Attached files
file | filename |
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EX-32.1 - SOX CERTIFICATIONS - LIFE SCIENCES RESEARCH INC | exhibit32.htm |
EX-99.1 - PRESS RELEASE 3Q09 RESULTS - LIFE SCIENCES RESEARCH INC | exhibit99.htm |
EX-31.1 - CEO CERTIFICATION - LIFE SCIENCES RESEARCH INC | exhibit31-1.htm |
EX-31.2 - CFO CERTIFICATION - LIFE SCIENCES RESEARCH INC | exhibit31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-Q
______________
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15
(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended: September 30, 2009
Commission
File No. 0-33505
______________
LIFE
SCIENCES RESEARCH, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
______________
MARYLAND
(State
of Incorporation)
|
52-2340150
(IRS
Employer Identification No.)
|
|
PO
BOX 2360, METTLERS ROAD,
EAST
MILLSTONE, NEW JERSEY
(Address
of Principal Executive Offices)
|
08875-2360
(Zip
Code)
|
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
o
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
o
|
(Do
not check if a smaller
|
Accelerated
filer
|
x
|
Non-accelerated
filer
|
o
|
reporting
company)
|
Smaller
reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
|
No
x
|
APPLICABLE
ONLY TO CORPORATE ISSUERS:
13,899,095
shares of voting common stock of $0.01 par value as of October 28,
2009
TABLE
OF CONTENTS
PART
I
|
FINANCIAL
INFORMATION
|
Page
|
|
Item
1
|
Financial
Statements (Unaudited).
|
||
Condensed
Consolidated Statements of Income for the three and nine months ended
September 30, 2009 and 2008.
|
5
|
||
Condensed
Consolidated Balance Sheets at September 30, 2009 and December 31,
2008.
|
6
|
||
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008.
|
7
|
||
Notes
to Condensed Consolidated Financial Statements.
|
8
|
||
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
22
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
29
|
|
Item
4
|
Controls
and Procedures.
|
31
|
|
PART
II
|
OTHER
INFORMATION
|
||
Item
1
|
Legal
Proceedings.
|
32
|
|
Item
1A
|
Risk
Factors.
|
34
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
34
|
|
Item
3
|
Defaults
Upon Senior Securities.
|
34
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders.
|
34
|
|
Item
5
|
Other
Information.
|
34
|
|
Item
6
|
Exhibits.
|
36
|
|
Signatures.
|
37
|
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
Note
Regarding Forward Looking Statements:
This Form
10-Q and other reports filed by Life Sciences Research, Inc. and subsidiaries
(the “Company”) from time to time with the U.S. Securities and
Exchange Commission (the "SEC"), as well as the Company's press releases,
contain or may contain forward-looking statements. The information
provided is based upon beliefs of, and information currently available to, the
Company's management, as well as estimates and assumptions made by the Company's
management. Statements that are not statements of historical fact may
be deemed to be forward-looking statements. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "may," "should," "anticipates," "estimates," "expects," "future,"
"intends," "hopes," "plans," or the negative thereof. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause actual results of the Company to vary materially
from historical results or from any future results expressed or implied in such
forward-looking statements.
Any
statements contained in this Form 10-Q that do not describe historical facts,
including without limitation statements concerning expected revenues, earnings,
product introductions and general market conditions, may constitute
forward-looking statements. Any such forward-looking statements
contained herein are based on current expectations, but are subject to a number
of risks and uncertainties that may cause actual results to differ materially
from expectations. The factors that could cause actual future results
to differ materially from current expectations include, but are not limited to,
the following: the Company's ability to raise the financing required to support
the Company's operations; the Company's ability to establish its intended
operations; fluctuations in demand for the Company's products and services; the
Company's ability to manage its growth; the Company's ability to attract
customers; and the ability of the Company to compete successfully in the
future. Any forward-looking statements should be considered in light
of those factors.
The
Company files periodic reports with the SEC, as well as current reports on Form
8-K, proxy or information statements and other reports required of publicly held
reporting companies. The public may read and copy any materials the
Company files with the SEC at the SEC's Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains
the reports, proxy and information statements, and other information that the
Company files electronically with the SEC, which is available on the Internet at
www.sec.gov. Further
information about the Company and its subsidiary may be found at www.lsrinc.net.
Important
Additional Information for Investors and Stockholders
In
connection with the proposed Merger of the Company with a wholly owned
subsidiary of Lion Holdings, the Company has filed with the SEC a definitive
proxy statement for the meeting of stockholders of the Company to be convened on
November 23, 2009 to approve the Merger. That definitive proxy
statement and a form of proxy has been mailed to the stockholders of the
Company. The Company, Parent, Merger Sub, Andrew Baker, LAB Holdings
LLC and Focused Healthcare Partners, LLC have also filed a Schedule 13E-3, as
amended, with the SEC regarding the proposed Merger. BEFORE MAKING
ANY VOTING OR INVESTMENT DECISION, THE COMPANY’S STOCKHOLDERS AND INVESTORS ARE
URGED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC
CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT
THE PROPOSED MERGER. Company stockholders and other investors can
obtain copies of these materials without charge from the SEC through the SEC’s
website at www.sec.gov. These documents can also be obtained free of
charge by accessing them on the Company’s corporate website at
www.lsrinc.net.
The
Company and its directors, executive officers and certain other members of its
management and employees may, under SEC rules, be deemed to be participants in
the solicitation of proxies from the Company’s stockholders in connection with
the transaction. Information regarding the interests of such
directors and executive officers (which may be different from those of the
Company’s stockholders generally) is set forth in the Company’s proxy statement
referred to above and additional information regarding the Company’s directors
and executive officers is included in the Company’s 2009 proxy statement and
2008 Annual Report on Form 10-K, previously filed with
SEC. Stockholders may obtain additional information regarding the
interests of the Company and its directors and executive officers in the Merger
and the solicitation of proxies, which may be different than those of the
Company’s stockholders generally, by reading the proxy statement and other
relevant documents regarding the Merger, filed with the SEC.
PART I
|
FINANCIAL
INFORMATION
|
ITEM
1
|
FINANCIAL
STATEMENTS
|
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
||||||||||||||||
(Dollars
in thousands, except per share data)
|
3
months ended
September
30
|
9
months ended
September
30
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
$ | 49,361 | $ | 63,560 | $ | 142,656 | $ | 191,117 | ||||||||
Cost
of sales
|
(36,408 | ) | (44,643 | ) | (104,017 | ) | (131,514 | ) | ||||||||
Gross
profit
|
12,953 | 18,917 | 38,639 | 59,603 | ||||||||||||
Selling,
general and administrative expenses
|
(7,494 | ) | (9,374 | ) | (21,788 | ) | (30,369 | ) | ||||||||
Acquisition-related
expenses
|
(1,038 | ) | - | (2,538 | ) | - | ||||||||||
Operating
income
|
4,421 | 9,543 | 14,313 | 29,234 | ||||||||||||
Interest
income
|
23 | 141 | 73 | 469 | ||||||||||||
Interest
income, related parties
|
79 | 98 | 294 | 349 | ||||||||||||
Interest
expense
|
(2,377 | ) | (2,192 | ) | (6,371 | ) | (6,857 | ) | ||||||||
Interest
expense, related parties
|
(745 | ) | (775 | ) | (2,193 | ) | (2,371 | ) | ||||||||
Other
income/(expense)
|
(887 | ) | (4,627 | ) | 3,412 | (4,664 | ) | |||||||||
Income
before income taxes
|
514 | 2,188 | 9,528 | 16,160 | ||||||||||||
Income
tax benefit/(expense)
|
544 | (120 | ) | 1,494 | (73 | ) | ||||||||||
Net
income
|
$ | 1,058 | $ | 2,068 | $ | 11,022 | $ | 16,087 | ||||||||
Income
per share
|
||||||||||||||||
-Basic
|
$ | 0.08 | $ | 0.16 | $ | 0.83 | $ | 1.27 | ||||||||
-Diluted
|
$ | 0.08 | $ | 0.13 | $ | 0.79 | $ | 1.04 | ||||||||
Weighted
average number of common stock
|
||||||||||||||||
-
Basic (000’s)
|
13,355 | 12,679 | 13,350 | 12,656 | ||||||||||||
-
Diluted (000’s)
|
14,048 | 15,625 | 14,027 | 15,489 | ||||||||||||
See Notes
to Condensed Consolidated Financial Statements.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
September
30, 2009
(Unaudited)
|
December
31, 2008
|
||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 39,361 | $ | 36,493 | ||||
Accounts
receivable, net
|
24,716 | 19,607 | ||||||
Unbilled
receivables, net
|
21,068 | 21,683 | ||||||
Inventories
|
2,259 | 2,854 | ||||||
Prepaid
expenses and other current assets (includes related parties of $1,969 and $985 in 2009 and
2008)
|
7,498 | 5,031 | ||||||
Total
current assets
|
$ | 94,902 | $ | 85,668 | ||||
Property,
plant and equipment, net
|
69,956 | 63,610 | ||||||
Goodwill
|
3,033 | 2,684 | ||||||
Intangible
assets, net
|
5,315 | 6,449 | ||||||
Other
assets, related parties
|
2,530 | 3,074 | ||||||
Deferred
income taxes
|
11,247 | 9,713 | ||||||
Total
assets
|
$ | 186,983 | $ | 171,198 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 12,732 | $ | 12,061 | ||||
Accrued
payroll and other benefits
|
4,150 | 4,643 | ||||||
Accrued
expenses and other liabilities
|
26,544 | 25,160 | ||||||
Short-term
debt
|
