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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 SEPTEMBER 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 0-33505
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LIFE SCIENCES RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-2340150
(I.R.S. EMPLOYER IDENTIFICATION No.)
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649 9961
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
-
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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 November 3, 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 nine months ended September 30, 2003
and 2002. 3
Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002. 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 Controls and Procedures 15
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and reports on Form 8-K 16
Signatures 17
Certifications 18
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30 September 30
Unaudited Unaudited
(Dollars in thousands, except per share data) 2003 2002 2003 2002
Net revenues $32,723 $29,951 $97,287 $84,676
Cost of revenue (26,164) (24,023) (76,979) (68,689)
-------- -------- -------- --------
Gross profit 6,559 5,928 20,308 15,987
Selling, general and administrative expenses (5,189) (4,637) (15,505) (13,363)
Other operating income 387 - 255 -
--- - --- -
Operating income 1,757 1,291 5,058 2,624
Interest income 10 20 49 53
Interest expense (1,464) (1,522) (4,616) (4,672)
Other income 308 1,747 2,037 2,364
--- ----- ----- -----
Income before income taxes 611 1,536 2,528 369
Income tax (expense)/benefit (215) (34) (630) 734
---- --- ---- ---
Net income $396 $1,502 $1,898 $1,103
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Net income per common share
- - Basic 0.03 0.13 0.16 0.11
- - Diluted 0.03 0.12 0.15 0.10
Weighted average common shares outstanding
- - Basic (000's) 11,932 11,932 11,932 10,256
- - Diluted (000's) 12,271 12,224 12,920 10,642
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) September 30, December 31,
2003 2002
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 10,549 $ 14,644
Accounts receivable, net of allowance of $546 and $287 in
2003 and 2002 respectively ................................ 20,080 20,176
Unbilled receivables .......................................... 11,238 9,108
Inventories ................................................... 1,590 1,556
Prepaid expenses and other current assets ..................... 3,801 3,075
--------- ---------
Total current assets .......................................... $ 47,258 $ 48,559
--------- ---------
Property and equipment, net ................................... 96,948 94,574
Investments ................................................... -- 248
Goodwill ...................................................... 693 --
Unamortized capital bonds issue costs ......................... 440 563
Deferred income taxes ......................................... 4,520 4,466
--------- ---------
Total assets .................................................. $ 149,859 $ 148,410
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 11,289 $ 8,574
Accrued payroll and other benefits ............................ 1,962 1,773
Accrued expenses and other liabilities ........................ 11,389 12,990
Fees invoiced in advance ...................................... 24,475 26,066
--------- ---------
Total current liabilities ..................................... $ 49,115 $ 49,403
--------- ---------
Long-term debt ................................................ 84,347 83,717
Related party loans ........................................... -- 358
Pension liabilities ........................................... 17,291 17,712
Deferred income taxes ......................................... 5,722 5,024
--------- ---------
Total liabilities ............................................. $ 156,475 $ 156,214
--------- ---------
Commitments and contingencies
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized 50,000,000
Issued and outstanding at September 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 ........ (628) (684)
Accumulated comprehensive loss ................................ (19,342) (18,576)
Accumulated deficit ........................................... (61,863) (63,761)
--------- ---------
Total shareholders' equity /(deficit) ......................... $ (6,616) $ (7,804)
--------- ---------
Total liabilities and shareholders' equity /(deficit) ......... $ 149,859 $ 148,410
--------- ---------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30
(Dollars in thousands) 2003 2002
Unaudited Unaudited
Cash flows from operating activities:
Net income ..................................................... $ 1,898 $ 1,103
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 6,407 5,992
Foreign exchange transaction (gain) on Convertible Capital Bonds (1,435) (3,858)
Gain on repurchase of Convertible Capital Bonds ................ (602) --
Share of profits of HLS KK prior to June 30, 2003 .............. (208) --
Deferred income taxes .......................................... 628 (755)
Provision for losses on accounts receivable .................... 251 32
Amortization of warrants ....................................... 266 117
Amortization of Convertible Capital Bonds issue costs .......... 123 120
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses . (2,053) 2,271
Inventories .................................................... 31 35
Accounts payable, accrued expenses and other liabilities ....... (1,539) (6,597)
Fees invoiced in advance ....................................... (2,434) 4,300
-------- --------
-------- --------
Net cash provided by operating activities ...................... $ 1,333 $ 2,760
-------- --------
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ............................. (5,744) (2,632)
Cash acquired on acquisition of business ....................... 1,893 --
