LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
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 quarterly period: March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-335-5
------------------------
LIFE SCIENCES RESEARCH INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-2340150
IRS 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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes _ No X
Indicate the number of outstanding shares of each of the Registrant's classes of
common stock as of the latest practicable date.
12,049,534 Voting Common Stock of $0.01 each as at May 5, 2004
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003. 3
Condensed Consolidated Balance Sheets at March 31, 2004 and
December 31, 2003. 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003. 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 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
Unaudited
Three months ended
March 31
(Dollars in thousands, except per share data) 2004 2003
Net revenues $37,236 $31,901
Cost of revenues (29,435) (25,373)
---------------
-----------------
Gross profit 7,801 6,528
Selling, general and administrative expenses (5,485) (4,921)
----------------- ---------------
Operating income 2,316 1,607
Interest income 14 16
Interest expense (1,576) (1,708)
Other income/(expense) 1,355 (450)
---------------
-----------------
Income/(loss) before income taxes 2,109 (535)
Income tax (expense)/benefit (716) 177
--------------- ---------------
Net income/(loss) $1,393 $(358)
----------------- ---------------
----------------- ---------------
Income/loss per common share
- - Basic $0.12 $(0.03)
- - Diluted $0.11 $(0.03)
Weighted average common shares outstanding
- - Basic (000's) 12,040 11,932
- - Diluted (000's) 12,241 11,932
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) March 31, December 31,
2004 2003
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents $15,423 $17,271
Accounts receivable, net of allowance of $606 and $561 in
2004 and 2003 respectively 20,292 17,515
Unbilled receivables 11,869 8,246
Inventories 1,757 1,901
Prepaid expenses and other current assets 4,396 4,610
---------------- ----------------
Total current assets 53,737 49,543
Property and equipment, net 104,197 101,547
Goodwill 859 832
Unamortized Capital Bonds issue costs 395 429
Deferred income taxes 3,858 3,922
---------------- ----------------
Total assets $163,046 $156,273
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $11,400 $12,508
Accrued payroll and other benefits 2,197 4,152
Accrued expenses and other liabilities 17,575 13,695
Short term debt 213 338
Fees invoiced in advance 26,277 22,761
--------------- ----------------
Total current liabilities 57,662 53,454
Long-term debt 88,291 87,560
Pension liabilities 22,654 21,414
Deferred income taxes 2,975 2,291
--------------- ----------------
Total liabilities 171,582 164,719
--------------- ----------------
Commitments and contingencies
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized 50,000,000
Issued and outstanding at March 31, 2004: 12,049,534 (December
31, 2003: 12,034,883) 120 120
Non-Voting Common Stock, $0.01 par value. Authorized 5,000,000
Issued and outstanding: None - -
Preferred Stock, $0.01 par value. Authorized 5,000,000
Issued and outstanding: None - -
Paid in capital 75,124 75,101
Less: Promissory notes for the issuance of common stock (666) (661)
Accumulated comprehensive loss (24,474) (22,973)
Accumulated deficit (58,640) (60,033)
--------------- ----------------
Total shareholders' equity /(deficit) (8,536) (8,446)
--------------- ----------------
Total liabilities and shareholders' equity /(deficit) $163,046 $156,273
--------------- ----------------
See Notes to Condensed Consolidated Financial Statements.
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three months ended March 31
(Dollars in thousands) 2004 2003
Cash flows from operating activities:
Net income/(loss) $1,393 $(358)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 2,346 2,129
Foreign exchange (gain)/ loss on Capital Bonds (1,355) 860
Gain on repurchase of Capital Bonds - (410)
Deferred income taxes 716 (177)
Provision for losses on accounts receivable 40 20
Amortization of warrants 57 209
Amortization of Capital Bonds issue costs 46 39
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (4,784) (1,763)
Inventories 200 (228)
Accounts payable, accrued expenses and other liabilities (198) 297
Fees invoiced in advance 3,011 (950)
---------------- ----------------
Net cash provided by/(used in) operating activities $1,472 $(332)
---------------- ----------------
Cash flows used in investing activities:
Purchase of property and equipment (2,309) (2,280)
---------------- ----------------
Net cash used in investing activities $(2,309) $(2,280)
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from issue of Voting Common Stock 18 63
Repayments of long-term borrowings - (642)
Repayments of short term borrowings (484) (127)
---------------- ----------------
Net cash used in financing activities $(466) $(706)
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (545) (228)
---------------- ----------------
---------------- ----------------
Decrease in cash and cash equivalents (1,848) (3,546)
Cash and cash equivalents at beginning of period 17,271 14,644
---------------- ----------------
Cash and cash equivalents at end of period $15,423 $11,098
---------------- ----------------
Supplementary disclosures
Interest paid in the quarter $2,307 $2,292
See Notes to Condensed Consolidated Financial Statements.