2,400 | 2,596 | ||||||
Fees
invoiced in advance
|
29,302 | 27,681 | ||||||
Total
current liabilities
|
$ | 75,128 | $ | 72,141 | ||||
Long-term
debt, net (includes related parties of $21,702 and $21,025 in
2009 and
2008)
|
71,729 | 71,943 | ||||||
Deferred
gain on disposal of US property
|
8,227 | 8,467 | ||||||
Pension
liabilities
|
36,809 | 33,859 | ||||||
Total
liabilities
|
$ | 191,893 | $ | 186,410 | ||||
Commitments
and contingencies
|
||||||||
Stockholders'
deficit
|
||||||||
Preferred
Stock, $0.01 par value. Authorized: 5,000,000
|
||||||||
Issued
and outstanding: None
|
- | - | ||||||
Non-Voting
Common Stock, $0.01 par value. Authorized:
5,000,000
|
||||||||
Issued
and outstanding: None
|
- | - | ||||||
Voting
Common Stock, $0.01 par value. Authorized:
50,000,000
|
||||||||
Issued
and outstanding at
September
30, 2009: 13,899,095
|
||||||||
(December
31, 2008: 13,345,495)
|
139 | 133 | ||||||
Paid
in capital
|
91,454 | 89,717 | ||||||
Accumulated
other comprehensive loss
|
(48,149 | ) | (45,686 | ) | ||||
Accumulated
deficit
|
(48,354 | ) | (59,376 | ) | ||||
Total
stockholders' deficit
|
$ | (4,910 | ) | $ | (15,212 | ) | ||
Total
liabilities and stockholders' deficit
|
$ | 186,983 | $ | 171,198 |
See Notes
to Condensed Consolidated Financial Statements.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars
in thousands)
|
September
30, 2009
|
September
30
2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 11,022 | $ | 16,087 | ||||
Adjustments
to reconcile net income to net cash provided by/(used in) operating
activities
|
||||||||
Depreciation
and amortization
|
6,733 | 7,410 | ||||||
Amortization
of gain on disposal of US property
|
(240 | ) | (241 | ) | ||||
Non-cash
compensation expense associated with employee stock compensation
plans
|
920 | 1,579 | ||||||
Foreign
exchange (gain)/loss on March 2006 Financing
|
(4,047 | ) | 4,041 | |||||
Foreign
exchange loss on intercompany balances
|
635 | 16 | ||||||
Deferred
income tax (benefit)/expense
|
(1,494 | ) | 73 | |||||
Provision
for losses on accounts receivable
|
412 | 272 | ||||||
Amortization
of debt issue and financing costs included in interest
expense
|
2,619 | 2,917 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, unbilled receivables and prepaid expenses
|
(2,944 | ) | (7,915 | ) | ||||
Inventories
|
760 | (928 | ) | |||||
Accounts
payable, accrued expenses and other liabilities
|
(1,282 | ) | (1,050 | ) | ||||
Fees
invoiced in advance
|
(885 | ) | (5,647 | ) | ||||
Defined
benefit pension plan liabilities
|
(823 | ) | (3,330 | ) | ||||
Net
cash provided by operating activities
|
$ | 11,386 | $ | 13,284 | ||||
Cash
flows used in investing activities:
|
||||||||
Purchase
of property, plant and equipment
|
(8,603 | ) | (13,947 | ) | ||||
Payment
for acquisition
|
- | (1,779 | ) | |||||
Net
cash used in investing activities
|
$ | (8,603 | ) | $ | (15,726 | ) | ||
Cash
flows used in financing activities:
|
||||||||
Proceeds
from issue of Voting Common Stock
|
5 | 571 | ||||||
Repurchase
of warrants
|
- | (1,000 | ) | |||||
Repayments
of long-term borrowings
|
(1,800 | ) | (1,542 | ) | ||||
Repayments
of short-term borrowings
|
(81 | ) | (496 | ) | ||||
Net
cash used in financing activities
|
$ | (1,876 | ) | $ | (2,467 | ) | ||
Effect
of exchange rate changes on cash and cash equivalents
|
1,961 | (1,156 | ) | |||||
Increase/(decrease)
in cash and cash equivalents
|
2,868 | (6,065 | ) | |||||
Cash
and cash equivalents at beginning of period
|
36,493 | 36,223 | ||||||
Cash
and cash equivalents at end of period
|
$ | 39,361 | $ | 30,158 |
Supplementary
Disclosures:
|
||||||||
Interest
paid
|
$ | 5,849 | $ | 6,055 | ||||
Income
taxes paid
|
$ | 148 | $ | 149 |
Supplementary
Disclosures of non-cash financing activity:
|
||||||||
Exercise
of warrants by independent third parties
|
$ | 825 | $ | - |
See Notes
to Condensed Consolidated Financial Statements.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
1. THE
COMPANY AND ITS OPERATIONS
Life
Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the "Company")
is a global contract research organization, offering worldwide pre-clinical and
non-clinical testing services for biological safety evaluation research to the
pharmaceutical and biotechnology, as well as the agrochemical and industrial
chemical industries.
On July
8, 2009, the Company entered into the Agreement and Plan of Merger (the “Merger
Agreement”) with Lion Holdings, Inc. (“Parent”) and Lion Merger Corp. (“Lion”),
a wholly owned subsidiary of Parent. Each of Parent and Lion was
formed for the purpose of consummating the transactions contemplated by the
Merger Agreement, and each of such entities is controlled by Andrew Baker,
Chairman and CEO of the Company. The Merger Agreement provides that,
upon the terms and subject to the conditions set forth in the Merger Agreement,
Lion will merge with and into the Company (the “Merger”), with the Company
continuing as the surviving company and a wholly owned subsidiary of Parent
following the Merger.
A Special
Committee consisting of the Company’s independent directors was charged with
evaluating strategic alternatives for the Company and unanimously recommended
the approval of the Merger. Based upon this recommendation, the Board
of Directors of the Company (with Andrew Baker and Brian Cass abstaining)
approved the Merger and resolved to recommend that LSR stockholders approve the
Merger. The Special Committee was advised by independent counsel and
an independent financial advisor who provided a fairness opinion to the Special
Committee.
The
Merger Agreement provides that, upon consummation of the Merger, each share of
common stock, par value $0.01 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger, other than shares owned
by Parent, Lion or their affiliates, will be converted into the right to receive
$8.50 in cash. Based upon the latest information available to the
Company, Mr. Baker beneficially owns approximately 17.7% of the
shares. No stockholder has any statutory right to demand and receive
payment of the fair value of his, her or its shares in connection with the
Merger.
Consummation
of the Merger is subject to a number of conditions, including without
limitation: (i) the approval of the Merger by (A) the holders of at least a
majority of the outstanding shares entitled to vote on the Merger at a
stockholders’ meeting duly called and held for such purpose and (B) a majority
of the votes cast by holders of outstanding shares entitled to vote on the
Merger at a stockholders’ meeting duly called and held for such purpose,
excluding any votes cast by Parent, Lion, Andrew Baker or any other “interested
party” (as such term is defined in the Merger Agreement); (ii) the absence of
any “company material adverse effect” (as defined in the Merger Agreement); and
(iii) other closing conditions set forth in the Merger Agreement.
Each of
the Company and Parent have the right to terminate the Merger Agreement under
certain circumstances, which may require the payment of a termination
fee.
A special
meeting of stockholders has been scheduled for November 23, 2009 for purposes of
allowing stockholders to vote on the Merger.
The
foregoing description is qualified in its entirety by reference to the full text
of the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on July 9, 2009 and to the definitive proxy statement in Schedule
14A filed on October 28, 2009.
2. SIGNIFICANT
ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, these financial statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America. The Company has included
all normal recurring adjustments, which are, in the opinion of management,
necessary to give a fair statement of its consolidated financial position,
results of operations and cash flows for the interim periods shown.
The
condensed consolidated financial statements are unaudited and are subject to
such year-end adjustments as may be considered appropriate and should be read in
conjunction with the historical consolidated financial statements of LSR for the
years ended December 31, 2008, 2007 and 2006 included in LSR's Annual Report on
Form 10-K for the fiscal year ended December 31, 2008. The
December 31, 2008 condensed consolidated balance sheet data was derived
from audited financial statements. Operating results for the three
and nine months ended September 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009.
We have
evaluated subsequent events through November 5, 2009, the date of issuance of
the condensed consolidated financial statements.
Consolidation
The
consolidated financial statements incorporate the accounts of LSR and each of
its subsidiaries. All intercompany balances have been eliminated upon
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with 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.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current
classifications. The Company reclassified from other expense to
interest expense certain prior period amounts relating to the amortization of
finance arrangement fees. The Company also reclassified from interest
income to interest income, related parties, and from interest expense to
interest expense, related parties, certain prior period amounts relating to
interest income and interest expense arising from transactions with related
parties.
Fair
Value of Financial Instruments
The
carrying amounts reported in the balance sheet for cash and cash equivalents,
receivables, accounts payable, accrued expenses and short-term debt approximate
fair value based on the short-term maturity of these instruments.
Recently
Issued Accounting Standards
Codification
Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. The Company’s
accounting policies were not affected by the conversion to
ASC. However, references to specific accounting standards in the
footnotes to the Company’s consolidated financial statements have been changed
to refer to the appropriate section of ASC.
