UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 205494
------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10173
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LIFE SCIENCES RESEARCH INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 873 2550 x 4824
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
- --------------------------------------- ----------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Voting Common Stock $0.01 par value REGISTERED
Other OTC Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the Voting Common Stock held by non-affiliates of
the Registrant at April 8, 2002 was approximately $13,153,082 based on a per
share price of $2.00, the closing market price of the Voting Common Stock on the
Other OTC Market.
Indicate the number of outstanding shares of each of the Registrant's classes of
common stock as of the latest practicable date
11,032,578 Voting Common Stock of $0.01 each as at April 8, 2002
900,000 Non Voting Common Stock of $0.01 each as at April 8, 2002
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business ........................................................................ 3
2. Properties ...................................................................... 11
3. Legal Proceedings ............................................................... 11
4. Submission of Matters to a Vote of Security Holders.............................. 11
PART II
5. Market For Registrant's Common Equity and Related Stockholder Matters............ 12
6. Selected Financial Data ......................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................... 16
7A. Quantitative and Qualitative Disclosures About Market Risk....................... 25
8. Financial Statements and Supplementary Data ..................................... 26
9. Changes in and disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................... 58
PART III
10. Directors and Executive Officers of the Registrant............................... 59
11. Executive Compensation .......................................................... 60
12. Security Ownership of Certain Beneficial Owners and Management................... 66
13. Certain Relationships and Related Transactions .................................. 66
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................ 68
PART I
ITEM 1. BUSINESS
INTRODUCTION
Life Science Research Inc. ("LSR") was incorporated on July 19, 2001 as a
Maryland corporation. It was formed specifically for the purpose of making a
recommended all share offer (the "Offer") for Huntingdon Life Sciences Group plc
("Huntingdon"). The Offer was made on October 16, 2001 and was declared
unconditional on January 10, 2002, at which time LSR acquired approximately 89%
of the outstanding ordinary shares of Huntingdon in exchange for approximately
5.3 million shares of LSR Voting Common Stock. The subsequent offer period
expired on February 7, 2002, by which time approximately 92% of the outstanding
ordinary shares had been offered for exchange. LSR completed its compulsory
purchase under UK law of the remaining outstanding ordinary shares of Huntingdon
on March 26, 2002 at which time Huntingdon became a wholly owned subsidiary of
LSR, in exchange for a total of approximately 5.9 million shares of LSR Voting
Common Stock (the "Exchange Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly,
the Exchange Offer will be accounted for as a 'reverse acquisition' for
financial reporting purposes. The reverse acquisition is deemed a capital
transaction and the net assets of Huntingdon (the accounting acquirer) are
carried forward to LSR (the legal acquirer and the reporting entity) at their
carrying value before the combination. Although Huntingdon is deemed to be the
acquiring corporation for financial accounting and reporting purposes, the legal
status of LSR as the surviving corporation does not change. The relevant
acquisition process will utilize the capital structure of LSR and the assets and
liabilities of Huntingdon will be recorded at historical cost. LSR has included
in "Item 8. Financial Statements and Supplemental Data" stand-alone financial
statements for LSR from July 19, 2001 (date of inception) to December 31, 2001.
During this period, LSR had no operations of its own, but nevertheless incurred
expenses relating principally to the Offer and the issuance of warrants. The
financial statements of Huntingdon as of December 31, 2001 and 2000 and for each
of the three years in the period ended December 31, 2001 have also been included
in Item 8. On consummation of the Exchange Offer in early 2002, Huntingdon
became the operating entity for financial reporting purposes. Consequently, when
presenting financial statements for LSR, the registrant, for periods preceding
to the effectiveness of the Exchange Offer, the financial statements will
represent Huntingdon's financial position and results of operations (as reported
in the financial statements included herein.) The assets and liabilities and
results of operations of LSR will be included in such financial statements as of
the date of the consummation of the Exchange Offer. Although Huntingdon will be
deemed to be the acquiring corporation for financial accounting and reporting
purposes, the legal status of LSR as the surviving corporation will not change.
As used in this report, the "Company" means Huntingdon prior to the consummation
of the Exchange Offer in early 2002 and, thereafter LSR reflecting the reverse
acquisition, as described above.
The financial statements of LSR and Huntingdon, as included in Item 8, have been
prepared in United States dollars (US$ or $.) Previously, Huntingdon prepared
its financial statements in pounds sterling ((pound)). The change in
Huntingdon's reporting currency was considered appropriate given, amongst other
things, the significance of Huntingdon's US operations and assets. The Company
is a Contract Research Organisation ("CRO") providing pre-clinical and
non-clinical biological safety evaluation research services to most of the
world's leading pharmaceutical, biotechnology, agrochemical and industrial
chemical companies. The purpose of this safety evaluation is to identify risks
to humans, animals or the environment resulting from the use or manufacture of a
wide range of chemicals which are essential components of Huntingdon's clients'
products. The Company's services are designed to meet the regulatory
requirements of governments around the world.
LSR's executive office is based at the Princeton Research Centre in New Jersey,
USA.
Huntingdon was originally incorporated in the UK in 1951 as a limited liability
company to provide contract research services to the UK pharmaceutical,
agrochemical and food industries. In 1964 it was acquired by the US company,
Becton Dickinson. Over the next 20 years it successfully established itself as a
leading CRO with business across a number of sectors and with a number of
leading pharmaceutical and agrochemical companies. In April 1983, Huntingdon was
re-registered as a public limited company with the name "Huntingdon Research
Centre plc". In June 1985, Huntingdon's name was changed from Huntingdon
Research Centre plc to Huntingdon International Holdings plc. In 1988 Huntington
was floated on the London Stock Exchange and in early 1989 it obtained a listing
for its ADR's on the New York Stock Exchange.
In 1995, it acquired the toxicology business of APBI, which comprised
laboratories near Princeton, New Jersey and Newcastle and Eye, Suffolk in the UK
for a total consideration of $43 million. Immediately upon acquisition, the
toxicology business of APBI in the UK was merged with that of Huntingdon
Research Centre Ltd and the name of that company changed to Huntingdon Life
Sciences Ltd. The US business acquired operates as Huntingdon Life Sciences Inc.
Huntingdon's name was subsequently changed in April 1997 to Huntingdon Life
Sciences Group plc. At that time the Company purchased a small specialist
research centre in Wilmslow, Cheshire (UK) which included a marmoset breeding
colony. Huntingdon transferred this work to its other UK facilities and closed
the Wilmslow facility. The site was sold on September 1, 1999.
In the first half of 1997 allegations were made relating to animal care and Good
Laboratory Practice (GLP) against Huntingdon's operating subsidiaries in the UK
and US. Those allegations and the UK Government's subsequent statement in the
House of Commons in July 1997 about its investigation into those allegations
caused the cancellation of booked orders and a decline in new orders.
Significant trading losses and cash outflows resulted during the period from mid
1997 through 1998.
During 1998 poor trading results put a heavy strain on cash resources, utilising
Huntingdon's available facilities. Given the medium to long term element of many
of Huntingdon's activities and the reluctance of clients to place new work until
Huntingdon's finances were stabilized, Huntingdon required a substantial
injection of finance to both initially restore confidence and then to fund
operations during the period until Huntingdon returned to profitability.
On September 2, 1998 a group of new investors subscribed (pound)15 million for
120 million ordinary shares whilst existing shareholders and institutional
investors took up a further 57 million shares, contributing (pound)7.1 million.
After expenses of (pound)1.7 million, the issue of shares raised (pound)20.4
million. On the same date Huntingdon's bankers agreed to confirm and fix
Huntingdon's facilities at (pound)24.5 million until August 31, 2000 and this
amount was fully drawn down.
On September 1, 1999 the sale of the Wilmslow Research Centre was completed.
Parts of the proceeds from this sale ((pound)1.9 million) were used to repay
bank debt and the facility was reduced accordingly. On September 1, 2000 the
remaining facility of (pound)22,586,000 was renewed, through a series of
extensions, up until January 19, 2001. The debt was refinanced on January 20,
2001 by means of a loan from HLSF LLC, a subsidiary company of the Stephens
Group Inc., a related party at the time which has since transferred the loan to
a third party, and the two other banks who were part of the original loan
syndicate. It is now repayable on June 30, 2006.
Since the involvement of the new investor group in 1998, a new management team
has been appointed, led by Brian Cass, which the Company believes has begun to
successfully address many of Huntingdon's past difficulties. Relationships with
customers have been restored, a substantial cost and headcount reduction program
has been effected and sales have started to grow again at an encouraging rate.
As the Company continues to build on these fundamentals, the Company has the
following strategy and goals:
o To be appreciated as the listening, understanding and reliable partner in
creative compound development and safety assessment; to be the first choice
for the industries we serve.
o To provide our employees with the opportunity for individual development in
a caring, rewarding and safe working environment.
o To be recognised positively in the local communities in which we operate.
o To grow to significant profitability and improved return on investment for
our shareholders.
In November 1999 a new so called "animal rights" group was formed in the UK with
Huntingdon as its target. During 2000 and 2001 the campaigners focused on
Huntingdon, its staff and directors, but also many other stakeholders in the
business, including shareholders, financial institutions, other suppliers and
customers. For further details see Other Information Pertaining to the Company -
Animal Rights Activism, below.
In October 2001 LSR commenced the Offer for Huntingdon which was completed in
March 2002 with Huntingdon becoming a wholly owned subsidiary of LSR. The effect
of the Offer was to effectively re-domicile Huntingdon's corporate and legal
existence to the US. The Company believes the US is a more hospitable corporate
environment than the UK. As a US and Maryland company, LSR benefits from
corporate governance and privacy rules and regulations that benefit LSR security
holders. Moreover, the investment community in the US is more familiar with the
CRO industry, since many publicly traded CRO's are domiciled in the US.
Additionally, the companies responsible for developing new pharmaceutical,
agrochemical and industrial compounds are increasingly concentrated in the US
and the Company's US operations have enjoyed substantial growth in the last two
years.
Also in March 2002, LSR completed a private placement of approximately 5.1
million shares of Voting Common Stock at a per share subscription price of $1.50
per share.
DESCRIPTION OF BUSINESS
The Company provides pre-clinical and non-clinical biological safety evaluation
research services to most of the world's leading pharmaceutical, biotechnology,
agrochemical and industrial chemical companies. The purpose of this safety
evaluation is to identify risks to humans, animals or the environment resulting
from the use or manufacture of a wide range of chemicals which are essential
components of our clients' products. 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, through a
mixture of organic growth and a small number of strategic acquisitions. In doing
so the Company will benefit from strong drug pipelines in the pharmaceutical
industry, the growing amount of legislation concerning the safety and
environmental impact of agrochemicals and industrial chemicals and a growing
trend towards outsourcing as clients focus more internal resources on research
in the search for new compounds.
The Company's sales and marketing functions are specifically focused on two main
groups, pharmaceutical and non-pharmaceutical customers. As much of the research
activity conducted for these two customer groups is similar, the Company
believes it is appropriate, operationally, to view this as one business.
Pharmaceuticals and Biopharmaceuticals
The Pharmaceutical research and development pathway is shown below:
DRUG DISCOVERY DRUG DEVELOPMENT MARKETING
NON-CLINICAL CLINICAL
Chemical Synthesis Pre-Clinical Phase I Phase II Phase III Phase IV
Toxicology Safety Efficacy Long Term Post Marketing
Pharmacology Efficacy Surveillance
Drug Metabolism
Pharmacokinetics
LONG TERM SAFETY STUDIES
The Company performs non-clinical testing in support of the drug development
process. This primarily consists of pre-clinical outsourcing from the
pharmaceutical industry, as well as further longer term non-clinical safety
testing that is performed in parallel to human clinical testing (such as
carcinogenicity studies and safety studies relating to reproductive
implications). Essentially all of this work is performed as a result of
regulatory requirements that seek to minimize the risks associated with the
ultimate testing and use of these compounds in people. Pre-clinical testing
includes studies conducted prior to the compounds exposure to people, this helps
to evaluate both how the drug affects the body as well as how the body affects
the drug. Utilizing advanced laboratory and toxicological evaluations, this work
helps assess safe and appropriate dose regimens. Non-clinical testing, which
includes longer term studies often conducted concurrently with clinical (human)
testing, can focus on identifying and avoiding the longer term cancer
implications of exposure to the compound, or relating to the potential of
possible reproductive implications. Approximately two thirds of the Company's
orders are derived from this source. The Company views its non-clinical market
as extending to "proof of concept" in man (Phase 2A) and to analytical chemistry
support for clinical trials. Since 1999 the Company has had collaborative
relationships with a number of Phase I clinical trial units and offers
centralised clinical laboratory services in support of clinical trials.
The Company has also actively pursued opportunities to extend its range of
capabilities supporting late stage drug discovery, focused around invitro and in
vivo models for lead candidate drug characterisation and optimisation. This
growing range of biological services is intended to position the Company to take
advantage of the knowledge arising from the Human Genome Project as the
identification of new molecular disease targets is expected to lead to the
development of increased numbers of potential therapies which will require
evaluation.
