement with CBC Co. Ltd (CBC), Tokyo,
Japan, to take full ownership of HLSKK, its existing Japanese joint venture with
CBC. HLSKK promotes HLS services in Japan. The amount to be paid shall be the
commission payments that the JV partner would have otherwise earned from the JV
over the next three years, subject to a minimum of Yen 120 million ($1 million).
6. 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.
7. FORWARD LOOKING STATEMENTS
Statements in this management's discussion and analysis of financial condition
and results of operations, as well as in certain other parts of this Quarterly
Report on Form 10-Q (as well as information included in oral statements or other
written statements made or to be made by the Company) that look forward in time,
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, expectations, predictions, and assumptions and other
statements which are other than statements of historical facts. Although the
Company believes such forward-looking statements are reasonable, it can give no
assurance that any forward-looking statements will prove to be correct. Such
forward-looking statements are subject to, and are qualified by, known and
unknown risks, uncertainties and other factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by those statements. These risks, uncertainties and other factors include, but
are not limited to the Company's ability to estimate the impact of competition
and of industry consolidation and risks, uncertainties and other factors more
fully described in the Company's Registration Statement on Form S-1, dated July
12, 2002, and Annual Report on Form 10-K for the year ended December 31, 2002,
each as filed with the Securities and Exchange Commission.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's (pound)22.6 million (approximately $37.3 million) credit facility
is sterling denominated and does not contribute to transaction gains and losses
on the income statement. Interest on all outstanding borrowings under this
credit facility is based upon LIBOR plus a margin and approximated 5.62% per
annum for the six months ended June 30, 2003. At June 30, 2003 this credit
facility was fully drawn down.
In the six months ended June 30, 2003, a 1% change in LIBOR would have resulted
in a fluctuation in interest expense of $187,000.
For the six months ended June 30, 2003, approximately 71% of the Company's net
revenues were from outside the United States. The Company does not engage in
derivative or hedging activities related to its potential foreign exchange
exposures.
On June 30, 2003, the Company's $46.2 million principal amount of Convertible
Capital Bonds is US dollar denominated, but is 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 have a non-cash impact on the
financial statements, based on the movement of exchange rates. Hence, the
Company does not take any actions to hedge against such risks. The Company is
unable to predict whether it will experience future gains or future losses from
such exchange-related risks on the bonds.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 4 CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated August 8, 2003, announcing the
second quarter earnings results for 2003.
Exhibit 99.2 - Sarbanes-Oxley Certifications.
(B) Reports on Form 8-K None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LIFE SCIENCES RESEARCH, INC.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: Chief Financial Officer
Date: August 8, 2003
CEO Certification
I, Andrew Baker, as Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 8, 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 quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 8, 2003 /s/ Richard Michaelson
-------------------------
Richard Michaelson
Chief Financial Officer