Variable Interest
Entities
In June
2009, the FASB issued guidance to change financial reporting by enterprises
involved with variable interest entities (“VIEs”). The standard
replaces the quantitative-based risks and rewards calculation for determining
which enterprise has a controlling financial interest in a VIE with an approach
focused on identifying which enterprise has the power to direct the activities
of a VIE and the obligation to absorb losses of the entity or the right to
receive the entity’s residual returns. This accounting standard is
effective for annual reporting periods beginning after November 15, 2009, with
earlier adoption prohibited. The Company is currently evaluating the
impact of the pending adoption of this pronouncement on its consolidated
financial statements.
Subsequent
Events
In April
2009, the FASB issued ASC 855 which requires an entity to recognize in the
financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of the balance
sheet. For non-recognized subsequent events that must be disclosed to
keep the financial statements from being misleading, an entity will be required
to disclose the nature of the event as well as an estimate of its financial
effect, or a statement that such an estimate cannot be made. In
addition, this standard requires an entity to disclose the date through which
subsequent events have been evaluated. The adoption of ASC 855 did
not have any impact on the Company’s consolidated financial statements as of and
for the three and nine months ended September 30, 2009.
Business
Combinations
Effective
January 1, 2009, the Company adopted ASC 805. This requires
recognition of assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date. In a business combination achieved in stages, this
pronouncement requires recognition of identifiable assets and liabilities,
as well as the non-controlling interest in the acquiree, at the full amounts of
their fair values. This pronouncement also requires the fair value of
acquired in-process research and development (IPRD) to be recorded as indefinite
lived intangibles, contingent consideration to be recorded on the acquisition
date, and restructuring and acquisition-related deal costs to be expensed as
incurred. In addition, any excess of the fair value of net assets
acquired over purchase price and any subsequent changes in estimated
contingencies are to be recorded in earnings. The adoption of ASC 805
did not have any impact on the Company’s consolidated financial statements as of
and for the three and nine months ended September 30, 2009.
Fair Value Measurements and
Disclosures
Effective
January 1, 2009, the Company adopted the provisions of ASC 820-10 with respect
to non-financial assets and liabilities. This pronouncement defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The adoption of ASC 820-10
did not have any impact on the Company’s consolidated financial statements as of
and for the three and nine months ended September 30, 2009.
Determination of the Useful
Life of Intangible Assets
Effective
January 1, 2009, the Company adopted the provisions of ASC 350 which amended the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under
previously issued goodwill and intangible assets topics. This change
was intended to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under topics related to business combinations and other
GAAP. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The adoption
of ASC 350 did not have any impact on the Company’s consolidated financial
statements as of and for the three and nine months ended September 30,
2009.
Compensation - Retirement
Benefits
In
December 2008, FASB issued ASC 715 which provides guidance on an employer's
disclosures about plan assets of a defined benefit pension or other
postretirement plan. This pronouncement is effective for fiscal years
ending after December 15, 2009. This pronouncement requires
additional disclosure only and, therefore, will not impact the Company’s
consolidated results of operations or financial
position.
Management
does not believe that any other recently issued, but not yet effective,
accounting standard if currently adopted would have a material effect on the
accompanying financial statements.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
3. SEGMENT
ANALYSIS
The
Company operates within two segments based on geographical markets, the United
Kingdom and the United States, and incurs corporate administrative
expenses. The Company has one continuing activity, Contract Research,
throughout these periods.
Transactions
between segments, which are immaterial, are carried out on an arms-length
basis. Interest income, interest expense and income taxes are also
not reported on an operating segment basis because they are not considered in
the performance evaluation by the Company's chief operating
decision-maker.
The
analysis of the Company's net revenues and operating income by segment for the
three month and nine month periods ended September 30, 2009 and September 30,
2008 is as follows:
Three
Months ended September 30
|
Nine
months ended September 30
|
|||||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
revenues
|
||||||||||||||||
UK
|
$ | 36,821 | $ | 49,962 | $ | 106,133 | $ | 150,513 | ||||||||
US
|
12,540 | 13,598 | 36,523 | 40,604 | ||||||||||||
Corporate
|
- | - | - | - | ||||||||||||
$ | 49,361 | $ | 63,560 | $ | 142,656 | $ | 191,117 | |||||||||
Operating
income
|
||||||||||||||||
UK
|
$ | 5,857 | $ | 9,520 | $ | 18,408 | $ | 29,831 | ||||||||
US
|
1,800 | 2,347 | 4,772 | 7,269 | ||||||||||||
Corporate
|
(3,236 | ) | (2,324 | ) | (8,867 | ) | (7,866 | ) | ||||||||
$ | 4,421 | $ | 9,543 | $ | 14,313 | $ | 29,234 |
Income
before income taxes
|
||||||||||||||||
Operating
income
|
$ | 4,421 | $ | 9,543 | $ | 14,313 | $ | 29,234 | ||||||||
Interest
expense, net
|
(3,020 | ) | (2,728 | ) | (8,197 | ) | (8,410 | ) | ||||||||
Other
income/(expense)
|
(887 | ) | (4,627 | ) | 3,412 | (4,664 | ) | |||||||||
$ | 514 | $ | 2,188 | $ | 9,528 | $ | 16,160 |
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
4. DEBT
On March
2, 2006, the Company entered into a $70 million loan (the “March 2006
Financing”) under the terms of a Financing Agreement dated March 1, 2006 with a
third party lender. The loan matures on March 1, 2011 and had an
interest rate of LIBOR + 825 basis points (which reduced to LIBOR + 800 basis
points upon the Company meeting certain financial tests). On August
1, 2007, the Company entered into an amendment to the March 2006 Financing in
which the principal amount was reduced to $60 million and the interest rate was
reduced from the reduced rate of LIBOR + 800 basis points to LIBOR + 350 basis
points. On November 30, 2007, the Company entered into a second
amendment to the March 2006 Financing in which certain financial covenants were
modified and consent was given by the lender to permit the Company to complete a
fold-in acquisition. On July 8, 2009, the Company entered into the
Third Amendment and Waiver and Consent (the “Third Amendment”) to the March 2006
Financing which, among other things, provided the consent of the lenders to the
Company’s entry into the Merger Agreement. It also makes the
following principal revisions to the March 2006 Financing: (i) increases the
applicable interest rate under the terms of the Financing Agreement from LIBOR
plus 3.50% per annum to LIBOR plus 5.50% per annum; (ii) revises the covenants
regarding Leverage Ratio and Consolidated EBITDA for the period ending June 30,
2009 to 1.06:1.00 and $41,300,000, respectively; and (iii) revises the covenants
regarding Leverage Ratio and Consolidated EBITDA for the period ending September
30, 2009 to 1.15:1.00 and $37,000,000, respectively. The Third
Amendment also provides that Consolidated EBITDA shall exclude reasonable fees
and expenses incurred in connection with the transactions contemplated by the
Merger Agreement to the extent accrued or actually paid during such period
(without duplication) in an aggregate amount not to exceed
$2,000,000. The Third Amendment provides for an amendment fee of $5
million payable to the lenders; such fee, however, will not be due if, on or
prior to the date that is five months after the amendment effective date, (i)
all obligations under the Financing Agreement are paid in full; (ii) the Merger
is consummated; or (iii) a “superior proposal” (as defined in the Merger
Agreement) is consummated with the prior written consent of the Required Lenders
(which consent shall not be unreasonably withheld). The original and
amended loans have a LIBOR floor set at 425 basis points. LIBOR has
fallen below 425 basis points for part of 2008 and for the duration of 2009
through to September 30, 2009, resulting in the interest rate being fixed at 775
basis points (the LIBOR floor of 425 basis points plus 350 basis points) for
eleven months during 2008 and for the six months ended June 30, 2009, and at 975
basis points (the LIBOR floor of 425 basis points plus 550 basis points) for the
three months ended September 30, 2009. The principal amount of the
outstanding debt relating to the March 2006 Financing was $55 million as of
September 30, 2009.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
5. RELATED
PARTY TRANSACTIONS
On June
14, 2005, the Company entered into and consummated with Alconbury Estates Inc.
and subsidiaries (collectively “Alconbury”) a sale/leaseback transaction (the
"Sale/Leaseback Transaction"), in which the Company sold to Alconbury its
three properties (two in the UK, one in the US) for an aggregate
consideration of $40 million and immediately leased back the properties under 30
year leases with an aggregate annual rental payment of approximately $5
million. Alconbury was newly formed in June 2005 and controlled by
LSR’s Chairman and CEO, Andrew Baker. Since the Sale/Leaseback
Transaction was with a related party (Mr. Baker, LSR’s Chairman and CEO and the
controlling owner of Alconbury), an Independent Committee of LSR’s Board of
Directors was formed to analyze and consider the proposed Sale/Leaseback
Transaction. The Company agreed to pay the expenses incurred by
Alconbury in the Sale/Leaseback Transaction of $4.9 million, subject to
Alconbury's obligation to reimburse those expenses in the future in five annual
20% installments beginning in June 2008. Alconbury paid the Company
approximately $1 million of those expenses in June 2008 in the first such
installment. The June 2009 second installment has not yet been
received by the Company.
On July
8, 2009, the Company entered into the Merger Agreement with Parent and
Lion. Each of Parent and Lion is controlled by Andrew Baker, the
Company’s Chairman and CEO.