The outsourced market for the large clinical trials (Phase 3 and beyond) is
relevant to the Company, but the margins are less attractive and it is subject
to a greater degree of volatility driven by the size of individual contracts.
While the Company does not preclude entering this market, it is a very different
business and one in which a number of major companies are already firmly
established.
o Market growth
It is estimated that the pharmaceutical industry annual research and development
(R & D) spending is between $35 billion and $40 billion and is growing at around
10% per annum. Around $20 billion is focused on development and, of this, 15% is
expenditure in the Company's core business area of pre-clinical development. The
Company believes that approximately 30% of this is outsourced which means that
the Company is today competing in approximately a $1 billion market.
The market for these services is growing as a result of strong new drug
pipelines:
The Company estimates that new drug discovery is growing at 10-15% per
annum, fueled by new technologies and strong profits. Use of techniques
like combinatorial chemistry and high throughput screening are dramatically
increasing the efficiency and effectiveness of the discovery process for
new molecules.
The need to replace earnings from drugs coming off patent is driving
increases in the number of drugs being put into development.
It is estimated there has been a 50% increase in the numbers of projects in
the R & D pipeline versus five years ago.
There is also a growing trend towards the outsourcing of development work as
clients focus more internal resource on discovery research in the search for new
lead compounds.
The biotechnology industry has become a significant source of business for
Company. The number of drugs produced by the biotechnology industry which
require US Food and Drug Administration (FDA) approval has grown
substantially over the past decade. Many biotechnology companies have
strategically chosen not to invest in asset intensive development and
regulatory safety evaluation, but rather to outsource major areas of R & D
and utilise contract research organisations to perform these services. This
frees them from the inefficient utilisation of in-house capabilities due to
their sporadic and varied demand for these capabilities.
In addition the process of consolidation within the pharmaceutical industry
is also accelerating the move towards outsourcing. While there is a short
term negative impact from mergers with development pipelines being
rationalised and a focus on integration rather than development, longer
term resources are increasingly invested in in-house facilities for
discovery and lead optimisation rather than development and regulatory
safety evaluation. The outsourcing of development and safety evaluation is
the Company's core business.
Therefore the overall market for outsourced services is estimated to be growing
at an annual rate of around 10-15%.
Non-Pharmaceuticals
The Company has historically generated one third to one half of its orders from
safety and efficacy testing of compounds for the agrochemical, industrial
chemical, veterinary and food industries. The work involved has many
similarities and often uses many of the same facilities, equipment, and
scientific disciplines to those employed in pre-clinical testing of
pharmaceutical compounds.
The Company's business in these areas is again driven by governmental regulatory
requirements. The Company's services address safety concerns surrounding a
diverse range of products, spanning such areas as agricultural herbicides and
other pesticides, medical devices, veterinary medicines, and specialty chemicals
used in the manufacture of pharmaceutical intermediates, and manufactured
foodstuffs and products. The Company believes it is a clear market leader in
programs designed to assess the safety, environmental impact and efficacy of
agricultural chemicals as well as in programs to take new specialty chemicals to
market.
o Market Growth
It is estimated that the world-wide market for outsourced contract research from
these industries is around $300 million. The growth in the non-pharmaceutical
business is driven both by the introduction of novel compounds and increasingly
by legislation concerning the safety and environmental impact of existing
products.
The Company believes that many market segments included in this broad area of
business have the potential for substantial growth in coming years, as a result
of:
Recent introduction of new testing requirements for `high production
volume' (HPV) chemical products in the US, and similar programs in Europe
and Japan.
Increasing scrutiny of any compound which is used in the manufacture of
products to which members of the public, especially children, are exposed,
either infrequently or on a day-to-day basis (e.g. phthalates used in the
plastic of childrens' toys).
More stringent regulations affecting compounds which have the potential to
adversely effect the environment, e.g. biocides and endocrine disrupters.
Growth in concerns over food safety, e.g. additives and genetically
modified foods, and the introduction of `nutraceuticals'.
The requirement to register or re-register pesticides on lists 2 and 3 to
meet the European Directive 91/414/EEC. The Company has unrivalled
experience with the chemicals which were included on list 1 of the
Directive.
Safety testing in these industries is also more likely to be outsourced as,
unlike the pharmaceutical industry, fewer companies have comprehensive internal
laboratory facilities. While overall R & D is growing at approximately 5%, we
believe that this coupled with increased outsourcing could provide market growth
of up to 8 -10% per annum over the next five years.
COMPETITION
Competition in both the pharmaceutical and non pharmaceutical market segments
ranges from the in-house research and development divisions of large
pharmaceutical, agrochemical and industrial chemical companies who perform their
own safety assessments, to "full service" providers - contract research
organisations like the Company who provide a full range of services to the
industries (such as Covance Inc., Quintiles Transnational Corp., Charles River
Laboratories International, Inc.,) and "niche" suppliers focussing on specific
services or industries (such as Bioreliance Corporation).
GOVERNMENT SUPERVISION OF OPERATIONS
Supervisory regimes
Since the services provided by the Company are used to support pharmaceutical,
biotechnological, chemical or agrochemical product approval applications, its
laboratories are subject to both formal and informal inspections by appropriate
regulatory and supervisory authorities, as well as by representatives from
client companies. The Company is regularly inspected by US, Japan and UK
governmental agencies because of the number and complexities of the studies it
undertakes. In 1979, the US Food and Drug Administration (FDA) promulgated the
Good Laboratory Practice (GLP) regulations, defining the standards under which
biological safety evaluations are to be conducted. Other governmental agencies
such as the Environmental Protection Agency (EPA), the Japanese Ministry Of
Health and Welfare, the Japanese Ministry of Agriculture, Forestry and
Fisheries, and the UK Department of Health, have introduced compliance
monitoring programs with similar GLP standards. The Company has had over 30 such
inspection visits and audits since 1985.
The Company's laboratory in the USA is subject to the United States Department
of Agriculture (USDA) Animal Welfare Regulations (Title 9, Code of Federal
Regulations, Subchapter A). The laboratory is regularly inspected by USDA
officials for compliance with these regulations. Compliance is assured through
an Institutional Animal Care and Use Committee, comprising staff from a broad
range of disciplines within the Company and including external representation.
Furthermore, in the USA there is a voluntary certification scheme run by an
independent and internationally recognised organisation, the Association for
Assessment and Accreditation of Laboratory Animal Care (AAALAC). The Company's
laboratory in the US is accredited under this program.
The Company's operations in the UK are regulated by the Animals (Scientific
Procedures) Act 1986. This legislation, administered by the UK Home Office,
provides for the control of scientific procedures carried out on living
vertebrate animals and regulation of the animals' environment. Personal licences
(the Company has approximately 250 licensees) are issued by the UK Home Office
to personnel who are competent to perform regulated procedures and each program
of work must be authorised in advance by a Project Licensee. Premises where
procedures are carried out must also be formally designated by the UK Home
Office. Consultations and inspections are regularly undertaken in order to
ensure continued compliance with regulatory and legislative requirements.
Typically, the Company has 18 such inspections annually.
The Company's Board has established an Animal Welfare and Ethics Committee to
oversee the Company's compliance with these regulatory and ethical issues.
At each of its research centres, the Company ensures the availability of
suitably experienced and qualified veterinary staff backed by a 24-hour call out
system.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Whilst the Company conducts its business to comply with certain environmental
regulations, compliance with such regulations does not impact significantly on
its earnings or competitive position. Management believes that its operations
are currently in material compliance with all applicable environmental
regulations.
OTHER INFORMATION PERTAINING TO THE COMPANY
Human Resources
The Company's most important resource is its people, they have created the
Company's knowledge base, its expertise and its excellent scientific reputation.
Scientists from the Company are represented at the highest levels in several US,
UK and international committees on safety and toxicity testing. Several staff
members are considered leaders in their respective fields, they frequently
lecture at scientific seminars and regularly publish articles in scientific
journals. This recognition has resulted in frequent assignments from clients for
consultation services. Some of the Company's staff serve by invitation or
election on a number of scientific and industrial advisory panels and groups of
certain organisations and agencies such as the FDA, the EPA, the UK Department
of Health, and the World Health Organisation.
To ensure that this experience and expertise is transmitted throughout the
organization, the Company maintains training programs. For example, the
Company's Introductory and Advanced Graduate Training Programs train graduate
staff in all phases of toxicology. Also, in conjunction with the Institute of
Animal Technology, the Company maintains what it believes to be one of the
largest animal technician training programs in the world. The Company employs
approximately 250 licensed personnel.
The number of employees in the Company at December 31, 2001 and 2000 were as
follows:
Employees at December 31
2001 2000
USA...................... 216 212
UK....................... 1,161 1,093
Japan.................... 10 10
----------- -----------
1,387 1,315
----------- -----------
Animal Rights Activism
In parallel with an increase in so called "animal rights" activity
internationally, targeting organisations not only in the CRO and medical
research community, during November 1999 a new campaign group (Stop Huntingdon
Animal Cruelty or SHAC) was formed in the UK with Huntingdon as its target.
SHAC's broad aim is to end all animal research; targeting Huntingdon is the next
step on this path. During 2000 this campaign intensified with any stakeholder in
Huntingdon becoming a potential target; this included staff, directors,
institutional and personal shareholders, customers, financial institutions and
other suppliers. The protests took the form of direct action; incorporating
demonstrations outside the Company's facilities and in local towns; distribution
of propaganda; abuse, intimidation and threats directed at many of the
stakeholders listed above. Many of these illegal activities were carried out by
extreme "animal rights" activists. The worst acts of violence have been targeted
at members of staff of the Company. These have taken the form of night-time
arson attacks on employees' cars outside their homes and physical attacks on two
of the senior managers as they returned home from work.
During 2001 the incidences of violent protest in the UK appeared to partly
diminish. However, activists increased the focus of protest activities on the
Company's financial institutions, in an attempt to defeat the Offer, which was
unsuccessful. Also during 2001, animal rights activities of SHAC and the other
groups expanded to the US, where the focus was on the Company's largest
stockholders, although the intensity and general public support appears to be
less than in the UK.
To counter this "animal rights" campaign the Company has adopted a strategy of
openness and direct co-operation with all its stakeholders, the media and the
local communities. The Company has taken every opportunity to promote the value
of the work it does in helping its customers bring to market safe and effective
products. Members of the media, schools, local groups and national bodies have
all visited the Company's facilities, toured the animal facilities and
laboratories, and talked with staff. These visitors have been consistently
impressed with the Company's ethics, standards of animal welfare and the
professionalism of its staff. As a consequence of the Company's high profile
public relations activities and the irrationality of the "animal rights"
messages, the national media coverage has become increasingly positive
throughout the duration of the campaign.
In the UK the Company has successfully lobbied politicians and the British
parliament, with great support from industry trade bodies such as the
Association of the British Pharmaceutical Industry, Bioindustry Association,
Chemical Industry Association and Research Defence Society. As a result the
British Government has made very positive statements in support of the Company
and has been extremely critical of the illegal acts of some "animal rights"
supporters. The Government has introduced legislation to offer more protection
to those targeted and is encouraging the police and courts to ensure the law is
enforced.
As a result of and in conjunction with the Company's leadership on this issue,
there has been a marked increase in communication campaigns to educate the
general population about the invaluable benefits of animal based research, the
commitment to and progress in development of non-animal based alternatives, and
the high standard of animal welfare in which this work is conducted. Our
clients' recognition for our scientific and professional integrity and
leadership was evident in the granting in October 2001 of the prestigious UK
Pharma Industry Individual Achievement Award to Brian Cass, the Company's
President and Managing Director.
Although the movement is more recent and undeveloped in the US, the Company is
addressing it proactively with actions similar to those it has utilized in the
UK, including a strategy of openness and media co-operation; legislative and
regulatory lobbying in association with industry trade bodies such as Americans
for Medical Progress, National Association for Biomedical Research and the
Foundation for Biomedical Research; and legal actions. For example, following an
incident of vandalism at a home protest against one of the Company's US
employees, the Company obtained an order of the New Jersey Superior Court
placing restrictions on home protests by animal rights activists as well as
limits on the scope of protests at the Company's Princeton Research Centre.
Management and Labour Relations
The Company's labour force is non-union and there has never been any disruption
of the business through strikes or other employee action. The Company regularly
reviews its pay and benefits packages and believes that its labour relations,
policies and practices and management structure are appropriate to support its
competitive position.
Research and Development
In addition to experience gained through research activities performed for
clients, the Company engages in research in order to respond to the changing
needs of clients and to maintain competitiveness within the industries in which
it operates. Most of the research undertaken, however, is an inherent part of
the research carried out on behalf of clients in completing studies and as such
it is not identified separately.
Know-how and Patents
The Company believes that its proprietary know-how plays an important role in
the success of its business. Where the Company considers it appropriate, steps
are taken to protect its know-how through confidentiality agreements and
protection through registration of title or use. However the Company has no
patents, trade-marks, licenses, franchises or concessions which are material and
upon which any of the services offered is dependent.