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
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 worldwide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that humans use, eat and are
otherwise exposed to. In addition, the Company 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 Life Sciences Research Ltd (LSR Ltd) formerly Huntingdon Life
Sciences Group plc ("Huntingdon"). The Offer was made on October 16, 2001 and
was declared unconditional on January 10, 2002, at which time LSR acquired
approximately 89% of the outstanding ordinary shares of Huntingdon in exchange
for approximately 5.3 million shares of LSR Voting Common Stock. The subsequent
offer period expired on February 7, 2002, by which time approximately 92% of the
outstanding ordinary shares had been offered for exchange. LSR completed its
compulsory purchase under UK law of the remaining outstanding ordinary shares of
Huntingdon on March 26, 2002 at which time Huntingdon became a wholly owned
subsidiary of LSR, in exchange for a total of approximately 5.9 million shares
of LSR Voting Common Stock (the "Exchange Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the Company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly,
the Exchange Offer is accounted for as a reverse acquisition for financial
reporting purposes. The reverse acquisition is deemed a capital transaction and
the net assets of Huntingdon (the accounting acquirer) are carried forward to
LSR (the legal acquirer and the reporting entity) at their carrying value before
the combination. Although Huntingdon was deemed to be the acquiring corporation
for financial accounting and reporting purposes, the legal status of LSR as the
surviving corporation does not change. The relevant acquisition process utilizes
the capital structure of LSR and the assets and liabilities of Huntingdon are
recorded at historical cost. The equity of LSR is the historical equity of
Huntingdon, retroactively restated to reflect the number of shares issued in the
Exchange Offer.
LSR's executive office is based at the Princeton Research Center in New Jersey,
US.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The condensed consolidated financial statements are
unaudited and are subject to such year-end adjustments as may be considered
appropriate and should be read in conjunction with the historical consolidated
financial statements of LSR years ended December 31, 2003, 2002 and 2001
included in LSR's Annual Report on Form 10-K for the fiscal year ended December
31, 2003. Operating results for the three-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
These financial statements have been prepared in accordance with US GAAP and
under the same accounting principles as the financial statements included in the
Annual Report on Form 10-K. Certain information and footnote disclosures related
thereto normally included in the financial statements prepared in accordance
with the US GAAP have been omitted in accordance with Rule 10-01 of Regulation
S-X.
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States. The Company has one continuing activity,
Contract Research.
The analysis of the Company's net revenues and operating income by segment for
the three-month periods ended March 31, 2004 and March 31, 2003 is as follows:
Three months ended
March 31
(Dollars in thousands) 2004 2003
Net revenues
UK $30,175 $25,375
US 7,061 6,526
------------- ------------
------------- ------------
$37,236 $31,901
============= ============
Operating income
UK $2,130 $1,430
US 186 177
------------- ------------
------------- ------------
$2,316 $1,607
============= ============
4. REFINANCING
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. A net $141,000 of such promissory notes was repaid
during 2002. A net $23,000 was repaid in 2003, and a further $18,000 was repaid
in the first quarter of 2004, offset by a foreign exchange movement of $23,000.
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 March 31, 2004 compared with three months ended
March 31, 2003.
Net revenues for the three months ended March 31, 2004 were $37.2 million, an
increase of 16.7% on net revenues of $31.9 million for the three months ended
March 31, 2003. Excluding the effect of exchange rate movements, the increase
was 4.7%. UK net revenues increased by 18.9%; at constant exchange rates the
increase was 3.7%. In the US, net revenues increased by 8.2%. After an 8.5%
decline in net new orders in the year ended December 31, 2003 compared to 2002,
net new orders for the three months ended March 31, 2004 were at a record level,
34% above the same period last year and 29% above Q4, 2003. This growth in net
new orders, which was particularly strong in toxicology and pharmaceutical
chemistry , started to feed through into revenues in the quarter.
Cost of revenues for the three months ended March 31, 2004 were $29.4 million,
an increase of 16.0 % on cost of revenue of $25.4 million for the three months
ended March 31, 2003. Excluding the effects of exchange rate movements, the
increase was 4.1%. This increase was driven by the improvement in net revenues,
with direct material costs increasing by $1.0 million and labor by $1.5 million.