A
definitive proxy statement with respect to the proposed Merger was filed with
the SEC on October 28, 2009 and has been mailed to stockholders. A
special meeting of stockholders will be held on November 23, 2009 for purposes
of allowing stockholders to vote on the Merger.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
6. COMMITMENTS
The
Compensation Committee approved and adopted at its December 6, 2006 meeting the
2007 Long Term Incentive Plan (the “2007 LTIP”), which provides for awards of
cash compensation to executive officers and other members of the senior
management team if certain performance goals are achieved during the 2007-2010
performance period. The Compensation Committee established a 16%
operating margin percentage to be achieved over any four consecutive quarters
during such performance period that would trigger such awards. The
aggregate amount payable to all participants under the 2007 LTIP if the
threshold performance level is achieved is approximately $4.89 million (assuming
an exchange rate of £1.00 = $1.55.)
At a
joint meeting on June 3, 2009 of the Board of Directors and Compensation
Committee (the “Committee”), the Company, the Committee and the Board, (with the
two management directors, Mr. Baker and Mr. Cass, abstaining from the Board
vote) approved certain amendments to the 2007 LTIP:
1.
|
In
the event there is a change in control of the Company on or before
December 31, 2010, then:
|
·
|
The
2007 LTIP matures immediately upon the change in control and the target
performance level is deemed
achieved
|
·
|
Payout
to participants in the 2007 LTIP is based on the individual gross salaries
(prior to the 6% reduction in salaries now in force) current at the time
of the change in control
|
·
|
Payout
to participants in the 2007 LTIP is made at the levels prescribed for
having fully achieved the 16% operating profit percentage LTIP target (the
“LTIP Target”)
|
·
|
Payout
is made within 30 days after the date of the change in
control
|
·
|
The
2007 LTIP payout amount to be included in a participant’s total
compensation or base salary for purposes of calculating employment
termination payments following a change in control under employment
agreement or other applicable change in control provisions is limited to
one third of the individual recipient’s LTIP
payout
|
·
|
There
will be a modified cutback of LTIP payouts to comply with US tax code
Section 280G limits for those, if any, to whom Section 280G
applies
|
2.
|
In
the event there is not a change in control of the Company on or before
December 31, 2010:
|
·
|
The
plan matures at December 31, 2010
|
·
|
Payout
to participants in the 2007 LTIP is calculated based on the operating
profit percentage achieved in the best 4 consecutive quarters during the
plan period (January 1, 2007 through December 31, 2010) (the “Best
OP%”)
|
·
|
Payout
is prorated to the original LTIP Target. That payout will be
equal to the percentage which the Best OP% bears to the LTIP Target; 100%
will be paid if the LTIP Target is achieved over any 4 consecutive
quarters.
|
·
|
Payout
is based on the individual gross salaries (prior to the 6% reduction now
in force) current at the time of
maturity
|
·
|
Payout
is made within 30 days after the earlier of (i) achieving the LTIP Target
or (ii) March 31, 2011 if the LTIP Target is not fully achieved by
December 31, 2010, in which case the payout would be based on the pro rata
percentage of the Best OP% to the LTIP
Target
|
The
aggregate amount payable to all participants under the 2007 LTIP in the event of
a change of control of the Company or full achievement of the LTIP Target is
approximately $4.89 million. The potential payments under the LTIP in
the event of a change of control of the Company or full achievement of the LTIP
Target for each of the executive officers is as follows:
Andrew
Baker, Chairman and CEO*
|
$1,147,000
|
Brian
Cass, President and Managing Director*
|
$1,147,000
|
Richard
Michaelson, CFO
|
$560,000
|
Julian
Griffiths, Director of Operations*
|
$496,000
|
Mark
Bibi, Secretary and General Counsel
|
$420,000
|
* Payments
to Messrs. Baker, Cass and Griffiths are made in UK pounds
sterling. For purposes of estimating these payments in US dollars, an
exchange rate of £1.00 = $1.55 has been used, the average exchange rate during
the second quarter of 2009.
The
employment or service agreements for each of Messrs. Baker, Cass, Michaelson,
Griffiths and Bibi were amended as of June 3, 2009 to reflect the 2007 LTIP
change of control provisions described above.
Management
has been ratably accruing, as compensation expense, an amount equal to the
estimated cash bonus that would be payable over the performance period during
which the specified performance goals are achieved. Management will
re-evaluate this estimate periodically throughout the performance period and, if
applicable, will adjust the estimate accordingly.
Change in Control Severance
Payments. Pursuant to employment agreements between the
Company, or a subsidiary thereof, and each of Messrs. Baker (through Focused
Healthcare Partners, L.L.C., an entity controlled by Mr. Baker), Bibi, Cass,
Griffiths and Michaelson, each such executive officer may be entitled to certain
severance payments if, within twelve months following a change of control of the
Company (which includes the consummation of the Merger), (i) his employment is
terminated by the Company (or such affiliate) without cause (as defined in each
such employment agreement) or (ii) he resigns such employment for good reason
(as defined in each such employment agreement). In case of such a
termination, the Company (or such affiliate) will make a lump sum severance
payment in cash to such executive officer in an amount equal to (a) 2.99 times
the executive’s then current annualized base salary plus (b) 2.99 times any
additional compensation (such as bonus or incentive compensation) earned during
the 12 months prior to such termination or resignation; provided, that, with
respect to any distribution to such executive pursuant to the LTIP during the 12
months prior to such termination or resignation, only one-third of such LTIP
distribution shall be considered “additional compensation” for purposes of
calculating such executive’s severance payment. Accordingly, if such
events described above were to occur, the following payments would be made: Mr.
Baker - $2,857,942; Mr. Bibi - $1,465,100; Mr. Cass - $2,857,942; Mr. Griffiths
- $1,421,247; and Mr. Michaelson - $1,604,633. For purposes of
estimating these payments, an exchange rate of £1.00 = $1.55 has been used,
which was the average exchange rate during the second fiscal quarter of
2009. However, the actual payments to Messrs. Baker, Cass and
Griffiths will be made in U.K. pounds sterling, based on the exchange rate in
effect at the time and, accordingly, the actual U.S. dollar amount paid to such
persons may differ from the U.S. dollar amounts set forth above.
The
employment agreements between the Company and each of the executive officers
named above further provide that, if any payments or benefits received or to be
received by any such executive in connection with his employment with the
Company or an affiliate of the Company (or termination thereof or otherwise)
would subject the executive to the excise tax imposed under Section 4999 of the
United States Tax Code such that the net-after-tax amount that the executive
would receive with respect to such payments or benefits would not exceed the
net-after tax amount the executive would receive if the amount of such payments
and benefits were reduced to the maximum amount which could otherwise be payable
to the executive without the imposition of such excise tax, then, only to the
extent necessary to eliminate the imposition of the excise tax, such payments
and benefits shall be so reduced in the following order: (i) cash payments and
benefits shall first be reduced (if necessary, to zero) and (ii) all other
non-cash payments and benefits shall next be reduced.
Acceleration of Stock Options and
Restricted Stock. The Merger Agreement provides that, except
as otherwise agreed to in writing by Parent and a holder thereof prior to the
effective time of the Merger, at the effective time of the Merger, each option
to purchase Shares granted under the Stock Plans will become fully vested and
exercisable and will be cancelled in exchange for the right to receive cash in
an amount equal to the excess, if any, of $8.50 over the per Share exercise
price of the option, multiplied by the total number of Shares subject to the
option, without interest and net of any applicable withholding
taxes. The Merger Agreement further provides that, at the effective
time of the Merger, each outstanding share of restricted stock granted under the
Stock Plans will become fully vested and will be cancelled in exchange for $8.50
in cash, without interest and less applicable withholding taxes.
Management
employees and directors hold options to purchase Shares, many of which options
have exercise prices below $8.50 per Share and will be accelerated as a result
of the Merger. Subsequent to the date of the Merger Agreement, the
executive officers of the Company were offered the opportunity to exchange their
Shares and options to purchase Shares for equity securities of
Parent. All of the executive officers declined this opportunity and,
therefore, their Shares and options to purchase Shares will be converted into
the right to receive cash in accordance with the terms of the Merger
Agreement. As a result of the Merger, options to purchase 554,008
Shares held by the Company’s directors and executive officers (excluding options
currently held by Mr. Baker) will be cashed out. In the aggregate,
the Company’s directors and executive officers (excluding Mr. Baker) will
receive an aggregate payment of $3,636,842 as a result of their options being
cashed out in the Merger, which amount will be apportioned among the Company’s
directors and officers as follows:
Name
|
Number
of Options
|
Cash
Out Value
|
Richard
Michaelson
|
120,303
|
$787,576
|
Brian
Cass
|
255,500
|
$1,688,600
|
Julian
Griffiths
|
87,750
|
$564,300
|
Mark
Bibi
|
70,455
|
$456,366
|
Gabor
Balthazar
|
20,000
|
$140,000
|
Total
|
554,008
|
$3,636,842
|
Non
executive-officer employees and directors also hold 9,000 shares of restricted
stock in the aggregate, and the Company’s non executive-officer employees and
directors (excluding Mr. Baker) will receive an aggregate payment of $76,500 in
respect of shares of restricted stock accelerated and cancelled as a result of
the Merger, which amount will be apportioned among the Company’s non
executive-officer employees and directors as follows:
Name
|
Number
of Shares
of
Restricted Stock
|
Cash
Out Value
|
Gabor
Balthazar
|
3,000
|
$25,500
|
Afonso
Junqueiras
|
3,000
|
$25,500
|
Yaya
Sesay
|
3,000
|
$25,500
|
Total
|
9,000
|
$76,500
|
Mr. Baker
will contribute to Parent “in the money” options to purchase 55,500 Shares in
exchange for options to purchase shares of Parent, and such options to purchase
Shares, representing a cash value of approximately $288,600, will not be cashed
out in the Merger.