Quality Assurance
The Company maintains extensive quality assurance programs, designed to ensure
that all testing programs meet client requirements, as well as all relevant
codes, standards and regulations. Based on a Master Schedule, periodic
inspections are conducted as testing programs are performed to assure adherence
to project specifications or protocols and final reports are extensively
inspected to ensure consistency with data collected.
Financial Information about Geographic Areas
See Financial Statements
Available Information
LSR has not yet filed any annual or quarterly reports with the SEC although it
will commence doing so beginning with this Form 10-K. Huntingdon has filed an
Annual Report on Form 10-K for the Fiscal Year ended December 31, 2000. You may
read and copy Huntingdon's reports, statements or other information at the SEC's
Internet site (http:/www.sec.gov) or at the SEC's public reference rooms (450
Fifth Street, N.W., Washington, DC 20549). You can request copies of those
documents, upon payment of a duplicating fee, by writing to the SEC.
ITEM 2. PROPERTIES
The Company's head office is situated within the Princeton Research Centre in
New Jersey.
The Company believes that its facilities, described below, are adequate for its
operations and that suitable additional space will be available when needed.
The following table shows the location of the facilities of the Company,
approximate size and the principal activities conducted at such facilities each
of which is owned by the Company.
Location Laboratories Size Principal Activities
and Offices
Near Princeton, NJ, USA 180,000 sq.ft. 53.5 acres Laboratories, animal accommodation and offices
Huntingdon, England 612,000 sq.ft. 80 acres Laboratories, animal accommodation and
offices
Near Diss, England 250,000 sq.ft. 28 acres Laboratories, animal accommodation and
offices
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LSR 's Voting Common Stock trades on the Other OTC Market under the symbol
"LSRI". The closing market price of the Voting Common Stock on April 8, 2002 was
$2.00 per share.
Until January 24, 2002 Huntingdon's Ordinary Shares were listed on the London
Stock Exchange Ltd under the Stock Exchange Automated Quotation symbol "HTD".
Huntingdon's American Depositary Shares "ADS's" were listed on the Other OTC
under the symbol "HTDLY". Prior to October 22, 2001 the ADS's were eligible for
quotation on the National Association of Security Dealers Over the Counter
Bulletin Board (OTCBB). On October 22, 2001 the ADS's were disqualified from
quotation on the OTCBB because no bid and ask had been posted for five
consecutive trading days and the ADS's began trading on the Other OTC. Prior to
December 27, 2000 these were listed on the New York Stock Exchange, Inc.
("NYSE") under the symbol "HTD". They were suspended from the NYSE because they
no longer met the NYSE's continuing listing criteria, in particular the market
capitalisation of Huntingdon was below $50 million.
On July 10, 2000 Huntingdon changed its ADS ratio from one ADS representing five
Ordinary Shares to one ADS representing twenty five Ordinary Shares. The ratio
change was implemented to ensure compliance with the New York Stock Exchange's
listing requirement that ADS's trade at a minimum price of $1.00 per share.
The high and low quarterly sales price (in pounds sterling) of Huntingdon's
Ordinary Shares on the London Stock Exchange from January 1, 2000 to December
31, 2001 were as follows:
HIGH SALES LOW SALES
QUARTER ENDED PRICE PRICE
- ------------- ------------------ ----------------
(pound) (pound)
March 31, 2000 0.2775 0.8
June 30, 2000 0.1475 0.0775
September 30, 2000 0.1125 0.06
December 31, 2000 0.06 0.0225
March 31, 2001 0.095 0.0175
June 30, 2001 0.055 0.02
September 30, 2001 0.0475 0.0275
December 31, 2001 0.05 0.0225
The high and low quarterly sales price (in US dollars) of Huntingdon ADSs, as
evidenced by ADRs, on the Other OTC, OTCBB and NYSE, as applicable, from January
1, 2000 to December 31, 2001 were as follows:
HIGH SALES LOW SALES
QUARTER ENDED PRICE PRICE
- ------------- ------------------ ----------------
$ $
March 31, 2000 14.7 2.5
June 30, 2000 7.5 3.15
September 30, 2000 4.31 1.69
December 31, 2000 1.94 0.19
March 31, 2001 3.13 0.5
June 30, 2001 1.69 0.75
September 30, 2001 1.25 0.51
December 31, 2001 1.82 0.51
The prices for periods prior to July 10, 2000 have been adjusted for the ratio
change of ordinary shares to ADS's.
The Company has not paid any cash dividends in the two most recent fiscal years
and does not expect to declare or pay cash dividends on the Company's Voting
Common Stock in the near future. The Board of Directors will determine the
extent to which legally available funds will be used to pay dividends. In making
decisions regarding dividends, the Board will exercise its business judgment and
will take into account such matters as results of operations and financial
condition and any then-existing or proposed commitments for the use of available
funds.
See Item 7 for discussion of restrictions impacting the export or import of
capital or that affect the remittance of dividends or other payments to non
resident holders of the Company's equity.
As of April 8, 2002, LSR had 1,565 holders of record of Voting Common Stock and
two holders of record of Non-Voting Common Stock.
Subscription Agreements
On July 17, 2001, Walter Stapfer purchased 100 shares of LSR at a purchase price
of $1.50 per share in a transaction exempt from registration under the
Securities Act.
On October 9, 2001 LSR entered into a subscription agreement with Mr Stapfer
(the "Stapfer Subscription Agreement") pursuant to which Mr Stapfer subscribed
for 99,900 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share (or an aggregate of $149,850) in a transaction exempt from the
registration requirements of the Securities Act. Mr Stapfer purchased those
shares on January 10, 2002.
On October 9, 2001, LSR also entered into a subscription agreement with two
other investors in LSR (the "LSR Investors"), other than Mr Stapfer (the
"Investor Subscription Agreement"), pursuant to which the LSR Investors, other
than Mr Stapfer, subscribed for 900,000 shares of LSR Non-Voting Common Stock
(convertible into shares of LSR Voting Common Stock) at a purchase price of
$1.50 per share (or an aggregate of $1,350,000) in a transaction exempt from the
registration requirements of the Securities Act. The LSR Investors purchased
their shares on January 10, 2002.
LSR has granted the LSR Investors:
o "most favoured nation" demand registration rights, which shall be at least
as favourable as the demand registration rights granted by LSR in the
future to investors in any private placement of shares of LSR Common Stock;
and
o "piggyback" registration rights, which will enable them to require LSR to
register their shares of LSR Voting Common Stock whenever LSR files a
registration statement (other than a registration relating solely to
employee benefit plans or a registration relating solely to a corporate
reorganisation or other transaction on Form S-4 or similar forms that may
be promulgated in the future), under the Securities Act on behalf of itself
or another LSR stockholder.
o LSR has also granted certain LSR Investors one demand registration right,
which will, under certain circumstances, enable them to request that LSR
register their shares of LSR Voting Common Stock for resale into the public
trading market. Such demand and piggyback registration rights shall apply
to any shares of LSR Voting Common Stock issued to the LSR Investors,
issuable upon the conversion of certain of the LSR Investors' shares of LSR
Non-Voting Common Stock into shares of LSR Voting Common Stock. All such
registration rights shall terminate five years after completion of the
first registered public offering by LSR.
The shares of LSR Common Stock to be issued under the Subscription Agreements
are subject to certain restrictions on transfer pursuant to US securities law.
In addition, prior to the exercise of any of the registration rights described
in the preceding paragraph, any shares of LSR Common Stock issuable pursuant to
the Subscription Agreements shall be subject to restrictions on transfer to any
transferee who will hold 5 per cent or more of any class of capital stock of LSR
as a result of such transfer, and who was not a 5 per cent holder prior to such
proposed transfer, without the consent of LSR, which consent may only be
withheld under limited circumstances.
Warrants to purchase shares of LSR Voting Common Stock
On October 9, 2001, on behalf of Huntingdon LSR issued to Stephens Group Inc. a
company which is controlled by the Stephens family of Little Rock, Arkansas,
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. Those warrants are referred to in this
document as the "LSR Warrants". Stephens subsequently transferred the LSR
Warrants to other investors in February 2002 in conjunction with the sale of all
its other interests in the Company. In addition, at the same time, subject to
compliance with the fiduciary duties, the Huntingdon Directors, who now
constitute the entire LSR Board, intend to ask the LSR shareholders at the next
shareholders' meeting to approve the issuance of an additional 410,914 warrants
to FHP, a firm which is controlled by Andrew Baker, LSR's Executive Chairman,
also exercisable at $1.50 per share, and on substantially the same terms as the
LSR Warrants. At the shareholders' meeting, FHP will not be permitted to vote on
this proposal.
Terms of the LSR Warrants. The LSR Warrants are exercisable at any time and will
expire on October 9, 2011. Both the exercise price and the number of shares of
LSR Voting Common Stock that are issuable upon the exercise of the LSR Warrants
are subject to adjustment in the case of certain events, including stock splits,
dividends or distributions, a reclassification, or the reorganisation, merger or
consolidation of LSR. The LSR Warrants and the shares of LSR Voting Common Stock
issuable upon their exercise will be subject to certain restrictions on transfer
pursuant to US securities laws. The holders of the shares of LSR Voting Common
Stock issuable upon the exercise of the LSR Warrants will have the following
registration rights:
o one "Form S-3 demand" registration right, which will, under certain
circumstances, enable them to request that LSR register their shares for
resale into the public trading market after LSR has qualified for
registration under the Securities Act on Form S-3; and
o "piggyback" registration rights, which will enable them to require LSR to
register their shares of LSR Voting Common Stock whenever LSR files a
registration statement, subject to certain exceptions, under the Securities
Act on behalf of itself or another stockholder.
Background and Reasons for Issuing Warrants. The LSR Warrants and the proposed
issuance of warrants to FHP arose out of negotiations regarding financing that
Stephens, FHP and their respective affiliates provided to Huntingdon in late
2000 and early 2001.
Huntingdon entered into a loan agreement with Mr Baker on September 25, 2000,
pursuant to which Mr Baker agreed to lend Huntingdon up to (pound)2,000,000. He
subsequently transferred a $550,000 participation in the loan to FHP. Mr Baker
is a member of FHP.
During January 2001 Stephens and its affiliates acquired loans that other
parties had made to Huntingdon and amended the terms of such loans and in July
2001 made additional loans.
During the course of the negotiations, Mr Baker and Stephens each requested that
Huntingdon issue them warrants to purchase Huntingdon Shares. In the course of
those discussions, the Huntingdon Directors were advised that the issuance of
warrants to Mr Baker, Stephens and their respective affiliates would require
shareholder approval. In March 2001 the Huntingdon Directors adopted resolutions
approving the issuance of warrants to Stephens and FHP, subject to shareholder
approval at Huntingdon's next annual general meeting. Huntingdon did not enter
into agreements with Stephens or FHP to issue these warrants, and it did not
submit the proposal to a shareholder vote. Huntingdon had not held an annual
general meeting since March 2001, and no such meeting was held before the Offer
became wholly unconditional in January 2002.
During the discussions regarding the Offer, both Stephens and Mr Baker requested
that in lieu of the warrants referenced in the Huntingdon Board resolutions, LSR
issue them warrants to purchase shares of LSR Voting Common Stock at the same
price at which the LSR Investors were purchasing their shares pursuant to the
Subscription Agreements. Stephens advised Huntingdon that it was not prepared to
grant the waiver necessary to enable the Offer to become wholly unconditional
without a default arising under Stephens' loan agreement unless LSR issued the
requested warrants to Stephens prior to the commencement of the Offer. After
considering these matters, LSR decided to grant the LSR Warrants to Stephens.
LSR also decided that it would submit a proposal to its shareholders regarding
FHP's request at its next shareholders meeting after the Offer becomes wholly
unconditional.
Private Placement Subscription Agreements
In January and February 2002, LSR entered into a series of subscription
agreements with a number of investors, (the "Private Placement Investors") some
of whom were officers and directors of LSR, under which they agreed to acquire
in a private placement transaction shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. LSR closed the private placement on March 28,
2002, having sold 5,085,334 shares of LSR Voting Common Stock. All such
subscription agreements granted the Private Placement Investors piggyback
registration rights. Two investors (who are not officers or directors of LSR)
were granted one demand registration right each.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with Huntingdon's audited consolidated financial statements and the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations", included elsewhere in this report. Selected
financial data as of December 31, 2001 and for the period from July 19, 2001
(date of inception) to December 31, 2001 for LSR (on a stand alone basis) has
not been presented below. During this period, LSR had no substantive operations.
The LSR stand-alone financial statements are included in "Item 8. Financial
Statements and Supplemental Data".
The selected consolidated financial information as of December 31, 2001 and 2000
and for each of the three years in the period ended December 31, 2001 has been
derived from Huntingdon's audited consolidated financial statements and the
related notes included in this Annual Report on Form 10-K beginning on page 36.