UK cost of revenues increased by 17.6%; at constant exchange rates the increase
was 2.5%, reflecting the increase in volume, mainly due to labor and direct
materials cost increases. US cost of revenues increased by 9.8%, a faster rate
than the increase in revenues as a result of higher direct study related
material costs.
Selling, general and administrative expenses (SG&A) rose by 12.3% to $5.5
million for the three months ended March 31, 2004 from $4.9 million in the
corresponding period in 2003. Excluding the effects of exchange rate movements,
the increase was less than 1%. UK SG&A increased by 14.8% over the corresponding
period in 2003; at constant exchange rates UK SG&A increased by 0.3%. US SG&A
also increased by 0.3%.
Net interest expense for the three months ended March 31, 2004 was $1.6 million,
which was $0.1 million lower than the net interest expense for the three months
ended March 31, 2003. Excluding the effects of exchange rate movements, there
was a net decrease of 19%, due to lower interest rates, lower borrowings, and a
lower charge for warrants (as a result of the repayment of related party loans
in 2003).
Other income in the three months ended March 31, 2004 of $1.4 million relates to
the non-cash foreign exchange remeasurement gain which arose on the Convertible
Capital Bonds denominated in US dollars (the functional currency of the
financial subsidiary that holds the bonds in UK sterling), with the weakening of
the dollar against sterling. In the three months ended March 31, 2003, other
expense of $0.5 million related to the non-cash foreign exchange remeasurement
loss of $0.9 million that arose on the Convertible Capital Bonds with the
strengthening of the dollar against sterling, offset by $0.4 million gain on the
repurchase of Capital Bonds.
The income tax expense on income for the three months ended March 31, 2004 was
$0.7 million, which was primarily a non-cash charge due to the company's
operating loss carry forwards. The income tax benefit for the three months ended
March 31, 2003 was $0.2 million.
The overall net income for the three months ended March 31, 2004 was $1.4
million compared to a net loss of $0.4 million for the three months ended March
31, 2003. The improvement in the net income of $1.8 million is due to an
increase in the operating income of $0.7 million, lower interest charge $0.1
million and an increase in non-cash foreign exchange remeasurement gains of $2.3
million, offset by an increase in the income tax expense of $0.9 million, and a
reduction in the gain on the repurchase of the Capital Bonds of $0.4 million.
Basic income per common share was 12 cents, compared to a loss of 3 cents last
year on the weighted average common shares outstanding of 12,039,874 (2003:
11,932,338).
2. LIQUIDITY & CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's net non-bank loan of (pound)22.5 million
($41.1 million approximately), 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. It is now repayable on June 30, 2006
and interest is payable quarterly at LIBOR plus 1.75%. At the same time the
Company was required to take all reasonable steps to sell off some 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 Life Sciences Research Ltd (LSR Ltd.), and is secured by the
guarantees of the Company's wholly owned subsidiaries, including LSR Ltd,
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
an unrelated third party. 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 and at March 31, 2004, $46.2 million were
outstanding. They carry interest at a rate of 7.5% per annum, payable biannually
in March and September. During 2002, the Company repurchased and cancelled
$2,410,000 principal amount of such bonds resulting in a $1.2 million gain
recorded in other income/expense. In 2003 the Company further repurchased and
cancelled $1,345,000 principal amount of such bonds resulting in a gain of $0.6
million recorded in other income/expense. 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
On June 11, 2002 LSR issued to Focus Healthcare Partners ("FHP") warrants to
purchase up to 410,914 shares of LSR Voting Common Stock at a purchase price of
$1.50 per share. The LSR warrants are exercisable at any time and will expire on
June 11, 2012. These warrants arose out of negotiations regarding the provision
of a $2.9 million loan facility made available to the Company on September 25,
2000 by Mr. Baker, a director of the Company, who controls FHP. This loan was
paid in full in 2002. In accordance with APB 14 the loan and warrants were
recorded at their pro rata fair values in relation to the proceeds received. As
a result, the value of the warrants was $250,000.
Common Shares
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and FHP ($0.3 million) and $825,000 was paid with promissory notes. A
net $141,000 of such promissory notes was repaid during 2002, a net $23,000 was
repaid in 2003, and a further $18,000 was repaid in the first quarter of 2004,
offset by an increase due to foreign exchange movements of $23,000.