Total Payments to Executive Officers
and Directors. The following table sets forth the total amount
that may be payable to the Company’s executive officers as a result of the
Merger (other than any amounts payable to such executive officers and directors
in respect of Shares held by such executive officers and directors, which number
of shares are disclosed in the definitive Proxy Statement with respect to the
Merger under the caption “Information About the Company –
Security Ownership of Management and Certain Beneficial Owners - Ownership of
Management and Directors”):
NAME
|
STOCK
OPTIONS
(2)
|
RESTRICTED
STOCK
|
LTIP
(3)
|
CHANGE
OF
CONTROL
SEVERANCE
PAYMENTS
(1)
|
TOTAL
|
Andrew
Baker
|
$0
|
$0
|
$1,147,000
|
$2,857,942
|
$4,004,942
|
Richard
Michaelson
|
$787,576
|
$0
|
$560,000
|
$1,604,633
|
$2,952,209
|
Brian
Cass
|
$1,688,600
|
$0
|
$1,147,000
|
$2,857,942
|
$5,693,542
|
Julian
Griffiths
|
$564,300
|
$0
|
$496,000
|
$1,421,247
|
$2,481,547
|
Mark
Bibi
|
$456,366
|
$0
|
$420,000
|
$1,465,100
|
$2,341,466
|
Gabor
Balthazar
|
$140,000
|
$25,500
|
$0
|
$0
|
$165,500
|
Yaya
Sesay
|
$0
|
$25,500
|
$0
|
$0
|
$25,500
|
Alfonso
Junqueiras
|
$0
|
$25,500
|
$0
|
$0
|
$25,500
|
TOTAL
|
$3,636,842
|
$76,500
|
$3,770,000
|
$10,206,864
|
$17,690,206
|
(1) A
named officer would only be entitled to a change of control severance payment
if, within 12 months following a change of control of the Company (including the
consummation of the Merger), (i) his employment is terminated by the Company (or
such affiliate) without cause (as defined in each such employment agreement) or
(ii) he resigns such employment for good reason (as defined in each such
employment agreement).
(2) As
described in the definitive proxy statement with respect to the Merger, Mr.
Baker has agreed to contribute all of his options to purchase Shares in exchange
for equity securities of Parent.
(3) Payments
to Messrs. Baker, Cass and Griffiths are made in U.K. pounds
sterling. For purposes of estimating these payments in U.S. dollars,
an exchange rate of £1.00 = $1.55 has been used, which was the average exchange
rate during the second fiscal quarter of 2009. However, the actual
payments to be received by Messrs. Baker, Cass and Griffiths will be made in
U.K. pounds sterling based on the exchange rate in effect at that time and,
accordingly, the actual U.S. dollar amount paid to such persons may differ from
the U.S. dollar amount set forth above.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009 and 2008
(Unaudited)
7. CONTINGENCIES
On or
about March 9, 2009, a purported class action lawsuit, Berger v. Life Sciences
Research, et al., was filed in Superior Court of New Jersey, Chancery Division,
Somerset County, naming as defendants the Company and each director of the
Company. The complaint alleged, among other things, that the
directors breached their fiduciary duties with respect to the March 3, 2009
non-binding proposal made by Andrew Baker to acquire all of the outstanding
shares of the Company for $7.50 per share.
On August
29, 2009, a Consolidated Amended Class Action and Derivative Complaint (the
“Consolidated Complaint”) was filed in the Superior Court of New Jersey,
Chancery Division, Somerset County (Civil Action No. SOM-C-12006-09) and named
as defendants the Company, Mr. Baker and other members of the Company’s Board of
Directors. The Consolidated Complaint combines and supplements the
lawsuit captioned Berger v. Life Sciences Research, et al. and another lawsuit
filed on August 10, 2009 captioned Oakland v. Life Sciences Research,
Inc., et al. The Consolidated Complaint, which made both direct and
derivative claims, alleged, among other things, that the directors breached
their fiduciary duties in connection with the Merger by agreeing to sell the
Company for an unfair price pursuant to an unfair process and by filing and
circulating a proxy statement with materially misleading disclosures and
omissions, that Mr. Baker controls the Company and its directors, that the
directors were motivated to accept Mr. Baker’s offer because of concerns that a
public dispute with Mr. Baker would draw unwanted attention from animal rights
activists, that certain terms of the Merger Agreement unfairly benefit Mr. Baker
at the expense of the other stockholders, including the absence of appraisal
rights and provisions providing for accelerated vesting of restricted stock,
restrictions on the solicitation of the negotiations with respect to third party
proposals and termination fees, and that the Company, Mr. Baker and the
Company’s other directors each aided and abetted the other defendants’ breach of
their fiduciary duties. The complaint seeks injunctive and other
unspecified relief.
On
October 20, 2009, the Company entered into a Memorandum of Understanding (“MOU”)
to settle (the “Settlement”) the Consolidated Complaint. The MOU
provides, among other things, that in consideration for full settlement and
release of all claims under the Consolidated Complaint:
1.
|
The
Company agreed to disclose certain additional information in the
definitive Proxy Statement to be filed by the Company regarding the Merger
with the Securities and Exchange Commission (the “SEC”) and mailed to the
Company’s stockholders (which agreed upon information has already been
included in a revised preliminary proxy
statement).
|
2.
|
Parent
agreed that for the twelve (12) month period beginning on the effective
date of the Merger, it will not, and will cause its controlled affiliates
not to, consummate (i.e., close) any transaction in which it sells 90% or
more of LSR’s assets (as existing on the date of the consummation of the
Merger) to an unaffiliated third party, whether by merger, consolidation,
or otherwise, for an amount representing an enterprise value at such time
in excess of 125% of the enterprise value of LSR at the time of the Merger
unless Parent pays or causes to be paid to the settlement class members an
amount equal to 50% of any amount in excess of 125% of the enterprise
value of LSR at the time of the
Merger.
|
3.
|
Parent
agreed that the Termination Fee, payable by LSR to Parent pursuant to
paragraph 8.5 of the Merger Agreement, shall be reduced from $2,230,000 to
$1,533,333. The Termination Fee is payable under certain
circumstances, including the termination of the Merger Agreement in
connection with the receipt of a Superior Proposal (as defined in the
Merger Agreement) by the Company.
|
4.
|
Defendants
in the litigation agree to pay fees and expenses of plaintiff’s counsel if
approved by the Court up to a certain capped
amount.
|
Consummation
of the Settlement is subject to certain conditions, including: (a) satisfactory
completion of reasonable confirmatory discovery by plaintiffs; (b) drafting and
execution of a formal Stipulation of Settlement and such other documentation as
may be required to obtain final approval by the Court of the Settlement; (c)
consummation of the Merger; and (d) final approval by the Court of the
Settlement and entry of a final order and judgment by the Court.
8.
DEFINED BENEFIT PENSION PLAN
The
Company operated the Huntingdon Life Sciences Pension and Life Assurance Scheme,
subsequently renamed “LSR Pension and Life Assurance Scheme” (the “Plan”)
through to December 31, 2002. The Plan has been closed to new
entrants since April 5, 1997. As of December 31, 2002, the
accumulation of plan benefits of employees in the Plan was permanently
suspended, and therefore, the Plan was curtailed.
The
components of the net periodic cost of the Plan for the three and nine months
ended September 30, 2009 and 2008, are as follows:
(Dollars
in thousands)
|
3
months ended
September
30
|
9
months ended
September
30
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Service
cost
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Interest
cost
|
2,288 | 2,724 | 6,457 | 8,408 | ||||||||||||
Expected
return on plan assets
|
(1,902 | ) | (2,917 | ) | (5,369 | ) | (9,004 | ) | ||||||||
Amortization
of net actuarial loss
|
681 | 611 | 1,921 | 1,887 | ||||||||||||
Net
periodic pension cost
|
$ | 1,067 | $ | 418 | $ | 3,009 | $ | 1,291 | ||||||||
Assumptions
used to determine net periodic pension cost:
|
||||||||||||||||
Discount
rate
|
6.40 | % | 5.75 | % | 6.40 | % | 5.75 | % | ||||||||
Expected
rate of return on assets
|
7.10 | % | 7.75 | % | 7.10 | % | 7.75 | % | ||||||||
In the
three and nine months ended September 30, 2009, the Company paid contributions
of $1,360,000 (£829,000) and $3,128,000 (£2,027,000) into the
plan. In the three and nine months ended September 30, 2008, the
contributions were $1,278,000 (£675,000) and $3,944,000
(£2,025,000).
9.
STOCKHOLDERS’ EQUITY
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. Stephens Group Inc. subsequently sold
the warrants to independent third parties. The LSR warrants were
exercisable at any time and would have expired 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. The value of the warrants was
$430,000. 154,425 of such warrants were exercised in 2004. The
remaining 550,000 of such warrants were exercised on September 30,
2009. Subsequent to September 30, 2009, cash proceeds of $825,000
were received by the Company.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
ITEM
2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion of the financial condition and results of operations of
Life Sciences Research, Inc (“LSR”) and Subsidiaries (collectively, “the
Company”) should be read together with the financial statements and related
notes, which are included elsewhere in this Quarterly Report on Form
10-Q. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties. The
Company’s actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in more detail in its 2008 Annual Report on Form 10-K. The
Company undertakes no obligation to update any information in its
forward-looking statements.