Such financial statements have been prepared in accordance with US GAAP.
The selected consolidated financial information as of December 31, 1999 and 1998
and for the year ended December 31, 1998 have been derived from Huntingdon's
consolidated financial statements which are not included in this Annual Report
on Form 10-K; such financial statements were presented in pounds sterling and
were prepared in accordance with US GAAP.
The selected consolidated financial information as of December 31, 1997 and for
the year then ended has been derived from Huntingdon's audited consolidated
financial statements which are not included in this Annual Report on Form 10-K;
such financial statements were presented in pounds sterling and were prepared in
accordance with UK GAAP with a reconciliation of net income and shareholders'
equity from UK GAAP to US GAAP.
As of and for the year ended December 31
------------- --------------- -------------- ------------- --------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------------
($000 except per share data)
Statement of Operations Data
Revenues 99,206 95,964 94,186 87,196 104,336
Operating loss (3,546) (1,735) (2,482) (34,622) (4,857)
Net loss (8,446) (9,763) (6,605) (38,301) (4,696)
Loss per share
- Basic $(0.03) $(0.03) $(0.02) $(0.22) $(0.04)
- Diluted $(0.03) $(0.03) $(0.02) $(0.22) $(0.04)
Weighted average number of shares
outstanding ('000) 293,421 291,206 291,010 172,200 112,935
Dividends per share - - - - -
Book value per share $(0.01) $0.01 $0.05 $0.13 $0.25
As of and for the year ended December 31
------------- --------------- -------------- ------------- --------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------------
($000)
Balance Sheet Data
Total assets 146,042 146.107 158,970 183,107 184,241
Long term debt 88,123 50,209 50,000 90,853 55,462
Net (liabilities)/assets (3,542) 4,066 14,850 22,144 28,582
Ordinary shares and paid in capital 66,094 65,330 65,242 65,242 31,501
Other Financial Data
Depreciation and amortisation 8,307 9,093 9,675 17,719 9,765
Capital expenditure 3,295 3,648 4,893 4,025 23,872
<FN>
(A) See Item 7 for information relating to exchange rates.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
You should read the following together with the Huntingdon consolidated
financial statements and the related notes included in this Annual Report on
Form 10-K, beginning on page 36. Certain statements in this section are
"forward-looking statements." You should read the information under
"Forward-Looking Statements" later in this section for special information about
our presentation of forward-looking information.
LSR was incorporated on July 19, 2001. Since incorporation, LSR has had no
substantive operations. The LSR stand-alone financial statements are included in
"Item 8. Financial Statements and Supplemental Data". The Company is a leading
CRO which provides an extensive range of pre-clinical and non-clinical services
to the pharmaceutical, agrochemical and industrial chemical industries. The
Company provides those services under contracts which may range from one day to
three years. Income from these contracts is recognised on the basis of work done
and variable costs are matched with such income. Contracts are generally
terminable upon notice by the client with the client being responsible for
reimbursing the Company for the value of work done to the date of cancellation
plus the value of work required to wind down a study on an orderly basis.
The Company's business is characterised by high fixed costs, in particular staff
and facility related costs. Such a high proportion creates favourable conditions
for the Company as excess capacity is utilized but, during periods of declining
revenue, careful planning is required to reduce costs without impairing revenue
generating activities.
RESULTS OF OPERATIONS
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues for the year ended December 31, 2001 at $99.2 million were just over 3%
above the revenues for the year ended December 31, 2000 of $96.0 million,
continuing the improvement shown last year. The underlying increase, after
adjusting for the impact of the movement in exchange rates, was nearly 9%. 2001
saw a 9% growth in orders with the return of client confidence after the
refinancing in January 2001.
Cost of sales for the year ended December 31, 2001 of $84.1 million compared
with $80.7 million for the year ended December 31, 2000, an increase of just
over 4%. Again, after allowing for the impact of the movement in exchange rates,
the underlying increase was approximately 10%. The main reasons for the increase
in costs relate to the increase in business volume, salary increases,
particularly in the UK, to reflect market rates, and recruitment costs
reflecting the shortage of qualified staff in the market place.
Selling and administration costs for the year ended December 31, 2001 at $16.0
million were 6% up on the costs for the year ended December 31, 2000 of $15.1
million. After allowing for the impact of exchange rate movements the underlying
cost increase was 11%. The increase was mainly due to increased sales activity
with additional staff ($350,000); increases in insurance costs of $200,000; and
banking costs of $100,000. Excluding these items, the increase was just over 1%.
In 2001, expenses totalling $1,686,000 were incurred and expensed in connection
with the Exchange Offer. In addition, there was a write off in connection with
foreign exchange dealings resulting from the bankruptcy of an exchange broker
($350,000), special legal and other costs were incurred in connection with the
Animal Rights campaign ($400,000) and unamortised costs of $217,000 relating to
the refinanced bank loan were written off. In 2000, costs incurred in the
refinancing of the Company's bank debt amounting to $1,819,000 were written off.
Such costs were incurred on elements of the refinancing which did not proceed,
or on facility extensions prior to the year end.
Net interest costs for the year ended December 31, 2001 were $6.5 million
compared with $7.2 million for the year ended December 31, 2000. The effect of
exchange rates movements reduced the charge for the year by $400,000, a
reduction in the facility renewal fees once the refinancing had been completed
in January 2001 reduced the charge by a further $600,000. These were offset by
an increase in interest costs of $300,000 resulting from the increase in
borrowings from $85.5 million to $89.0 million.
Other expense of $1.4 million for the year ended December 31, 2001 is
principally the result of foreign exchange remeasurement losses on the Capital
Bonds denominated in US dollars. The functional currency of the financing
subsidiary that holds the bonds is the UK pound sterling. This expense compares
with other expense of $3.5 million for the year ended December 31, 2000. The
decrease relates to the movement in the UK pound sterling to US dollar exchange
rate during 2001 as compared to 2000."
Taxation relief on loss for the year ended December 31, 2001 was $3.0 million
representing relief at 26% compared to $2.7 million representing relief at 22%
in the previous year. A reconciliation between the US Corporation tax rate and
the effective rate of tax relief on losses before taxes for the year ended
December 31, 2001 and December 31, 2000 is shown below.
% of Loss before
income taxes
2001 2000
% %
US statutory rate 40 40
Foreign rate differential (11) (10)
Non deductible foreign exchange loss (3) (4)
Prior year adjustments - (4)
------------ -----------
26 22
------------ -----------
The resultant net loss for the year ended December 31, 2001 was $8.4 million
compared with $9.8 million the previous year. Loss per share for the year ended
December 31, 2001 was $0.03 compared with $0.03 in the year ended December 31,
2000.
Year ended December 31, 2000 compared with the year ended December 31, 1999
Revenues in the year ended December 31, 2000 were $96.0 million, an increase of
2% on revenues of $94.2 million for the year ended December 31, 1999. The
underlying increase, after adjusting for the impact of the movement in exchange
rates was nearly 8%. The recovery in the volume and value of orders placed
following the refinancing in September 1998 which was experienced in 1999, was
maintained in the first three quarters of 2000 and was the reason for the 11%
growth in revenues in the first three quarters of the year. However the decline
in orders in the final quarter led to a fall off in revenues in the final
quarter.
Cost of sales in the year ended December 31, 2000 were $80.7 million, a decrease
of 3% on cost of sales of $82.9 million for the year ended December 31, 1999.
This decrease was due to exchange rate movements, which reduced cost of sales in
the year by $5.4 million. Without these movements cost of sales would have
increased by 3.9%. Increases in costs in the US were in line with the growth in
revenues. However, in the UK cost increases in sterling were higher than those
reflecting revenue growth alone. This was partly due to a change in the mix of
business which required higher animal and sub contract costs. However the main
increase was in labour costs reflecting actions taken to adjust salaries to
allow retention and recruitment of key employees. This program started in 1999
and continued through 2000.
Selling and administrative expenses rose by 4% to $15.1 million for the year
ended December 31, 2000 from $14.6 million in the year ended December 31, 1999.
This growth was due to a build-up of the Company's sales campaign during the
year and a higher proportion of commission based orders.
Other operating expenses in the year ended December 31, 2000 comprised a write
off of costs incurred in the refinancing of the Company's bank debt of $1.8
million. The costs were written off as they were incurred on elements of the
refinancing which did not proceed or on facility extensions prior to the year
end. Other operating income in the year ended December 31, 1999 comprised a
profit of $2.8 million on the sale of the Wilmslow Research Centre, offset by a
loss of $2.0 million to write off assets that were not Year 2000 compliant.
Net interest expense rose by 13% to $7.2 million for the year ended December 31,
2000 from $6.4 million in the year ended December 31, 1999. The effect of
exchange rate movements reduced the charge for the year by $700,000. This was
offset by an increase in both the facility renewal fees of $500,000 and interest
rates of $600,000 whilst the refinancing was being renegotiated, and with lower
cash balances interest receivable reduced by $400,000.
Other expense of $3.5 million for the year ended December 31, 2000 is
principally the result of foreign exchange remeasurement losses on Capital Bonds
denominated in US dollars. The functional currency of the financing subsidiary
that holds the bonds is the UK pound sterling. This expense compares with other
expense of $1.6 million for the year ended December 31, 1999. The increase
relates to the movement in the UK pound sterling to US dollar exchange rate
during 2000 as compared to 1999.
Taxation relief on losses for the year ended December 31, 2000 was $2.7 million
representing relief at 22% compared to $3.8 million representing relief at 36%
for the year ended December 31, 1999. A reconciliation between the US
Corporation tax rate and the effective rate of income tax relief on losses
before income taxes for the year ended December 31, 2000 and December 31, 1999
is shown below:
% of loss before income taxes
2000 1999
% %
US statutory rate 40 40
Effect of non taxable income - 6
Foreign rate differential (10) (9)
Non deductible foreign exchange loss (4) (6)
Effect of reduction in UK tax rate on deferred tax - 5
Prior year adjustments (4) -
---------------- --------------
Effective tax rate 22 36
---------------- --------------
The overall net loss for the year ended December 31, 2000 was $9.8 million
compared to a loss of $6.6 million in the year ended December 31, 1999. The loss
per share for the year ended December 31, 2000 was $0.03 compared to a loss per
share of $0.02 for the year ended December 31, 1999 on shares in issue of
291,206,073 (1999, 291,010,294).
SEGMENT ANALYSIS
The analysis of the Company's revenues and operating loss between segments for
the 3 years ended December 31, 2001 is as follows:
Company 2001 2000 1999
$000 $000 $000
Revenues
UK 75,705 73,035 76,844
US 23,501 22,929 17,342
-------------- ------------ -----------
99,206 95,964 94,186
-------------- ------------ -----------
Operating (loss)/ profit before other operating
(expenses)/income
UK (784) (1,615) (2,853)
US (109) 1,699 (454)
-------------- ------------ -----------
(893) 84 (3,307)
-------------- ------------ -----------
Other operating (expense)/income
UK (2,653) (1,819) 1,125
US - - (300)
-------------- ------------ -----------
(2,653) (1,819) 825
-------------- ------------ -----------
Operating loss
UK (3,437) (3,434) (1,728)
US (109) 1,699 (754)
-------------- ------------ -----------
(3,546) (1,735) (2,482)
-------------- ------------ -----------
The performance of each segment is measured by revenues and by operating
profit/(loss) before other income/expense.
UK
2001 2000 1999
$000 $000 $000
Revenues 75,705 73,035 76,844
Operating loss before other operating
(expenses)/ income (784) (1,615) (2,853)
Revenues increased by 3.6% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. After allowing for the effect of exchange rate
movements the increase was over 9%. The return of client confidence following
the refinancing in January 2001 resulted in a 26% growth in orders (at constant
exchange rates) over the prior year and this was responsible for the growth in
revenues.
The operating loss before other operating (expenses)/income for the year ended
December 31, 2001 was $0.8 million compared to $1.6 million in the year to
December 31, 2000. The increase in revenues reduced the losses, but this was
offset by additional costs. These included salary increases to reflect market
rates; recruitment costs reflecting the shortage of qualified staff in the
market place; increased sales activity with additional staff ($350,000) and a
reduction in exchange gains ($900,000).
Revenues declined by 5% in the year ended December 31, 2000 compared to the year
ended December 31, 1999. After allowing for the effect of exchange rate
movements revenues increased by 1.4%. Order growth (at constant exchange rates)
in this period was 3%.
The operating loss before other operating (expenses)/income for the year ended
December 31, 2000 was $1.6 million compared to $2.9 million in the year ended
December 31, 1999. The main reason for the reduction in the operating loss was
an increase in exchange gains of $1.3 million.
US
2001 2000 1999
$000 $000 $000
Revenues 23,501 22,929 17,342
Operating (loss)/profit before other operating
(expense) (109) 1,699 (454)
Revenues increased by 2.5% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. This reduction in the rate of growth of revenues
was due to a decline in orders after two years of rapid growth. Revenues from
the US's toxicology operations continued to grow, but revenues derived from the
analysis of samples from clinical trials declined with the completion of a
number of major studies.