-------- --------
Net cash used for investing activities ......................... $ (3,851) $ (2,632)
-------- --------
-------- --------
Cash flows from financing activities:
Proceeds from issue of Voting Common Stock ..................... 56 4,432
Proceeds from issue of Non Voting Common Stock ................. -- 1,500
Repayments of long-term borrowings ............................. (328) 0
Repayments of short term borrowings ............................ (1,216) (1,678)
-------- --------
-------- --------
Net cash (used for) / provided by financing activities ......... $ (1,488) $ 4,254
-------- --------
-------- --------
Effect of exchange rate changes on cash and cash equivalents ... (89) 754
-------- --------
-------- --------
(Decrease)/increase in cash and cash equivalents ............... (4,095) 5,136
Cash and cash equivalents at beginning of period ............... 14,644 2,240
-------- --------
-------- --------
Cash and cash equivalents at end of period ..................... $ 10,549 $ 7,376
-------- --------
Supplementary disclosures
Non cash transactions:
Equity issued in exchange for debt conversion .................. $- $ 2,400
Equity issued in exchange for promissory notes ................. $- $ 792
-------- --------
$ 4,547
Interest paid .................................................. $ 4,659
-------- --------
See Notes to Condensed Consolidated Financial Statements
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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"), a company which
was incorporated in the UK in 1951 to provide contract research services to the
pharmaceutical, agrochemical and food industries. 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 for the 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 nine month periods ended September
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 nine month periods ended September 30, 2003 and
September 30, 2002 is as follows:
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands) 2003 2002 2003 2002
Net revenues
UK ........ $25,337 $23,314 $76,585 $66,024
US ........ 7,386 6,637 20,702 18,652
------- ------- ------- -------
$32,723 $29,951 $97,287 $84,676
------- ------- ------- -------
------- ------- ------- -------
Operating income
UK ........ $ 1,400 $ 945 $ 4,337 $ 2,566
US ........ 357 346 721 58
------- ------- ------- -------
$ 1,757 $ 1,291 $ 5,058 $ 2,624
------- ------- ------- -------
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 nine 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 September 30, 2003 compared with three months ended
September 30, 2002.
Net revenues for the three months ended September 30, 2003 were $32.7 million,
an increase of 9.3% on net revenues of $30.0 million for the three months ended
September 30, 2002. Excluding the effect of exchange rate movements, the
increase was 6%. UK net revenues increased by 8.5%, at constant exchange rates
the increase was 4.4%. 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. In
the US, net revenues increased by 11.3%. New signings in the US for the three
months ended September 30, 2003 were 8% down on the same period last year.
Cost of revenue for the three months ended September 30, 2003 were $26.2
million, an increase of 8.9% on cost of sales of $24.0 million for the three
months ended September 30, 2002. Excluding the effects of exchange rate
movements, the increase was 5.7%. This increase was driven by the increase in
net revenues though it was lower than the rate of increase in net revenues due
primarily to the high level of fixed costs which characterizes the business. UK
cost of revenue increased by 7.2%, at constant exchange rates the increase was
3.1%, reflecting the increase in volumes. US cost of revenue increased by 9.4%,
also as a result of the increase in volumes.
Selling, general and administrative expenses rose by 11.9% to $5.2 million for
the three months ended September 30, 2003 from $4.6 million in the corresponding
period in 2002. Excluding the effects of exchange rate movements, the increase
was 8.6%. The increase was due to an increase in sales resources resulting in
higher labor costs of $0.5 million, together with higher insurance premiums of
$0.2 million, and higher other costs of $0.4 million offset by lower commission
of $0.5 million. (The results of HLS KK were incorporated with effect from July
1st 2003.) UK selling, general and administrative expenses increased by 10.6%;
at constant exchange rates the increase was 6.3%. This increase was due to the
factors outlined above. US selling, general and administrative expenses
increased by 16.1% also due to factors outlined above.
Other operating income for the three months ended September 30, 2003 was $0.4
million. It comprises the recognition of the Group's share of the net income of
HLS KK for the period it was held as an investment, as the Group did not
exercise control, of $0.2 million. In addition, $0.4 million related to a
recovery of funds which has been written off following the bankruptcy of a
foreign exchange broker in 2001. Offset against these was $0.2 million in
connection with specific legal and other actions taken against animal rights
groups.
Net interest expense for the three months ended September 30, 2003 was $1.45
million, $0.06 million lower than the net interest expense for the three months
ended September 30, 2002. At constant exchange rates the reduction was $0.1
million, due to lower interest rates.
Other income in the three months ended September 30, 2003 was $0.3 million. This
comprises a non-cash foreign exchange remeasurement gain of $0.3 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. In the three
months ended September 30, 2002 other income of $1.8 million comprised a
non-cash foreign exchange remeasurement gain that arose on the Convertible
Capital Bonds with the weakening of the dollar against sterling of $1.6 million;
and $0.2 million relating to a reduction in merger/offer costs.