OVERVIEW
OF THE COMPANY'S BUSINESS
The
Company provides pre-clinical and non-clinical biological safety evaluation
research services to most of the world’s leading pharmaceutical and
biotechnology companies, as well as many agrochemical and industrial chemical
companies. The purpose of this safety evaluation is to identify risks
to humans, animals or the environment resulting from the use or manufacture of a
wide range of chemicals, which are essential components of the Company’s
clients' products. The Company’s services are designed to meet the
regulatory requirements of governments around the world.
The
Company’s aim is to develop its business within these markets, principally in
the pharmaceutical sector, and through organic growth. A number of
the larger pharmaceutical companies are going through mergers and acquisitions,
or reprioritizing their research and development functions, and as a result
there has been a short term decrease in outsourced projects. It is
expected that this pharmaceutical development market will return in the medium
term and that the Company will benefit from improving drug pipelines across the
industry. In addition there is a growing trend towards greater
outsourcing as clients focus more internal resources on research and
increasingly look to variabilize their development costs.
On July
8, 2009, the Company entered into the Merger Agreement with Parent and Lion, a
wholly owned subsidiary of Parent. Each of Parent and Lion was formed
for the purpose of consummating the transactions contemplated by the Merger
Agreement, and each of such entities is controlled by Andrew Baker, Chairman and
CEO of the Company. The Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Merger Agreement, Lion will
merge with and into the Company (the “Merger”), with the Company continuing as
the surviving company and a wholly owned subsidiary of Parent following the
Merger.
A Special
Committee consisting of the Company’s independent directors was charged with
evaluating strategic alternatives for the Company and unanimously recommended
the approval of the Merger. Based upon this recommendation, the Board of
Directors of the Company (with Andrew Baker and Brian Cass abstaining), approved
the Merger and resolved to recommend that LSR stockholders approve the
Merger. The Special Committee was advised by independent counsel and
an independent financial advisor who provided a fairness opinion to the Special
Committee.
The
Merger Agreement provides that, upon consummation of the Merger, each share of
common stock, par value $0.01 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger, other than Shares owned
by Parent, Lion or their affiliates, will be converted into the right to receive
$8.50 in cash. Based upon the latest information available to the
Company, Mr. Baker beneficially owns approximately 17.7% of the
Shares. No stockholder has any statutory right to demand and receive
payment of the fair value of his, her or its Shares in connection with the
Merger.
Consummation
of the Merger is subject to a number of conditions, including without
limitation: (i) the approval of the Merger by (A) the holders of at least a
majority of the outstanding Shares entitled to vote on the Merger at a
stockholders’ meeting duly called and held for such purpose and (B) a majority
of the votes cast by holders of outstanding Shares entitled to vote on the
Merger at a stockholders’ meeting duly called and held for such purpose,
excluding any votes cast by Parent, Lion, Andrew Baker or any other “interested
party” (as such term is defined in the Merger Agreement); (ii) the absence of
any “company material adverse effect” (as defined in the Merger Agreement); and
(iii) other closing conditions set forth in the Merger Agreement.
Each of
the Company and Parent has the right to terminate the Merger Agreement under
certain circumstances, which may require the payment of a termination
fee.
The
foregoing description is qualified in its entirety by reference to the full text
of the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on July 9, 2009.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
following discussion and analysis of the Company’s financial condition and
operating results is based on the Company’s financial statements. The
preparation of this Quarterly Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the Company’s
financial statements, and the reported amount of revenue and expenses during the
reporting period. Actual results may differ from those estimates and
assumptions. See “Notes to Unaudited Condensed Financial Statements”
in Part I of this Quarterly Report for a presentation of the Company’s
significant accounting policies. No changes have been made to the
Company’s critical accounting policies and estimates disclosed in its 2008
Annual Report on Form 10-K.
RESULTS
OF OPERATIONS
Three
months ended September 30, 2009 compared with three months ended September 30,
2008.
The
Company is continuing to experience what it expects is a near term softness in
demand driven by a number of factors, including reorganizations and
reprioritizations within pharmaceutical industry customers, and contraction in
spending by biotechnology customers who are facing a challenging financing
environment. This impacted orders in the third quarter of 2009 with
the result that orders for the quarter ended September 30, 2009 were $42.5
million, a 17% decrease on orders for the quarter ended September 30, 2008 at
constant exchange rates. This reduction in orders, following on from
a reduction in orders in the first quarter of 2009, together with a significant
weakening of the British Pound against the US dollar, reduced revenues in the
third quarter of 2009 compared to the third quarter of 2008.
Net
revenues for the three months ended September 30, 2009 were $49.4 million, a
decrease of 22.3% on net revenues of $63.6 million for the three months ended
September 30, 2008. The underlying decrease, after adjusting for the
impact of the movement in exchange rates was 13.3%; with the UK showing a 14.7%
decrease and the US a 7.8% decrease.
Cost of
sales for the three months ended September 30, 2009 were $36.4 million (73.8% of
revenue), a decrease of 18.4% on cost of sales of $44.6 million (70.2% of
revenue) for the three months ended September 30, 2008. The
underlying decrease, after adjusting for the impact of the movement in exchange
rates was 9.1%; with the UK showing a 11.0% decrease and the US a 2.1%
decrease. The increase in cost of sales as a % of revenue was due to
an increase of 80 basis points in direct study costs as a % of revenue, and a
400 basis points increase in overhead costs as a % of revenue offset by a
decrease of 130 basis points in salary costs as a % of revenue. The
increase in overhead costs as a % of revenues was due to a reduction in capacity
utilization consequent upon the decline in revenue and also reflected higher
utility costs. The increase in direct study costs as a % of revenues
was due to a change in the mix of business. The decrease in labor
costs as a % of revenues was due to the reduction in salaries and related costs,
effective April 1, 2009, and a reduction in headcount.
Selling,
general and administrative expenses decreased by 20.1% to $7.5 million for the
three months ended September 30, 2009 from $9.4 million in the corresponding
period in 2008. The underlying decrease, after adjusting for the
impact of the movement in exchange rates was 12.2%. The decrease was
due to lower incentive expenses and professional fees.
Acquisition-related
expenses in the three months ended September 30, 2009 were $1.0
million. These represented costs associated with the Merger, and were
comprised predominantly of professional fees.
Net
interest expense increased by 10.7% to $3.0 million for the three months ended
September 30, 2009 from $2.7 million for the three months ended September 30,
2008. The increase was due to changes in interest rates consequent
upon the July 8, 2009 amendments to the March 2006 Financing.
Other
expense of $0.9 million for the three months ended September 30, 2009 comprised
$1.2 million from the non-cash foreign exchange re-measurement loss on the March
2006 Financing denominated in US dollars (the functional currency of the
subsidiary that holds the loan is UK sterling), offset by other exchange gains
of $0.3 million. In the three months ended September 30, 2008 other
expense of $4.7 million comprised a non-cash foreign exchange re-measurement
loss on the March 2006 Financing denominated in US dollars (the functional
currency of the subsidiary that holds the loan is UK sterling) of $5.2 million,
offset by other exchange gains of $0.5 million.
Income
tax benefit for the three months ended September 30, 2009 was $0.5
million. This reflects a tax benefit arising in the US, which the Company
expects to utilize during the course of 2009. The income tax expense
for the three months ended September 30, 2008 was $0.1 million. Net
operating losses are $97.7 million at September 30, 2009, with net operating
losses in the US of $17.9 million and net operating losses in the UK of $79.8
million.
Net
income for the three months ended September 30, 2009 was $1.1 million compared
with net income of $2.1 million for the three months ended September 30,
2008. The decrease in net income of $1.0 million is due to a $5.1
million decrease in operating income and an increase in the net interest expense
of $0.3 million, offset by a decrease in other expense of $3.7 million, and an
increase in the income tax benefit of $0.7 million.
Net
income per outstanding common share for the three months ended September 30,
2009 was 8 cents, compared to 16 cents income in the three months ended
September 30, 2008, on the weighted average common shares outstanding of
13,355,073 and 12,679,488, respectively. Net income per fully diluted
share for the three months ended September 30, 2009 was 8 cents, compared to 13
cents in the three months ended September 30 2008, on the weighted average fully
diluted common shares outstanding of 14,047,937 and 15,625,054,
respectively.
Nine
months ended September 30, 2009 compared with nine months ended September 30,
2008.
The
Company is continuing to experience what it expects is a near term softness in
demand driven by a number of factors, including reorganizations and
reprioritizations within pharmaceutical industry customers, and contraction in
spending by biotechnology customers who are facing a challenging financing
environment. This impacted orders in the first nine months of 2009
with the result that orders for the nine months ended September 30, 2009 were
$128.0 million, a 23% decrease on orders for the nine months ended September 30,
2008 at constant exchange rates. This reduction in orders, following
on from a reduction in orders in the second half of 2008 and a significant
weakening of the British Pound against the US dollar since the first half of
2008, reduced revenues in the first nine months of 2009 compared to the first
nine months of 2008.
Net
revenues for the nine months ended September 30, 2009 were $142.7 million, a
decrease of 25.4% on net revenues of $191.1 million for the nine months ended
September 30, 2008. The underlying decrease, after adjusting for the
impact of the movement in exchange rates was 10.5%; with the UK showing an 10.7%
decrease and the US an 10.1% decrease.