Operating (loss)/profit before other operating (expense) declined from a profit
of $1.7 million in the year ended December 31, 2000 to a loss of $0.1 million in
the year ended December 31, 2001. Apart from inflationary cost increases,
additional security expenses of $0.5 million were incurred in the year ended
December 31, 2001.
Revenues increased by 32% in the year ended December 31, 2000 compared to the
year ended December 31, 1999. This was driven by a 30% growth in orders.
Operating profit before other operating expense for the year ended December 31,
2000 was $1.7 million, an increase of $2.2 million on the year ended December
31, 1999. The growth in revenues was the principal reason for this increase.
LIQUIDITY AND CAPITAL RESOURCES
On January 20, 2001 the Company's bank loan of $32.9 million ((pound)22.6
million) was refinanced and it is now repayable on June 30, 2006 and interest is
payable quarterly at LIBOR plus 1.75%. At the same time the Company was required
to take all reasonable steps to sell off such of its real estate assets through
sale/leaseback transactions and/or obtaining mortgage financing secured by the
Company's real estate assets to discharge this loan. The loan is secured by
guarantees from LSR, Huntingdon Life Sciences Group plc, Huntingdon Life
Sciences Ltd and Huntingdon Life Sciences Inc., collateralized by all the assets
of these companies. The loan was transferred to another party effective February
11, 2002.
On October 9, 2001, on behalf of Huntingdon LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc., in
January 2001. In accordance with APB 14, the bank loan and warrants were
recorded at their pro rata fair values in relation to the proceeds received on
the date of issuance. As a result, the value of the bank loan and the warrants
were $23,249,000 and $430,000 respectively.
Other finance has been provided by a $2.9 million ((pound)2 million) loan
facility made available on September 25, 2000 by a director, Mr Baker, and a
$2.9 million ((pound)2 million) facility from the Stephens Group Inc. made
available on July 19, 2001 (subsequently transferred to a third party effective
February 11, 2002). Both facilities have been fully drawn down. $550,000 of the
loan from Mr Baker was transferred to and assumed by FHP in March 2001. These
loans from Mr Baker and FHP are repayable on demand although they are
subordinated to the bank debt, they are unsecured and interest is payable
monthly at a rate of 10% per annum. On March 28 2002, $2.1 million of Mr Baker's
loan was converted into 1,400,000 shares of LSR Voting Common Stock and $300,000
of FHP's loan was converted into 200,000 shares of LSR Voting Common Stock, in
each case as part of LSR's private placement of approximately 5.1 million shares
of Voting Common Stock. As a result of such conversions, approximately $260,000
remains payable to Mr Baker and $ 250,000 remains payable to FHP. The former
Stephens facility is repayable on July 19, 2002, and is secured but it is
subordinated to the bank debt. Interest is payable monthly at a rate of 10% per
annum.
The Board intends to ask LSR shareholders at the next shareholders' meeting to
approve the issuance of warrants to purchase up to 410,914 shares of LSR Voting
Common Stock at a purchase price of $1.50 per share. These warrants arose out of
negotiations regarding the provision of the $2,910,800 ((pound)2,000,000) loan
facility made available to the Company on September 25, 2000 by Mr Baker, who
controls FHP. In accordance with APB 14 the loan and warrants were recorded at
their pro rata fair values in relation to the proceeds received. As a result,
the value of the loan and the warrants were $2,660,800 and $250,000
respectively.
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in 2006. These Bonds, totaling $50 million, were issued
in 1991 and remain outstanding as at December 31 2001. They carry interest at a
rate of 7.5% per annum, payable at biannual breaks in March and September. At
the current conversion rate the number of shares of Voting Common Stock to be
issued on conversion and exchange of each unit of US$ 10,000 comprised in a Bond
would be 49 (2000-49). The conversion rate is subject to adjustment in certain
circumstances.
During the year ended December 31, 2001 funds used were $0.9 million, reducing
cash in hand and on short-term deposit from $ 3.3 million at December 31, 2000
to $2.4 million at December 31, 2001. The funds were utilized as follows (in $
millions):
2001 2000 1999
Operating loss before other operating (expense)/income (0.9) (0.1) (3.3)
Depreciation and amortisation 8.3 9.1 9.7
Working capital movement (0.2) (2.7) (6.7)
Interest (6.5) (7.2) (6.4)
Capital expenditure (3.3) (3.6) 1.9
Other operating (expense)/income (2.7) (1.8) 0.4
Loan receipts (net) and share issues 5.0 1.8 (8.7)
Effect of exchange rate changes on cash (0.7) (0.7) (0.6)
--------------
-------------- ------------- --------------
(1.0) (5.2) (13.7)
-------------- ------------- --------------
Capital expenditure in 1999 is net of the proceeds of the sale of the Wilmslow
site of $6.8 million.
Net days sales outstanding (DSOs) at December 31, 2001 were 46 days, up from 36
days at December 31, 2000. Since January 1999 DSOs at the quarter end have
varied from 26 days to 47 days so they are currently at a relatively high level.
Recent experience shows that DSOs have increased during periods of business
expansion and fallen during periods of contraction. Q4 2001 experienced a 5%
revenue increase compared to the prior quarter, whereas Q4 2000 experienced a 4%
revenue decrease compared to the prior quarter. The impact on liquidity from a
one-day change in DSO is approximately $290,000.
On March 28, 2002 LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a per share price of $1.50 per share.
Of the aggregate proceeds of approximately $7.6 million, $4.4 million was in
cash, $2.4 million represented conversion into equity of debt owed to Mr Baker
($2.1 million) and FHP ($0.3 million) and $825,000 was paid with promissory
notes. At December 31, 2001, the Company had a working capital deficiency of
$1,963,000. The Company believes that projected cash flow from operations and
the completion of the private placement described above will satisfy its
contemplated cash requirements for at least the next 12 months.
ORDERS
2001 saw a 9% growth in orders with the return of client confidence after the
refinancing in January 2001.
The uncertainties surrounding the refinancing of the Company's bank debt and the
threats by animal rights campaigners directed at companies and their employees
in our client industries, had resulted in a weakness in orders in the latter
part of 2000. However, the very public support for the Company and its work,
coming from the UK Government and the Pharmaceutical, Biotechnology and Chemical
industries, together with the completion of the refinancing in January 2001 led
to a resumption in order growth in 2001.
The increase in orders was driven by the Company's pharmaceutical business which
was 27% up on 2000. The main growth here was in the UK where the Company's
pharmaceutical business was 41% up on the previous year and this was responsible
for the overall growth of orders in the UK of 26%.
The non pharmaceutical business showed a decline, principally due to the impact
of mergers within the industry. The effect of this was most marked in the US and
meant that business placed at the Princeton laboratory was down after growth of
30% and 13% in 1999 and 2000 respectively.
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The Company operates on a world-wide basis and generally invoices its clients in
the currency of the country in which it operates. Thus, for the most part,
exposure to exchange rate fluctuations is limited as sales are denominated in
the same currency as costs. Trading exposures to currency fluctuations do occur
as a result of certain sales contracts, performed in the UK for US clients,
which are denominated in US dollars and contribute approximately 11% of total
revenues. Management have decided not to hedge against this exposure.
Secondly exchange rate fluctuations have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars.
Finally, the consolidated financial statements of Huntingdon and the stand-alone
financial statements of LSR are denominated in US dollars. Changes in exchange
rates between the UK pounds sterling and the US dollar will affect the
translation of the UK subsidiary's financial results into US dollars for the
purposes of reporting the consolidated financial results. The process by which
each foreign subsidiary's financial results are translated into US dollars is as
follows: income statement accounts are translated at average exchange rates for
the period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical exchange
rates. Translation of the balance sheet in this manner affects the stockholders'
equity account, referred to as the cumulative translation adjustment account.
Management have decided not to hedge against the impact of exposures giving rise
to these translation adjustments as such hedges may impact upon the Company's
cash flow compared to the translation adjustments which do not affect cash flow
in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
YEAR ENDED AT DECEMBER 31 AVERAGE RATE (1)
DECEMBER 31
- ---------------------- ------------------------ -------------------------
1997 0.6075 0.6104
1998 0.6010 0.6034
1999 0.6205 0.6181
2000 0.6694 0.6596
2001 0.6871 0.6943
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On March 25, 2002 the noon buying rate for sterling was $1.00 = (pound)0.7014.
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.
Whilst the UK has not at this time entered the European Monetary Union, the
Company has ascertained that its financial systems are capable of dealing with
Euro denominated transactions.
The following table summarizes the financial instruments denominated in
currencies other than the US dollar held by Huntingdon as of December 31, 2001:
Expected Maturity Date
2002 2003 2004 2005 2006 Thereafter Total FairValue
$000 $000 $000 $000 $000 $000 $000 $000
Cash - Pound Sterling 391 391 391
- Euro 19 19 19
Accounts
receivable - Pound Sterling 10,108 10,108 10,108
- Euro 2,128 2,128 2,128
Debt - Pound Sterling 37,238 37,238 37,238
COMPETITION
Competition in both the pharmaceutical and non-pharmaceutical market segments
ranges from in-house research and development divisions of large pharmaceutical,
agrochemical and industrial chemical companies, who perform their own safety
assessments to contract research organisations like the Company, who provide a
full range of services to the industries and niche suppliers focusing on
specific services or industries.
This competition could have a material adverse effect on the Company's net
revenues and net income, either through in-house research and development
divisions doing more work internally to utilise capacity or through the loss of
studies to other competitors on pricing. As the Company operates on an
international basis, movements in exchange rates, particularly against sterling,
can have a significant impact on its price competitiveness.
INDUSTRY CONSOLIDATION
The process of consolidation within the pharmaceutical industry should
accelerate the move towards outsourcing work to contract research organisations
such as the Company in the longer term as resources are increasingly invested in
in-house facilities for discovery and lead optimization, rather than development
and regulatory safety evaluation. However, in the short term, there is a
negative impact with development pipelines being rationalised and a focus on
integration rather than development. This can have a material adverse impact on
the Company's net revenues and net income.
ANIMAL RIGHTS ACTIVISM
During the past two years animal rights extremists have made threats and
committed acts of violence against the Company, its employees and firms that do
business or are believed to do business with the Company. Such acts have
included physical damage to employees' cars and homes and violent demonstrations
against the Company and firms that are believed to be clients of the Company.
While the Company does not disclose the identity of its clients, the Company
believes that these threats and acts of violence may have a material adverse
affect on its ability to attract business and to hire employees.
INFLATION
While most of the Company's net revenues are earned under fixed price contracts,
the effects of inflation do not generally have a material adverse effect on its
operations or financial condition as only a minority of the contracts have a
duration in excess of one year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The Company considers the following accounting policies to be
critical accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts
which generally range in duration from a few months to two years. Revenue from
these contracts is generally recognized under either the percentage of
completion method of accounting or as services are rendered or products are
delivered. Contracts may contain provisions for renegotiation in the event of
cost overruns due to changes in the level of work scope. Renegotiated amounts
are included in revenue when earned and realization is assured. Provisions for
losses to be incurred on contracts are recognized in full in the period in which
it is determined that a loss will result from performance of the contractual
arrangement. Most service contracts may be terminated for a variety of reasons
by the Company's customers either immediately or upon notice. The contracts
generally require payments to the Company to recover costs incurred, including
costs to wind down the study, and payment of fees earned to date, and in some
cases to provide the Company with a portion of the fees or profits that would
have been earned under the contract had the contract not been terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of milestones or in
accordance with predetermined payment schedules. Unbilled receivables are
billable to customers within one year from the respective balance sheet date.
Fees in advance are recorded for amounts billed to customers for which revenue
has not been recognized at the balance sheet date (such as upfront payments upon
contract authorisation, but prior to the actual commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company's results of
operations.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the dates of the financial
statements and the results of operations during the reporting periods. Although
these estimates are based upon management's best knowledge of current events and
actions, actual results could differ from those estimates.
Taxation
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of
deferred tax assets and liabilities for the estimated future tax consequences of
events attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted rates in effect for the year in which the differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in the statement of operations
in the period in which the enactment date changes. Deferred tax assets and
liabilities are reduced through the establishment of a valuation allowance at
such time as, based on available evidence, it is more likely than not that the
deferred tax assets will not be realized. While the Company has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that the Company
were to determine that it would not be able to realize all or part of its net
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to income in the period such determination was made. Likewise,
should the Company determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 had no
impact on LSR's results of operations, financial position or cash flow.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement applies to intangibles and goodwill acquired after
September 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This Statement is effective for the Company
for the first quarter of the fiscal year ended December 31, 2002. As of December
31, 2001 the Company had no goodwill or intangible assets on its balance sheet.