Cash flows
During the three months ended March 31, 2004, funds used were $1.9 million,
reducing cash and cash equivalents from $17.3 million at December 31, 2003 to
$15.4 million at March 31, 2004.
Net days sales outstanding ("DSOs") at March 31, 2004 were 17 days, the same as
at December 31, 2003. 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 $210,000.
3. CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with US GAAP. The Company considers the following
accounting policies to be critical accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts,
which generally range in duration from a few months to 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 changes in the level of work scope. Renegotiated amounts are included
in net revenue when earned and realization is assured. Provisions for losses to
be incurred on contracts are recognized in full in the period in which it is
determined that a loss will result from performance of the contractual
arrangement. Most service contracts may be terminated for a variety of reasons
by the Company's customers, either immediately or upon notice of a future date.
The contracts generally require payments to the Company to recover costs
incurred, including costs to wind down the study, and payment of fees earned to
date, and in some cases to provide the Company with a portion of the fees or
income that would have been earned under the contract had the contract not been
terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment schedules. Unbilled
receivables are billable to customers within one year from the respective
balance sheet date. Fees in advance are recorded for amounts billed to customers
for which, revenue has not been recognized at the balance sheet date (such as
upfront payments upon contract authorization, but prior to the actual
commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company's results of
operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the financial statements and the results of operations during the
reporting periods. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. Although these estimates are based upon management's best
knowledge of current events and actions, actual results could differ from those
estimates.
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment rate 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.
Exchange rate fluctuations and exchange controls
The Company operates on a world-wide basis and generally invoices its clients in
the currency of the country in which it operates. Thus, for the most part,
exposure to exchange rate fluctuations is limited as sales are denominated in
the same currency as costs. Trading exposures to currency fluctuations do occur
as a result of certain sales contracts, performed in the UK for US clients,
which are denominated in US dollars and contribute approximately 9% of total
revenues. Management has decided not to hedge against this exposure.
Also, exchange rate fluctuations may have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars. Such fluctuations also have an impact on the
translation of the 7.5% Convertible Capital Bonds payable in September 2006.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK 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 capital accounts are translated
at historical exchange rates and retained earnings are translated at weighted
average of historical rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated other
comprehensive loss account. Management has decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating sterling into US dollars were as follows:
At December 31 At March 31 3 months to March 31 Average
rate (1)
2002 1.6099 1.4240 1.4266
2003 1.7857 1.5807 1.6031
2004 - 1.8378 1.8365
(1) Based on the average of the exchange rates on each day of each month during
the period.
On May 5, 2004 the noon buying rate for sterling was (pound)1.00 = $1.7932.
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 March
31, 2004:
Expected Maturity Date
2004 2005 2006 2007 2008 Thereafter Total Fair
Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 5,381 - - - - - 5,381 5,381
- Euro 2,137 - - - - - 2,137 2,137
- Japanese Yen 4,236 - - - - - 4,236 4,236
Accounts
Receivable - Pound Sterling 14,072 - - - - - 14,072 14,072
- Euro 631 - - - - - 631 631
- Japanese Yen 118 - - - - - 118 118
Debt - Pound Sterling - - 41,133 - - - 41,133 41,133
- Japanese Yen 108 259 259 129 - - 755 755
4. 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.
5. 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 filings with the SEC, including its
Registration Statement on Form S-1, dated July 12, 2002, and Annual Report on
Form 10-K for the year ended December 31, 2003, each as filed with the
Securities and Exchange Commission.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's (pound)22.5 million (approximately $41.1 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 5.7819% per
annum for the three months ended March 31, 2004. At March 31, 2004 this credit
facility was fully drawn down.
In the three months ended March 31, 2004, a 1% change in LIBOR would have
resulted in a fluctuation in interest expense of $104,000.
For the three months ended March 31, 2004, 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 March 31, 2004, 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 has a non-cash impact on the
financial statements, based on the movement of exchange rates. Hence, the
Company does not take any actions to hedge against such risks. The Company is
unable to predict whether it will experience future gains or future losses from
such exchange-related risks on the bonds.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2004 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 March 31, 2004 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 March 31, 2004
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 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 May 5, 2004, announcing the first quarter
earnings results for 2004.
(B) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this Quarterly Report on Form 10-Q has been signed below by the
following person on behalf of the Registrant and in the capacities and on the
dates indicated.
Life Sciences Research Inc.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: CFO & Secretary
Date: May 6, 2004