Cost of
sales for the nine months ended September 30, 2009 were $104.0 million (72.9% of
revenue), a decrease of 20.9% on cost of sales of $131.5 million (68.8% of
revenue) for the nine months ended September 30, 2008. The underlying
decrease, after adjusting for the impact of the movement in exchange rates was
5.6%; with the UK showing a 6.3% decrease and the US a 2.9%
decrease. The increase in cost of sales as a % of revenue was due to
an increase of 90 basis points in direct study costs as a % of revenue, a 280
basis points increase in overhead costs as a % of revenue, and an increase of 40
basis points in salary costs as a % of revenue. The increase in
overhead costs as a % of revenue was due to a reduction in capacity utilization
consequent upon the decline in revenue, and also reflected higher utility
costs. The increase in direct study costs as a % of revenue was due
to a change in the mix of business
Selling,
general and administrative expenses decreased by 28.3% to $21.8 million for the
nine months ended September 30, 2009 from $30.4 million in the corresponding
period in 2008. The underlying decrease, after adjusting for the
impact of the movement in exchange rates was 16.3%. The decrease was
due to lower incentive expenses and professional fees.
Acquisition-related
expenses in the nine months ended September 30, 2009 were $2.5
million. These represented costs associated with the Merger, and were
comprised predominantly of professional fees.
Net
interest expense decreased by 2.5% to $8.2 million for the nine months ended
September 30, 2009 from $8.4 million for the nine months ended September 30,
2008.
Other
income of $3.4 million for the nine months ended September 30, 2009 comprised
$4.1 million from the non-cash foreign exchange re-measurement gain on the March
2006 Financing denominated in US dollars (the functional currency of the
subsidiary that holds the loan is UK sterling), offset by other exchange losses
of $0.7 million. In the nine months ended September 30, 2008 other
expense of $4.6 million comprised a non-cash foreign exchange re-measurement
loss on the March 2006 Financing denominated in US dollars (the functional
currency of the subsidiary that holds the loan is UK sterling) of $5.1 million,
offset by other exchange gains of $0.5 million.
Income
tax benefit for the nine months ended September 30, 2009 was $1.5 million.
This reflects a tax benefit arising in the US, which the Company expects to
utilize during the course of 2009. The income tax expense for the
nine months ended September 30, 2008 was $0.1 million.
Net
income for the nine months ended September 30, 2009 was $11.0 million compared
with net income of $16.1 million for the nine months ended September 30,
2008. The decrease in net income of $5.1 million is due to a $14.9
million decrease in operating income, offset by an increase in other income of
$8.0 million, a decrease in the net interest expense of $0.2 million and an
increase in the income tax benefit of $1.6 million.
Net
income per outstanding common share for the nine months ended September 30, 2009
was 83 cents, compared to $1.27 income in the nine months ended September 30,
2008, on the weighted average common shares outstanding of 13,350,378 and
12,655,939, respectively. Net income per fully diluted share for the
nine months ended September 30, 2009 was 79 cents, compared to $1.04 in the nine
months ended September 30, 2008, on the weighted average fully diluted common
shares outstanding of 14,026,628 and 15,488,807, respectively.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
LIQUIDITY
& CAPITAL RESOURCES
Cash
and Cash Equivalents
Cash and
cash equivalents at September 30, 2009 were $39.4 million and were held in
accounts denominated in the following currencies:
Currency
|
September
30, 2009
|
|||
(Amounts
in USD Equivalents)
|
$ | 000 | ||
Dollar
|
21,145 | |||
Sterling
|
14,955 | |||
Euro
|
1,044 | |||
Yen
|
2,217 | |||
39,361 |
The
Company’s cash balances increased by $2.9 million during the nine months ended
September 30, 2009.
The
Company retains sufficient working capital in the appropriate currencies to meet
its local short term requirements. These local currency balances are
normally funded by the collection of similar currency accounts
receivables. Excess cash is converted into US Dollars and held on
deposit to act as an economic hedge against the Company’s US Dollar denominated
debt.
The
Company has approximately $77 million of outstanding debt. $55 million of this
debt relates to the March 2006 Financing, and is repayable on March 1,
2011. In addition, the Company has a long term lease of $22 million
arising on the sale and leaseback deal (Alconbury) which is classed as long-term
debt.
The
Company’s expected primary cash needs on both a short-term and a long-term basis
are for capital expenditures, expansion of services, possible future
acquisitions, geographic expansion, working capital and other general corporate
purposes, including possible share repurchases.
As of
September 30, 2009, the Company had a working capital surplus of $19.8 million,
and the Company believes that projected cash flow from operations will satisfy
its contemplated cash requirements for at least the next 12 months.
Net days
sales outstanding (“DSO”) at September 30, 2009 were 31 days, an increase from
30 days at December 31, 2008 (28 days at September 30, 2008). DSO is
calculated as a sum of accounts receivable, unbilled receivables and fees in
advance over total net revenue. The impact on liquidity from a
one-day change in DSO is approximately $532,000.
During
the nine months ended September 30, 2009, the Company’s operating activities
generated net cash of $11.4 million. The change in net operating
assets and liabilities used $5.2 million, mainly caused by the increase in DSO
which used $3.0 million, and the decrease in accounts payable, accrued expenses
and other liabilities, which used $1.3 million.
Investing
activities for the nine months ended September 30, 2009 used $8.6 million, as a
result of capital expenditures.
Financing
activities for the nine months ended September 30, 2009 used $1.9 million,
mainly due to capital repayments of the March 2006 Financing which used $1.8
million.
The
effect of exchange rate movements on cash for the nine months ended September
30, 2009 was an increase of $2.0 million.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
September 30, 2009, the Company did not engage in any off-balance sheet
arrangements as defined in Item 303 (a) (4) of Regulation S-K under the
Securities Act of 1933, as amended, that have, or are likely to have, a material
current or future effect on its consolidated financial position or results of
operations.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
ITEM
3
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
LSR is
subject to market risks arising from changes in interest rates and foreign
currency exchange rates.
EXCHANGE
RATE RISK
Volatility
in the currency markets has an effect on the Company’s results due principally
to movements of the British Pound against the US Dollar, as more than 75% of the
Company trade is denominated in Pounds. A 10% movement in the
exchange rate between the British Pound and the US Dollar would result in
approximately a 7.5% movement in both the revenue and operating profit of the
Company.
The
consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pound sterling and
the US dollar will affect the translation of the UK subsidiary's financial
results into US dollars for the purposes of reporting the consolidated financial
results. The process by which each foreign subsidiary's financial
results are translated into US dollars is as follows: income statement accounts
are translated at average exchange rates for the period; balance sheet asset and
liability accounts are translated at end of period exchange rates; and 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. 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.
The
Company operates on a worldwide 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 4% of total net 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 á vis competitors who trade in currencies
other than sterling or dollars.
The
Company has debt denominated in US dollars, whereas the Company’s functional
currency is the UK pound sterling, which results in the Company recording other
income/expense associated with US dollars debt as a function of relative changes
in foreign exchange rates. The Company is unable to predict whether
it will experience future gains or future losses from such exchange-related
risks on the debt. To manage the volatility relating to these
exposures, from time to time, the Company might enter into certain derivative
transactions. The Company holds and issues derivative financial
instruments for economic hedging purposes only. There were no
derivative financial instruments in place at September 30, 2009.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
Exchange
rates for translating sterling into US dollars were as follows:
At
December 31
|
At
September 30
|
3
months to September 30
Average
rate (1)
|
9
months to September 30
Average
rate (1)
|
|
2007
|
1.9906
|
2.0374
|
2.0214
|
1.9869
|
2008
|
1.4378
|
1.7825
|
1.8931
|
1.9476
|
2009
|
-
|
1.5994
|
1.6398
|
1.5429
|
(1)
|
Based
on the average of the exchange rates on each day of each month during the
period.
|
On
October 28, 2009 the exchange rate for sterling was £1.00 =
$1.6376.
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.
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,
2009:
Expected
Maturity Date
|
|||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
There
after
|
Total
|
Fair
Value
|
||
(In
US Dollars, amounts in thousands)
|
|||||||||
Cash
|
-
Pound Sterling
|
14,955
|
-
|
-
|
-
|
-
|
-
|
14,955
|
14,955
|
-
Euro
|
1,044
|
-
|
-
|
-
|
-
|
-
|
1,044
|
1,044
|
|
-
Japanese Yen
|
2,217
|
-
|
-
|
-
|
-
|
-
|
2,217
|
2,217
|
|
Accounts
receivable
|
-
Pound Sterling
|
15,152
|
-
|
-
|
-
|
-
|
-
|
15,152
|
15,152
|
-
Euro
|
647
|
-
|
-
|
-
|
-
|
-
|
647
|
647
|
|
-
Japanese Yen
|
2,201
|
-
|
-
|
-
|
-
|
-
|
2,201
|
2,201
|
|
Capital
leases
|
-
Pound Sterling
|
-
|
-
|
-
|
-
|
-
|
6,702
|
6,702
|
6,702
|
LIBOR
In the
three and nine months ended September 30, 2009, if LIBOR had been above 4.25%,
the floor stipulated in the Company's Amended March 2006 Financing, a 1% change
in LIBOR would have resulted in a fluctuation in interest expense of $138,000
and $415,000 respectively. Below 4.25%, fluctuations in LIBOR do not
result in a change in interest expense.
REVENUE
For the
three and nine months ended September 30, 2009, approximately 74% of the
Company’s net revenues were from outside the US.