The adoption of this standard will have no impact on the Company's results of
operations, financial position or cash flows.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS 143") SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When a liability is initially recorded, the entity capitalizes a cost
by increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The Company does not believe
that the adoption of this statement will have a material impact on its results
of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
These new rules on asset impairment supersede SFAS Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and portions of APB Opinion 30, "Reporting the Results of
Operations". This statement provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that would have
to be met to classify an asset as held-for-sale. Classification as held-for-sale
is an important distinction since such assets are not depreciated and are stated
at the lower of fair value or carrying amount. This statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company does not believe that
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
FORWARD LOOKING STATEMENTS
Statements in this management's discussion and analysis of financial condition
and results of operations, as well as in certain other parts of this Annual
Report on Form 10-K (as well as information included in oral statements or other
written statements made or to be made by the Company) that look forward in time,
are forward looking statements made pursuant to the safe harbor provisions of
the Private Litigation Reform Act of 1995. Forward looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance, expectations, predictions, and assumptions and other statements
which are other than statements of historical facts. Although the Company
believes such forward-looking statements are reasonable, it can give no
assurance that any forward-looking statements will prove to be correct. Such
forward-looking statements are subject to, and are qualified by, known and
unknown risks, uncertainties and other factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by those statements. These risks, uncertainties and other factors include, but
are not limited to the Company's ability to estimate the impact of competition
and of industry consolidation and risks, uncertainties and other factors set
forth in the Company's filings with the Securities and Exchange Commission,
including without limitation this annual report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
INTEREST RATES
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has a cash flow
exposure on its bank loans due to its variable LIBOR pricing. In the 12 months
ended December 31, 2001 a 1% change in LIBOR would have resulted in a
fluctuation in interest expense of approximately $325,000.
FOREIGN EXCHANGE RISK
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations, Exchange Rate Fluctuations and Exchange Controls.
For disclosure of other risks see Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Life Sciences Research, Inc.
Report of Deloitte & Touche - Report of Independent Auditors 27
Balance Sheet - December 31, 2001 28
Statement of Operations-
Period from July 19, 2001 (date of inception)
to December 31, 2001 29
Statement of Shareholder's Deficit -
Period from July 19, 2001 (date of inception)
to December 31, 2001 30
Statement of Cash Flows - Period from July 19, 2001
(date of inception) to December 31, 2001 31
Notes to Financial Statements 32
Huntingdon Life Sciences Group plc
Report of Deloitte & Touche - Report of Independent Auditors 35
Consolidated Balance Sheets - December 31, 2001 and 2000 36
Consolidated Statements of Operations and
Comprehensive Loss - Years ended December 31, 2001,
2000 and 1999 37
Consolidated Statements of Changes in Shareholders'
(Deficit)/Equity - Years ended December 31, 2001,
2000 and 1999 38
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 39
Notes to Consolidated Financial Statements 40
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Life Sciences Research, Inc.
We have audited the accompanying balance sheet of Life Sciences Research, Inc.
(the "Company") as of December 31, 2001 and the related statements of
operations, shareholder's deficit and cash flows for the period from July 19,
2001 (date of inception) to December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
aspects, the financial position of the Company as of December 31, 2001 and the
result of its operations and its cash flows for the period from July 19, 2001
(date of inception) to December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche
Chartered Accountants
London
England
April 12, 2002
Life Sciences Research, Inc.
Balance Sheet
December 31, 2001
ASSETS $
Current assets:
Cash 150
Prepaid expenses 217,305
--------------
Total current assets 217,455
--------------
--------------
Total assets 217,455
--------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable 1,399,000
--------------
Total current liabilities 1,399,000
--------------
--------------
Total liabilities 1,399,000
Shareholder's deficit
Voting Common Stock, $0.01 par value
50,000,000 shares authorised and 100 shares issued 1
Paid-in capital 430,149
Accumulated deficit (1,611,695)
--------------
Total shareholder's deficit (1,181,545)
--------------
--------------
Total liabilities and shareholder's deficit (217,455)
--------------
--------------
The accompanying notes are an integral part of these financial statements.
Life Sciences Research, Inc.
Statement of Operations
Period from July 19, 2001 (date of inception) to December 31, 2001
$
Other operating expenses 1,611,695
----------------
Net Loss 1,611,695
----------------
The accompanying notes are an integral part of these financial statements.
Life Sciences Research, Inc.
Statement of Shareholders' Deficit
Period from July 19, 2001 (date of inception) to December 31, 2001
Common Stock Paid in Accumulated Total
$ Capital Deficit
$ $ $
Issuance of stock 1 149 - 150
Issuance of warrants (note 4) 430,000 - 430,000
Net loss - - (1,611,695) (1,611,695)
------------- ------------- ------------------ ---------------
Balance, December 31, 2001 1 430,149 (1,611,695) (1,181,545)
------------- ------------- ------------------ ---------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
Life Sciences Research, Inc.
Statement of Cash Flows
Period from July 19, 2001 (date of inception) to December 31, 2001
Cash flows from operating activities: $
Net loss (1,611,695)
Adjustments to reconcile net loss to net
cash used in operating activities
Issuance of warrants (note 4) 430,000
Prepaid expenses (217,305)
Accounts payable 1,399,000
----------------
Net cash used in operating activities -
Cash flows from financing activities:
Proceeds from issue of common stock 150
----------------
Net cash provided by financing activities 150
Net increase in cash 150
Cash, beginning of period -
Cash, end of period 150
----------------
The accompanying notes are an integral part of these financial statements.
Life Sciences Research, Inc.
Notes to Financial Statements
Period from July 19, 2001 to December 31, 2001
1. Organisation
Life Sciences Research, Inc. ("LSR") was incorporated in Maryland on July 19,
2001 solely for the purpose of making an offer (the "Offer") to acquire the
whole of the issued and outstanding ordinary share capital of Huntingdon Life
Sciences Group plc ("Huntingdon"), a UK based group. The Offer was made on
October 16, 2001 and was declared unconditional on January 10, 2002, at which
time LSR acquired approximately 89% of the outstanding ordinary shares of
Huntingdon in exchange for approximately 5.3 million shares of LSR Voting Common
Stock. The subsequent offer period expired on February 7, 2002, by which time
approximately 92% of the outstanding ordinary shares had been offered for
exchange. The Company completed its compulsory purchase under UK law of the
remaining outstanding ordinary shares of Huntingdon on March 26, 2002 at which
time Huntingdon became a wholly owned subsidiary of LSR, in exchange for a total
of approximately 5.9 million shares of LSR Voting Common Stock (the "Exchange
Offer").
Since incorporation, LSR has had no operations and has incurred expenses
relating principally to the Offer and the issuance of warrants. The reasons for
the Offer are to enable the proposed investors in LSR (the "LSR Investors") to
invest in Huntingdon on terms they consider to be advantageous and to allow the
ownership of Huntingdon to be re-domiciled to the United States.
Huntingdon provides pre-clinical and non-clinical biological safety evaluation
research services to most of the world's leading pharmaceutical, biotechnology,
agrochemical and industrial chemical companies. The purpose of this safety
evaluation is to identify risks to humans, animals or the environment, resulting
from the use or manufacture of a wide range of chemicals which are essential
components of Huntingdon's clients' products. Huntingdon's services are designed
to meet the regulatory requirements of governments around the world.
2. Basis of preparation
Exchange Offer and private offering costs: As noted above, from July 19, 2001
(date of inception) to December 31, 2001, LSR had no operations of its own, but
nevertheless incurred expenses relating to the Offer and has also incurred
offering costs associated with a private offering of securities that occured in
2002 (see note 6, Subsequent Events). The expenses relating to the Offer have
been expensed as incurred and as the costs of the private offering will be paid
from the proceeds of that offering, the costs have been capitalised as of
December 31, 2001 as prepaid expenses and will be netted against the proceeds of
the private offering upon completion.
Income tax: Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" ("SFAS 109"), the provision for income taxes
includes US taxes currently payable and deferred income taxes arising as a
result of temporary differences between financial and tax reporting calculated
in accordance with the comprehensive liability method of accounting. Under this
method, a company is required to recognise a deferred tax asset or liability for
all temporary differences and operating losses. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of changes in tax rates
is recognised in income in the period that the enactment date changes. Deferred
tax assets and liabilities are reduced through the establishment of a valuation
allowance where, based on available evidence, it is more likely than not that
the deferred tax assets will not be realised. As of December 31, 2001 a
valuation allowance has been recorded to reduce the deferred tax asset balance
to zero.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.
3. Other operating expenses
Other operating expenses represent fees for legal services relating to the Offer
by LSR for securities of Huntingdon. LSR is solely liable for such fees;
Huntingdon did not issue any guarantee to fund such expenses.
4. Share capital
LSR's authorized share capital is comprised of (a) 50,000,000 shares of voting
common stock, par value $.01 per share ("Voting Common Stock"); (b) 5,000,000
shares of non-voting common stock, par value $.01 per share ("Non-Voting Common
Stock"); and (c) 5,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"). The holders of shares of Non-Voting Common Stock may, on at
least 75 days' notice, exchange all or any portion of their shares of Non-Voting
Common Stock for shares of Voting Common Stock, provided that such exchange does
not result in any person becoming the beneficial owner of more than 5% of the
shares of Voting Common Stock.
On July 17, 2001, Mr. Stapfer, a director of LSR, purchased 100 shares of LSR at
a purchase price of $1.50 per share.
As of December 31, 2001, the issued share capital of LSR comprised of 100 shares
of Voting Common Stock.
Subscription Agreements
On October 9, 2001 LSR entered into a subscription agreement with Mr. Stapfer
(the "Stapfer Subscription Agreement") pursuant to which Mr. Stapfer agreed to
purchase 99,900 shares of LSR Voting Common Stock at a purchase price of $1.50
per share (or an aggregate of $149,850).
On October 9, 2001, LSR also entered into a subscription agreement with two
other investors in LSR, pursuant to which the investors agreed to purchase
900,000 shares of LSR Non-Voting Common Stock (convertible into shares of LSR
Voting Common Stock) at a purchase price of $1.50 per share (or an aggregate of
$1,350,000).
Warrants issued and to be issued by LSR
On October 9, 2001, LSR issued to Stephens Group Inc., a related party, warrants
to purchase up to 704,425 shares of LSR Voting Common Stock at a purchase price
of $1.50 per share. These warrants arose out of negotiations regarding the
refinancing of Huntingdon's bank loan by the Stephens Group Inc., in January
2001. LSR has recognized the fair value of the warrants issued as an expense in
the current period. The fair value of the warrants was estimated using the
Black-Scholes pricing model.
The Board intends to ask LSR shareholders at the next shareholders' meeting to
approve the issuance of additional warrants to purchase up to 410,914 shares of
LSR Voting Common Stock at a purchase price of $1.50 per share to FHP, a related
party. These warrants arose out of negotiations regarding the provision of a
loan facility made available to Huntingdon on September 25, 2000 by Mr Baker,
who controls FHP.
The warrants are exercisable at any time on or after the date that the Offer
becomes wholly unconditional and will expire on the tenth anniversary of that
date. Both the exercise price and the number of shares of LSR Voting Common
Stock that are issuable upon the exercise of the LSR Warrants are subject to
adjustment in the case of certain events, including stock splits, dividends or
distributions, a reclassification, or the reorganisation, merger or
consolidation of LSR.
5. LSR 2001 Equity Incentive Plan
The LSR 2001 Equity Incentive Plan (the "Plan") was adopted on October 5, 2001.
Under the Plan, stock options and other stock based awards can be granted as a
means to attract, retain and motivate key personnel. The number of shares of LSR
Voting Common Stock that may be subject to outstanding awards granted under the
Plan may not exceed 20 per cent of the aggregate number of shares of LSR Voting
Common Stock outstanding. No awards were granted during 2001 pursuant to the
Plan.
6. Subsequent events
As described in note 1, the Offer was declared unconditional on January 10,
2002, at which time LSR acquired approximately 89% of the outstanding ordinary
shares of Huntingdon in exchange for approximately 5.3 million shares of LSR
Voting Common Stock. The subsequent offer period expired on February 7, 2002, by
which time approximately 92% of the outstanding ordinary shares had been offered
for exchange. The Company completed its compulsory purchase under UK law of the
remaining outstanding ordinary shares of Huntingdon on March 26, 2002 at which
time Huntingdon became a wholly owned subsidiary of LSR, in exchange for a total
of approximately 5.9 million shares of LSR Voting Common Stock Exchange Offer.
Under accounting principles generally accepted in the United States ("US GAAP"),
the company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly
the Exchange Offer will be accounted for as a 'reverse acquisition' for
financial reporting purposes. The reverse acquisition is deemed a capital
transaction and the net assets of Huntingdon (the accounting acquirer) will be
carried forward to LSR (the legal acquirer and the reporting entity) at their
carrying value before the combination. Although Huntingdon is deemed to be the
acquiring corporation for financial accounting and reporting purposes, the legal
status of LSR as the surviving corporation does not change. The relevant
acquisition process utilizes the capital structure of LSR and the assets and
liabilities of Huntingdon are recorded at historical cost. Huntingdon will be
the operating entity for financial reporting purposes and future financial
statements of LSR will represent Huntingdon's financial position and results of
operations.