The income tax expense on profits for the three months ended September 30, 2003,
was $0.2 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 charge for the three months ended
September 30, 2002 was $0.03 million when the exchange gains and losses on the
Convertible Capital Bonds were non-taxable. The disallowance of this gain for
income tax purposes reduced the charge by $0.6 million. However, with the
company's net operating losses (NOLs) available for tax purposes ($53.1 million
at December 31, 2002), the company does not expect to be paying any material
amounts in tax for the foreseeable future.
The overall net income for the three months ended September 30, 2003 was $0.4
million compared to a net income of $1.5 million for the three months ended
September 30, 2002. The decrease in the net income of $1.1million is due to a
decrease in other income of $1.4 million and an increase in the tax expense of
$0.2 million; offset by an increase in operating profit of $0.5 million.
Income per share was 3 cents, compared to an income per share of 13 cents last
year, on the weighted average common shares outstanding of 11,932,338 (2002,
11,932,338).
b) Nine months ended September 30, 2003 compared with the nine months ended
September 30, 2002
Net revenues for the nine months ended September 30, 2003 were $97.3 million, an
increase of 14.9% on net revenues of $84.7 million for the nine months ended
September 30, 2002. Excluding the effect of exchange rate movements, the
increase was 7.5%. UK net revenues increased by 16.6%, at constant exchange
rates the increase was 7.1%. 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. In the US, net revenues increased
by 11.1% also reflecting a growth in orders. New signings in the US for the nine
months ended September 30, 2003 were 7% up on the same period last year.
Cost of revenue for the nine months ended September 30, 2003 were $77.0 million,
an increase of 12.1% on cost of revenue of $68.7 million for the nine months
ended September 30, 2002. Excluding the effects of exchange rate movements, the
increase was 4.9%. This increase was driven by the improvement in net revenues
though it was lower than the rate of increase in net revenues as a high level of
fixed costs characterizes the business. UK cost of revenue increased by 14.5%.
At constant exchange rates, the increase was 5.2%, reflecting the increase in
volumes. US cost of revenue increased by 7.4%, as a result of general
inflationary increases in the fixed cost element of cost of revenue.
Selling, general and administrative expenses rose by 16.0% to $15.5 million for
the nine months ended September 30, 2003 from $13.4 million in the corresponding
period in 2002. Excluding the effects of exchange rate movements, the increase
was 8.8%. The increase was due to an increase in sales resources resulting in
higher labor costs $1.2 million together with higher insurance costs of $0.6
million, and higher other costs $0.3 million. UK selling, general and
administrative expenses increased by 14.5%. At constant exchange rates, the
increase was 15.1%. This increase was due to the factors outlined above. US
selling, general and administrative expenses increased by 21.1% also due to the
factors outlined above.
Other operating income for the nine months ended September 30, 2003 was $0.3
million. It comprises the recognition of the Group's share of the net income of
HLS KK for the period it was held as an investment, as the Group did not
exercise control, of $0.2 million. In addition, with $0.4 million related to a
recovery of funds which had been written off following the bankruptcy of a
foreign exchange broker in 2001. Offset against these was $0.3 million in
connection with specific legal and other actions taken against animal rights
groups.
Net interest expense for the nine months ended September 30, 2003 was $4.6
million, compared with the net interest expense for the nine months ended
September 30, 2002 of $4.6 million. At constant exchange rates there was a
reduction in interest of $0.4 million, due to the repayment of loans and lower
interest rates.
Other income in the nine months ended September 30, 2003 was $2.0 million. This
comprises a non-cash foreign exchange remeasurement gain of $1.4 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
nine months ended September 30, 2002, other income of $2.4 million comprised a
non-cash foreign exchange remeasurement gain of $3.9 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 nine months ended September 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 nine months ended
September 30 2002 was $0.7 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 $1.1 million. In addition the Exchange
Offer and share issuance costs are also non-taxable and reduced the tax benefit
by $0.4 million. However, with the company's net operating losses (NOLs)
available for tax purposes ($53.1 million at December 31, 2002), the company
does not expect to be paying any material amounts in tax for the foreseeable
future.
The overall net income for the nine months ended September 30, 2003 was $1.9
million compared to a net income of $1.1 million for the nine months ended
September 30, 2002. The increase in the net income of $0.8 million is due to an
increase in the operating income of $2.4 million offset by lower exchange gains
of $0.3 million; and an increase in the income tax expense of $1.3 million.