See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
ITEM
4
|
CONTROLS
AND PROCEDURES
|
As of
September 30, 2009 an evaluation was carried out, under the supervision and with
the participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s 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 the Company’s disclosure controls and
procedures were effective as of the quarter ended September 30, 2009 in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in its periodic SEC
filings. During the quarter ended September 30, 2009 there were no
significant changes in internal controls or in other factors that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
PART
II
OTHER INFORMATION
ITEM
1
|
LEGAL
PROCEEDINGS
|
On or
about March 9, 2009, a purported class action lawsuit, Berger v. Life Sciences
Research, et al., was filed in Superior Court of New Jersey, Chancery Division,
Somerset County, naming as defendants the Company and each director of the
Company. The complaint alleged, among other things, that the directors
breached their fiduciary duties with respect to the March 3, 2009 non-binding
proposal made by Andrew Baker to acquire all of the outstanding shares of the
Company for $7.50 per share.
On July
8, 2009, the Company entered into the Merger Agreement with Parent and Lion, an
entity controlled by Andrew Baker, pursuant to which the Company will be
acquired for $8.50 per share and be taken private, subject to certain
conditions, including stockholder approval.
On August
29, 2009, a Consolidated Amended Class Action and Derivative Complaint (the
“Consolidated Complaint”) was filed in the Superior Court of New Jersey,
Chancery Division, Somerset County (Civil Action No. SOM-C-12006-09) and named
as defendants the Company, Mr. Baker and other members of the Company’s Board of
Directors. The Consolidated Complaint combines and supplements the
lawsuit captioned Berger v. Life Sciences Research, et al. and another lawsuit
filed on August 10, 2009 captioned Oakland v. Life Sciences Research, Inc., et
al. The Consolidated Complaint, which made both direct and derivative
claims, alleged, among other things, that the directors breached their fiduciary
duties in connection with the Merger by agreeing to sell the Company for an
unfair price pursuant to an unfair process and by filing and circulating a proxy
statement with materially misleading disclosures and omissions, that Mr. Baker
controls the Company and its directors, that the directors were motivated to
accept Mr. Baker’s offer because of concerns that a public dispute with Mr.
Baker would draw unwanted attention from animal rights activists, that certain
terms of the Merger Agreement unfairly benefit Mr. Baker at the expense of the
other stockholders, including the absence of appraisal rights and provisions
providing for accelerated vesting of restricted stock, restrictions on the
solicitation of the negotiations with respect to third party proposals and
termination fees, and that the Company, Mr. Baker and the Company’s other
directors each aided and abetted the other defendants’ breach of their fiduciary
duties. The complaint seeks injunctive and other unspecified
relief.
On
October 20, 2009, the Company entered into a Memorandum of Understanding (“MOU”)
to settle (the “Settlement”) the Consolidated Complaint:
1.
|
The
Company agreed to disclose certain additional information in the
definitive Proxy Statement to be filed by the Company regarding the Merger
with the Securities and Exchange Commission (the “SEC”) and mailed to the
Company’s stockholders (which agreed upon information has already been
included in a revised preliminary proxy
statement).
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2.
|
Parent
agreed that for the twelve (12) month period beginning on the effective
date of the Merger, it will not, and will cause its controlled affiliates
not to, consummate (i.e., close) any transaction in which it sells 90% or
more of LSR’s assets (as existing on the date of the consummation of the
Merger) to an unaffiliated third party, whether by merger, consolidation,
or otherwise, for an amount representing an enterprise value at such time
in excess of 125% of the enterprise value of LSR at the time of the Merger
unless Parent pays or causes to be paid to the settlement class members an
amount equal to 50% of any amount in excess of 125% of the enterprise
value of LSR at the time of the
Merger.
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3.
|
Parent
agreed that the Termination Fee, payable by LSR to Parent pursuant to
paragraph 8.5 of the Merger Agreement, shall be reduced from $2,230,000 to
$1,533,333. The Termination Fee is payable under certain
circumstances, including the termination of the Merger Agreement in
connection with the receipt of a Superior Proposal (as defined in the
Merger Agreement) by the Company.
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4.
|
Defendants
in the litigation agree to pay fees and expenses of plaintiff’s counsel if
approved by the Court up to a certain capped
amount.
|
Consummation
of the Settlement is subject to certain conditions, including: (a) satisfactory
completion of reasonable confirmatory discovery by plaintiffs; (b) drafting and
execution of a formal Stipulation of Settlement and such other documentation as
may be required to obtain final approval by the Court of the Settlement; (c)
consummation of the Merger; and (d) final approval by the Court of the
Settlement and entry of a final order and judgment by the Court.
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.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
ITEM
1A
|
RISK
FACTORS
|
The
Company’s business is subject to a number of risks and uncertainties, which are
discussed in detail in Part I, Item 1A of its 2008 Annual Report on Form
10-K.
The
Company hereby amends the risk factors set forth in its 2008 Annual Report on
Form 10-K by 1) deleting in its entirety the risk factor entitled “Reliance on
transportation” and 2) amending the risk factor entitled “The Company relies on
third parties for important services” such that it reads in its entirety as
follows: “The Company depends on third parties to provide it with products and
services for its business. In the event of a failure of any of these
third parties to adequately provide the products or services, the Company could
have difficulty in obtaining alternative sources of the products and services
due to the activities of animal rights extremists and this could have a material
adverse effect on the Company’s business.”
ITEM
2
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Not
applicable.
ITEM
3
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not
applicable.
ITEM
4
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
Not
applicable.
ITEM
5
|
OTHER
INFORMATION
|
On July
8, 2009, the Company entered into the Merger Agreement with Parent and Lion, a
wholly owned subsidiary of Parent. Each of Parent and Lion was formed
for the purpose of consummating the transactions contemplated by the Merger
Agreement, and each of such entities is controlled by Andrew Baker, Chairman and
CEO of the Company. The Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Merger Agreement, Lion will
merge with and into the Company (the “Merger”), with the Company continuing as
the surviving company and a wholly owned subsidiary of Parent following the
Merger.
A Special
Committee consisting of the Company’s independent directors was charged with
evaluating strategic alternatives for the Company and unanimously recommended
the approval of the Merger. Based upon this recommendation, the Board
of Directors of the Company (with Andrew Baker and Brian Cass abstaining),
approved the Merger and resolved to recommend that LSR stockholders approve the
Merger. The Special Committee was advised by independent counsel and
an independent financial advisor who provided a fairness opinion to the Special
Committee.
The
Merger Agreement provides that, upon consummation of the Merger, each share of
common stock, par value $0.01 per share, of the Company (the “Shares”) issued
and outstanding immediately prior to the effective time of the Merger (the
“Effective Time”), other than Shares owned by Parent, Lion or their affiliates,
will be converted into the right to receive $8.50 in cash (“Per Share Merger
Consideration”). Based upon the latest information available to the
Company, Mr. Baker beneficially owns approximately 17.7% of the
Shares. No stockholder has any statutory right to demand and receive
payment of the fair value of his, her or its Shares in connection with the
Merger.
Consummation
of the Merger is subject to a number of conditions, including without
limitation: (i) the approval of the Merger by (A) the holders of at least a
majority of the outstanding Shares entitled to vote on the Merger at a
stockholders’ meeting duly called and held for such purpose and (B) a majority
of the votes cast by holders of outstanding Shares entitled to vote on the
Merger at a stockholders’ meeting duly called and held for such purpose,
excluding any votes cast by Parent, Lion, Andrew Baker or any other “interested
party” (as such term is defined in the Merger Agreement); (ii) the absence of
any “company material adverse effect” (as defined in the Merger Agreement); and
(iii) other closing conditions set forth in the Merger Agreement.
Each of
the Company and Parent has the right to terminate the Merger Agreement under
certain circumstances, which may require the payment of a termination
fee.
A special
meeting of stockholders has been scheduled for November 23, 2009 for purposes of
allowing stockholders to vote on the Merger.
The
foregoing description is qualified in its entirety by reference to the full text
of the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on July 9, 2009 and to the definitive proxy statement in Schedule
14A filed on October 28, 2009.
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
ITEM
6
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EXHIBITS
|
Exhibit
2.1
|
Agreement
and Plan of Merger, dated as of July 8, 2009, among Life Sciences
Research, Inc., Lion Holdings, Inc. and Lion Merger Corp. (Incorporated by
Reference to Current Report on Form 8-K, dated July 9,
2009)
|
Exhibit
2.2
|
Definitive
Proxy Statement filed as of October 28, 2009. (Incorporated by Reference
to Definitive Schedule 14A dated October 28, 2009)
|
Exhibit
31.1
|
Rule
13a-14(a) Certification of the Chief Executive Officer
|
Exhibit
31.2
|
Rule
13a-14(a) 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 and Chief Financial Officer
|
Exhibit
99.1
|
Press
Release, dated November 5, 2009 announcing the third quarter earnings
results for 2009
|
LIFE
SCIENCES RESEARCH, INC. AND SUBSIDIARIES
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/ Andrew Baker
|
Name:
|
Andrew
Baker
|
Title:
|
Chairman
and Chief Executive Officer – Principal Executive
Officer
|
Date:
|
November
5, 2009
|
By:
|
/s/ Richard Michaelson
|
Name:
|
Richard
Michaelson
|
Title:
|
Chief
Financial Officer – Principal Financial and Accounting
Officer
|
Date:
|
November
5, 2009
|