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock to Mr
Stapfer, a Director of LSR, and 900,000 shares of Non-Voting Common Stock
(convertible into shares of LSR Voting Common Stock) to two other investors, at
a purchase price of $1.50 per share (or an aggregate of $1,499,850).
On March 28, 2002 LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a per share price of $1.50 per share.
Of the aggregate proceeds of approximately $7.6 million, $4.4 million was in
cash, $2.4 million represented the conversion into LSR equity of debt owed by
Huntingdon to Mr Baker ($2.1 million) and FHP ($0.3 million) and $825,000 was
paid with promissory notes. The $2.1 million of Mr Baker's loan was converted
into 1,400,000 shares of LSR Voting Common Stock and $300,000 of FHP's loan was
converted into 200,000 shares of LSR Voting Common Stock. As a result of such
conversions, approximately $260,000 remains payable by Huntingdon to Mr Baker
and $250,000 remains payable to FHP.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Huntingdon Life Sciences Group plc
We have audited the accompanying consolidated balance sheets of Huntingdon Life
Sciences Group plc and subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations and comprehensive loss,
shareholders' (deficit)/equity and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of December 31,
2001 and 2000 and the results of their operations and their cash flows for the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche
Chartered Accountants
London
England
April 12, 2002
Huntingdon Life Sciences Group plc. and subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
$000 $000
ASSETS
Current assets:
Cash and cash equivalents 2,240 3,286
Accounts receivable, net of allowance
for uncollectible amounts of $164,000 (2000, $86,000) 18,257 16,454
Unbilled receivables 13,920 8,866
Inventories 1,275 1,354
Prepaid expenses and other 2,560 2,002
Deferred income taxes (note 5) 73 493
------------- --------------
Total current assets 38,325 32,455
------------- --------------
Property and equipment, net (note 4) 90,353 97,660
Investments 202 230
Unamortised capital bonds issue costs 691 872
Deferred income taxes (note 5) 16,471 14,890
------------- --------------
Total assets 146,042 146,107
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,500 5,941
Accrued payroll and other benefits 2,323 1,591
Accrued expenses and other liabilities 10,336 6,602
Fees invoiced in advance 17,722 16,221
Short-term debt (note 6) 158 32,325
Related party loans (note 6) - 2,989
------------- --------------
Total current liabilities 39,039 65,669
-------------- -------------
Long-term debt (note 6) 59,302 50,209
Related party loans (note 6) 28,821 -
Other long-term liabilities (note 7) 174 1,817
Deferred income taxes (note 5) 22,248 24,346
------------- --------------
Total liabilities 149,584 142,041
Commitments and contingencies (note 8)
Shareholders (deficit)/equity (note 9)
Authorised Shareholders' Equity, 400,000,000 (2000: 400,000,000)
five pence Ordinary Shares.
Issued and outstanding 293,510,294 (2000: 292,184,962) 24,114 24,030
five pence Ordinary Shares
Paid-in capital 41,980 41,300
Currency translation adjustment (4,360) (4,434)
Accumulated deficit (65,276) (56,830)
------------ ------------
Total shareholders' (deficit)/equity (3,542) 4,066
------------ ------------
------------ ------------
Total liabilities and shareholders' (deficit)/equity 146,042 146,107
------------ ------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Huntingdon Life Sciences Group plc and subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
Year Ended December 31,
2001 2000 1999
$000 $000 $000
Revenues 99,206 95,964 94,186
Cost of sales (84,133) (80,740) (82,890)
------------------- ----------------- ---------------
Gross profit 15,073 15,224 11,296
Selling and administrative expenses (15,966) (15,140) (14,603)
Other operating (expense)/income (note 12) (2,653) (1,819) 825
------------------- ----------------- ---------------
Operating loss (3,546) (1,735) (2,482)
Interest income 104 181 571
Interest expense (6,614) (7,385) (6,934)
Other expense (1,386) (3,544) (1,550)
------------------- ----------------- ---------------
Loss before income taxes (11,442) (12,483) (10,395)
Income tax benefit (note 5) 2,996 2,720 3,790
------------------- ----------------- ---------------
Net loss for the year (8,446) (9,763) (6,605)
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments 74 (1,109) (689)
------------------- ----------------- ---------------
Total comprehensive loss for the year (8,372) (10,872) (7,294)
------------------- ----------------- ---------------
------------------- ----------------- ---------------
Loss per share
-basic $(0.03) $(0.03) $(0.02)
-diluted $(0.03) $(0.03) $(0.02)
Weighted average number of shares outstanding
-basic 293,421,084 291,206,073 291,010,294
-diluted 293,421,084 291,206,073 291,010,294
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Huntingdon Life Sciences Group plc. and subsidiaries
Consolidated Statements of Changes in Shareholders' (Deficit)/Equity
Ordinary Ordinary AdditionalPaidAccumulated Accumulated Total
Shares Shares in Deficit Other
Capital Comprehensive
(Loss)/Income
(Cumulative
Translation
Adjustments)
000 $000 $000 $000 $000 $000
Balance, December 31, 1998 291,010 23,942 41,300 (40,462) (2,636) 22,144
Net loss for the year - - - (6,605) - (6,605)
Cumulative translation adjustment - - - - (689) (689)
-------------------------------------------------------------------------------
Balance, December 31, 1999 291,010 23,942 41,300 (47,067) (3,325) 14,850
Issue of shares 1,175 88 - - - 88
Net loss for the year - - - (9,763) - (9,763)
Cumulative translation adjustments - - - - (1,109) (1,109)
-------------------------------------------------------------------------------
Balance, December 31, 2000 292,185 24,030 41,300 (56,830) (4,434) 4,066
Issues of shares 1,325 84 - - - 84
Issue of warrants (note 6) - - 680 - - 680
Net loss for the year - - - (8,446) - (8,446)
Cumulative translation adjustments - - - - 74 74
-------------------------------------------------------------------------------
Balance, December 31, 2001 293,510 24,114 41,980 (65,276) (4,360) (3,542)
-------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Huntingdon Life Sciences Group plc. and subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
2001 2000 1999
$000 $000 $000
Cash flows from operating activities:
Net loss (8,446) (9,763) (6,605)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation and amortisation 8,307 9,093 9,675
Foreign exchange translation loss on Capital Bonds 1,272 3,713 1,572
Deferred income taxes (2,996) (2,720) (3,790)
Provision for losses on accounts receivable 80 108 97
Profit on sale of property, plant and equipment - - (2,843)
Asset write down - - 2,018
Amortisation of capital bonds issue costs 157 163 175
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (8,112) (2,909) (5,316)
Inventories 44 (157) 541
Accounts payable, accrued expenses and other liabilities 5,732 (2,479) (3,484)
Fees invoiced in advance 1,898 2,337 1,581
------------ ------------ ------------
Net cash used in operating activities (2,064) (2,614) (6,379)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,295) (3,648) (4,893)
Proceeds from sale of property, plant and equipment - - 6,818
------------ ------------ ------------
Net cash (used in)/ provided by investing activities (3,295) (3,648) 1,925
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issue of ordinary shares 84 88 -
Proceeds from issue of warrants 680 - -
Proceeds from long-term borrowings 4,321 1,728 -
Repayments of long-term borrowings (93) - (8,656)
------------ ------------ ------------
Net cash provided by/(used in) financing activities 4,992 1,816 (8,656)
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (679) (743) (599)
------------ ------------ ------------
Decrease in cash and cash equivalents (1,046) (5,189) (13,709)
Cash and cash equivalents at beginning of year 3,286 8,475 22,184
------------ ------------ ------------
Cash and cash equivalents at end of year 2,240 3,286 8,475
------------ ------------ ------------
------------ ------------ ------------
Supplementary disclosures:
Interest paid (6,267) (6,797) (6,726)
Income taxes received - - 45
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Huntingdon Life Sciences Group plc. and subsidiaries
Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999
1. The Company and its Operations
Huntingdon Life Sciences Group plc ("Huntingdon") and subsidiaries
(collectively, the "Company") is a leading Contract Research Organisation,
offering world-wide pre-clinical and non-clinical testing for biological safety
evaluation research services to pharmaceutical, biotechnology, agrochemical and
industrial chemical companies. The Company serves the rapidly evolving
regulatory and commercial requirements to perform safety evaluations on new
pharmaceutical compounds and chemical compounds contained within the products
that man uses, eats, and is otherwise exposed to. In addition, it tests the
effect of such compounds on the environment and also performs work on assessing
the safety and efficacy of veterinary products. As discussed in note 14, on
October 16, 2001, Life Sciences Research Inc. ("LSR") made an offer (the
"Exchange Offer") to acquire all of the outstanding ordinary shares of
Huntingdon.
At December 31, 2001, the Company had a working capital deficiency of
$1,963,000. The Company believes that projected cash flow from operations and
the completion of the private placement described in note 14 will satisfy its
contemplated cash requirements for at least the next 12 months.
2. Basis of Financial Statements
These financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America ("US GAAP"). These US GAAP
statements are prepared solely for the purposes of preparing the Annual Report
on Form 10-K.
Considering, inter alia, that the Company has significant operations and
activities in the US, the Company has changed its reporting currency into the
United States dollar (US$ or $) from pounds sterling ("(pound)"); prior year
financial statements have been recast into the US$ in accordance with the
standards set forth in Statement of Financial Accounting Standards ("SFAS"), No.
52 "Foreign Currency Translation".
3. Summary of Significant Accounting Policies
A summary of the principal accounting policies, all of which have been applied
consistently throughout the year ended December 31, 2001, and the preceding
periods presented, is set out below:
Basis of consolidation
The consolidated financial statements incorporate the accounts of Huntingdon and
each of its subsidiaries. The results of subsidiaries acquired or disposed of
during any period are included in the Consolidated Statement of Operations from
or to, the date on which control passed. Intercompany balances and transactions
have been eliminated on consolidation.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with an original
maturity date of three months or less at the date of purchase and consist
principally of amounts temporarily invested in money market funds.
Inventories
Inventories are valued at the lower of cost, on a FIFO basis, or net realisable
value. They comprise materials and supplies.
Impairment of long-lived assets
In accordance with SFAS No.121, "Accounting for the Impairment of the Long Lived
Assets and for Long Lived Assets to be Disposed Of", long lived assets and
certain identifiable intangibles held or used by a company are required to be
reviewed whenever events or changes in circumstances indicate that carrying
amount of an asset may not be recoverable. In performing the review of
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the undiscounted
future cash flow is less than the carrying amount of the asset, the asset is
deemed impaired. The amount of the impairment is measured as the difference
between the carrying value and the fair value of the asset. Generally long lived
assets and certain identifiable intangibles to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
Depreciation
Property and equipment, stated at cost, is depreciated over the estimated useful
lives of the assets on a straight-line basis. Estimated useful lives are as
follows:
Freehold buildings and facilities 15 - 50 years
Plant and equipment 5 - 15 years
Vehicles 5 years
Computer software 5 years
Goodwill arising on consolidation
Goodwill, being the excess of the purchase consideration for subsidiary
companies acquired over the fair market values ascribed to their identifiable
net assets at the date of acquisition, is amortized over its expected useful
life. In subsequent years, goodwill carried forward is assessed based on its
fair value and any permanent impairment is written-off at the time it is
identified.
All goodwill has been fully amortised as of December 31, 2001 and December 31,
2000.
Taxation
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of
deferred tax assets and liabilities for the estimated future tax consequences of
events attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted rates in effect for the year in which the differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in the statement of operations
in the period in which the enactment date changes. Deferred tax assets and
liabilities are reduced through the establishment of a valuation allowance at
such time as, based on available evidence, it is more likely than not that the
deferred tax assets will not be realized.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts
which generally range in duration from a few months to two years. Revenue from
these contracts is generally recognized under either the percentage of
completion method of accounting or as services are rendered or products are
delivered. Contracts may contain provisions for renegotiation in the event of
cost overruns due to changes in the level of work scope. Renegotiated amounts
are included in revenue when earned and realization is assured. Provisions for
losses to be incurred on contracts are recognized in full in the period in which
it is determined that a loss will result from performance of the contractual
arrangement. Most service contracts may be terminated for a variety of reasons
by the Company's customers either immediately or upon notice. The contracts
generally require payments to the Company to recover costs incurred, including
costs to wind down the study, and payment of fees earned to date, and in some
cases to provide the Company with a portion of the fees or profits that would
have been earned under the contract had the contract not been terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of milestones or in
accordance with predetermined payment schedules. Unbilled receivables are
billable to customers within one year from the respective balance sheet date.
Fees in advance are recorded for amounts billed to customers for which revenue
has not been recognized at the balance sheet date (such as upfront payments upon
contract authorisation, but prior to the actual commencement of the study).