Income per share for the nine months ended September 30, 2003 was 16 cents,
compared to 11 cents last year, on the weighted average common shares
outstanding of 11,932,338 (2002, 10,256,483).
c) ACQUISITION OF HUNTINGDON LIFE SCIENCES KK (HLS KK)
On July 1, 2003, the remaining 50% of the shares in HLS KK, not previously owned
by Huntingdon, a company registered in Japan, was purchased, resulting in HLS KK
becoming a wholly owned subsidiary of LSRI. The purchase price is payable over a
three year period, and is equal to the greater of (a) $1 million or (b) the
commission which would have been paid if the purchase had not happened. Payments
during that three year period shall be made at the rate and timing which had
been in effect for commissions prior to the acquisition. Commissions paid to the
previous owner of the acquired 50% of HLS KK during the 12 months to June 30,
2003 were $0.3 million.
Prior to this date, the shares owned by the Group in HLS KK were held as an
investment, as the day to day control of HLS KK was not exercised by any member
of the LSR group. The Group's share of the profits of HLS KK from the date of
incorporation, January 2, 1996, to June 30, 2003 of $208 thousand was recognised
in this quarter.
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
September 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 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.
On July 1, 2003, the Company entered into an agreement with Chugai Boyeki Co.
(CBC) to purchase the remaining 50% of the shares in Huntingdon Life Sciences KK
for $1 million, subject to certain adjustments related to further sales, which
is payable over three years.
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 nine months ending September 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 September 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 $56,000
was repaid in the first nine months of 2003.
Cash flows
During the nine months ended September 30, 2003, funds used were $4.1 million,
reducing cash and cash equivalents from $14.6 million at December 31, 2002 to
$10.5 million at September 30, 2003.
Net days sales outstanding ("DSOs") at September 30, 2003 were 25 days, up from
the 9 days at December 31, 2002, but down from 32 days at September 30, 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. The impact on liquidity from a one-day
change in DSO is approximately $379,000.
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 subsidiaries' 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 comprehensive loss account. Management have decided not to hedge
against the impact of exposures giving rise to these translation adjustments as
such hedges may impact upon the Company's cash flow compared to the translation
adjustments which do not affect cash flow in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
At December 31 At September 30 3 months to September 9 months to September 30
30 Average rate (1) Average rate (1)
2002 1.6099 1.5726 1.5493 1.4805
2003 - 1.6614 1.6111 1.6111
(1) Based on the average of the exchange rates on the last day of each month during the period.
On October 31, 2003 the noon buying rate for sterling was (pound)1.00 = $1.6970.
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
September 30, 2003:
Expected Maturity Date
2003 2004 2005 2006 2007 Thereafter Total Fair
Value
(In US Dollars, amounts in
thousands)
Cash - Pound Sterling 2,380 - - - - - 2,380 2,380
- Euro 172 - - - - - 172 172
- Yen 3,529 - - - - - 3,529 3,529
Accounts
receivable - Pound Sterling 16,875 - - - - - 16,875 16,875
- Euro 418 - - - - - 418 418
- Yen 2,227 - - - - - 2,227 2,227
Debt - Pound Sterling - - - (37,262) - - (37,262) (37,262)
- Yen - - - (987) - - (987) (987)
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 September 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.
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 5.48% per
annum for the nine months ended September 30, 2003. At September 30, 2003 this
credit facility was fully drawn down.
In the nine months ended September 30, 2003, a 1% change in LIBOR would have
resulted in a fluctuation in interest expense of $281,000.
For the nine months ended September 30, 2003, approximately 72% 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 September 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
As of September 30, 2003 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-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
quarter ended September 30, 2003 in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in our periodic SEC filings. During the quarter ended September 30,
2003 there were no significant changes in internal controls or in other factors
that has materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on September 9, 2003, the
Company's stockholders voted upon the following proposal:
Election of Directors
Andrew Baker For: 6,878,823
Against: 125,580
Abstain: 128,218
Gabor Balthazar For: 7,004, 373
Against: 30
Abstain 2,668
Brian Cass For: 6,878,903
Against: 125,500
Abstain: 128,138
Afonso Junquerias For: 7,004,157
Against: 246
Abstain: 2,884
Yaya Sesay For: 6,992,957
Against: 11,446
Abstain: 14,084
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 31.1 Certification of the Chief Executive Officer
Exhibit 31.2 Certification of the Chief Financial Officer
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Executive Officer
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Financial Officer
Exhibit 99.1 - Press Release, dated November 3, 2003,
announcing the third quarter earnings results for 2003.
(B) Reports on Form 8-K
(i) Current report on Form 8-K dated September 11, 2003 with respect
to Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFE SCIENCES RESEARCH, INC.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: Chief Financial Officer
Date: November 3, 2003