Contracts
Profit on contracts, irrespective of length, is recognised as the work is
carried out. The profit is calculated to reflect the proportion of the work
performed, by recording turnover and related costs as contract activity
progresses. Turnover is calculated as that proportion of total contract value
which costs incurred to date bear to total expected costs for that contract.
Full provision is made for losses on contracts when they are first foreseen.
Foreign currencies
Transactions in currencies other than the functional currency of the entity are
recorded at the rates of exchange prevailing at the date of the transaction.
Monetary assets and liabilities in currencies other than the functional currency
are translated at the rates of exchange prevailing at the balance sheet date and
the related transaction gains and losses are reported in the statements of
operations. Certain intercompany loans are determined to be of a long-term
investment nature. The Company records transaction gains and losses from
remeasuring such loans as a component of other comprehensive income.
Upon consolidation, the results of operations of subsidiaries and associates
whose functional currency is other than the US dollar are translated into US
dollars at the average exchange rate and assets and liabilities are translated
at year-end exchange rates. Translation adjustments are presented as a separate
component of other comprehensive income in the financial statements and are
included in net earnings only upon sale or liquidation of the underlying foreign
subsidiary or associated company.
Leased assets
Assets held under the terms of capital leases are included in property and
equipment and are depreciated on a straight-line basis over the lesser of the
useful life of the asset or the term of the lease. Obligations for future lease
payments, less attributable finance charges are shown within liabilities and are
analysed between amounts falling due within and after one year. Operating lease
rentals are charged to the Consolidated Statement of Operations as incurred.
Pension costs
The Company has a defined benefit pension plan and two defined contribution
plans. One of the defined contribution plans covers all employees in the US; the
other, those employees in the UK not eligible to join the defined benefit plan.
The defined benefit pension plan provides benefits to employees based on their
final pensionable salary. The pension cost of the plan is accounted for in
accordance with SFAS No. 87, "Employers' Accounting For Pensions". Pension
information is presented in accordance with SFAS No. 132, "Employers'
Disclosures About Pensions And Other Post Retirement Benefits".
Costs of raising long-term debt
The costs of raising long-term financing are capitalised as an asset and are
amortised, using the effective interest method, over the term of the loan.
Convertible debt is reported as a liability unless conversion actually occurred.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the dates of the financial
statements and the results of operations during the reporting periods. Although
these estimates are based upon management's best knowledge of current events and
actions, actual results could differ from those estimates.
Loss per share
Loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of shares outstanding during
the year. The computation of diluted loss per share is similar to the
computation of basic loss per share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued. Diluted loss per share
reflects the potential dilution that could occur if dilutive securities and
other contracts to issue ordinary shares were exercised or converted into
ordinary shares or resulted in the issuance of ordinary shares that then shared
in the losses of the Company.
Segment analysis
The Company's operations have been aggregated into a single reportable segment,
contract research, which operates in two geographical areas, the UK and the US.
The Company's operating locations have similar economic characteristics,
production processes and types of customers and provide similar services.
Stock-based compensation
The Company accounts for its stock option and stock-based compensation plans
using the intrinsic-value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting For Stock Issued To Employees" ("APB 25").
Accordingly, the Company computes compensation costs for each employee stock
option granted as the amount by which the estimated fair value of the Company's
common voting stock on the date of the grant exceeds the amount the employee
must pay to acquire the shares. As required by SFAS No. 123, "Accounting For
Stock-Based Compensation" ("SFAS 123"), the Company has included, in Note 9, the
required SFAS 123 pro forma disclosures of net loss and loss per share as if the
fair value-based method of accounting had been applied.
Reclassifications
Certain reclassifications have been made to the prior periods to conform to the
current period presentation.
New accounting standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." ("SFAS 141"). SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 had no
impact on LSR's results of operations, financial position or cash flows.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement applies to intangibles and goodwill acquired after
September 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however these assets will be reviewed
for impairment on a periodic basis. This Statement is effective for LSR for the
first quarter of the fiscal year ended December 31, 2002. As of December 31, LSR
had no goodwill or intangible assets on its balance sheet. The adoption of this
statement will have no impact on LSR's results of operations, financial position
or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When a liability is initially recorded, the entity capitalizes a cost
by increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. LSR does not believe that the
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived" Assets. This statement is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. These new rules on asset impairment supersede FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and portions of APB Opinion 30, "Reporting the Results
of Operations". This statement provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that would have
to be met to classify an asset as held-for-sale. Classification as held-for-sale
is an important distinction since such assets are not depreciated and are stated
at the lower of fair value or carrying amount. This statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. Huntingdon does not believe that
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
4. Property and Equipment
Property and equipment as of December 31, 2001 and 2000 consists of the
following:
2001 2000
$000 $000
Property and equipment at cost:
Freehold property 95,967 95,346
Plant equipment and vehicles 87,518 88,308
Assets in the course of construction 283 1,090
------------------- ------------------
183,768 184,744
Less: Accumulated depreciation and amortisation (93,415) (87,084)
------------------- ------------------
Property and equipment, net 90,353 97,660
------------------- ------------------
Depreciation and amortisation expenses aggregated $8,307,000, $9,093,000, and
$9,675,000 for 2001, 2000 and 1999 respectively.
The net book value of assets held under capital leases and included above under
plant, equipment and vehicles is as follows:
Cost Depreciation Net book
value
$000 $000 $000
At December 31, 2001 514 198 316
At December 31, 2000 484 120 364
5. Income taxes
The components of loss before taxes and the related benefit for tax for the
years ended December 31 are as follows:
(Loss)/profit before taxes 2001 2000 1999
$000 $000 $000
United Kingdom (11,036) (14,182) (9,700)
United States (406) 1,699 (695)
------------- ------------- -------------
(11,442) (12,483) (10,395)
------------- ------------- -------------
The benefit for income taxes by location of the 2001 2000 1999
taxing jurisdiction for the years ended December $000 $000 $000
31, consisted of the following:
UK corporation tax calculated at 30% for all periods
presented - - 45
Deferred taxation - United Kingdom 2,886 3,108 3,639
- United States 110 (388) 106
------------- ------------- -------------
2,996 2,720 3,790
------------- ------------- -------------
The differences between the benefit for income taxes and income taxes computed
using the US corporation tax rate for the years ended December 31 are as
follows:
% of Loss before income taxes
2001 2000 1999
% % %
US statutory rate 40 40 40
Effect of non-taxable income - - 6
Foreign rate differential (11) (10) (9)
Non-deductible foreign exchange loss (3) (4) (6)
Effect of reduction in UK tax rate on deferred tax - - 5
Prior year adjustments - (4) -
----------- ---------- ----------
Effective tax rate 26 22 36
----------- ---------- ----------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31 are as follows:
2001 2000
$000 $000
Current deferred tax assets
Accrued liabilities 73 493
------------ -----------
73 493
------------ -----------
Non current deferred tax assets
Net operating losses 16,471 14,890
Capital losses 12,411 12,411
Valuation allowance (12,411) (12,411)
------------ -----------
Net non-current deferred tax assets 16,471 14,890
------------ -----------
------------ -----------
Net deferred tax assets 16,544 15,383
------------ -----------
Non current deferred tax liabilities
Property and equipment 22,248 24,346
------------ -----------
Deferred tax liabilities 22,248 24,346
------------ -----------
------------ -----------
------------ -----------
------------ -----------
Net deferred tax liabilities 5,704 8,963
------------ -----------
Of the gross amount of net operating losses, $41,377,000 have no expiry date,
$290,000 expire in 2011, $3,955,000 expire in 2012, $6,162,000 expire in 2013,
$522,000 expire in 2019 and $400,000 in 2021.
The Company has not provided a valuation allowance on the net operating loss
carry forwards because it believes that it is more likely than not that those
amounts will be realized through taxable income from future operations.
A valuation allowance has been recorded for the total benefit of capital losses
incurred in prior years as the Company does not anticipate that the benefit will
be realized in the foreseeable future through the recognition of capital gains.
6. Short and Long-Term Debt
2001 2000
$000 $000
Bank overdrafts and loans - short-term:
Bank loan - 30,750
Capital leases 158 81
Other loans - 1,494
-------------- -------------
158 32,325
Related party loans - 2,989
-------------- -------------
158 35,314
-------------- -------------
Loans - long-term:
Bank loans 9,192 -
Capital leases 110 209
Convertible Capital Bonds 50,000 50,000
-------------- -------------
59,302 50,209
Related party loans 28,821 -
-------------- -------------
-------------- -------------
88,123 50,209
-------------- -------------
The bank loan outstanding at December 31, 2000 was refinanced on January 20,
2001. Interest on this loan was payable quarterly at the London Inter Bank
Offered Rate ("LIBOR") plus 1.75% for the first $28,380,000 and LIBOR plus 2%
for drawings over $28,380,000 up until August 31, 2000. From September 1, 2000
until January 19, 2001 it was payable at LIBOR plus 3%.
As indicated above, on January 20, 2001 the aforementioned bank loan was
refinanced by means of a loan from HLSF LLC, a subsidiary company of the
Stephens Group Inc., a related party, and the other two banks who were part of
the original loan syndicate. The loan is now repayable on June 30, 2006 and
interest is payable quarterly at LIBOR plus 1.75%. The interest rate payable as
of December 31, 2001 was 6.185%. At December 31, 2001 $23,249,000 of the loan
relating to HLSF LLC and has therefore been included in "Loans-long-term:
Related party loans", while the remaining third party elements of $9,192,000 is
included in "Loans-long-term: Bank loan". The bank loan is secured by guarantees
from LSR, Huntingdon Life Sciences Group plc, Huntingdon Life Sciences Ltd., and
Huntingdon Life Sciences Inc., collateralised by all the assets of those
companies. The loan was transferred to another party effective February 11,
2002.
On October 9, 2001, on behalf of the Company, 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. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc., in
January 2001. In accordance with APB No. 14 "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants" ("APB 14") the bank loan and warrants
were recorded at their pro rata fair values in relation to the proceeds received
on the date of issuance. As a result, the value of the bank loan and the
warrants were $23,249,000 and $430,000 respectively.
A $2,910,800 ((pound)2,000,000) loan facility was made available to the Company
on September 25, 2000 by a director, Mr Baker. $1,445,400 of this was drawn down
immediately, a further $705,400 and $300,000 were drawn down on March 21, 2001
and May 21, 2001 respectively while the final $450,000 was drawn down on July
18, 2001. The loan is repayable on demand, although it is subordinate to the
bank loan, it is unsecured and interest is payable monthly at a rate of 10% per
annum. By Amendment No. 2 to that loan facility, dated March 20, 2001, FHP
became party to the loan and $550,000 of the amount loaned was transferred to
FHP. On March 28, 2002 $2,100,000 of Mr Baker's loan was converted into
1,400,000 shares of LSR Voting Common Stock and $300,000 of FHP's loan was
converted into 200,000 shares of LSR Voting Common Stock. As a result of such
conversions approximately $260,000 remains payable to Mr Baker and $250,000
remains payable to FHP.
The Board of LSR intends to ask the LSR shareholders at the next LSR
shareholder's meeting to approve the issuance of warrants to purchase up to
410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share. These warrants arose out of negotiations regarding the provision of the
$2,910,800 ((pound)2,000,000) loan facility made available to the Company on
September 25, 2000 by Mr Baker, who controls FHP. The Terms for the issuance of
such warrants were finalised in the last quarter of 2001. In accordance with
APB14 the loan and warrants were recorded at their pro rata fair values in
relation to the proceeds received. As a result, the value of the loan and the
warrants were $2,660,800 and $250,000 respectively.
A $2,910,800 ((pound)2,000,000) facility was made available to the Company on
July 19, 2001 from the Stephens Group Inc., of which $1,455,400 was drawn down
on August 20, 2001 with the final $1,455,400 drawn down on September 19, 2001.
The loan is repayable on July 19, 2002, although it is subordinated to the bank
loan, it is secured and interest is payable monthly at a rate of 10% per annum.
The loan was transferred to another party effective February 11, 2002.
On August 12, 1991, an issue of $50,000,000 7 1/2% Convertible Capital Bonds,
2006 ("the Bonds"), was made by a subsidiary company, HIH Capital Ltd. The Bonds
are guaranteed on a subordinated basis by the Company, and are convertible by
the holders at any time into Redeemable Preference Shares of HIH Capital Ltd.,
which in turn are exchangeable for Voting Common Stock of $0.01 each in LSR. At
the current conversion rate the number of shares of Voting Common Stock to be
issued on conversion and exchange of each unit of US$ 10,000 comprised in a Bond
would be 49 (2000 - 49). The Bond issuance costs of $2,314,000 were capitalized
and are being amortised over the life of the Bonds using the effective interest
method. The Bonds are redeemable by the holders at the maturity date and by the
Company at any time. To date no Bonds have been redeemed.
Fair value of financial instruments
The Company's principal financial instruments comprise cash and cash
equivalents, long term loans, and the Convertible Capital Bonds. The Company
does not hold financial instruments for trading purposes.
The estimated fair value of the Company's financial instruments as of December
31, 2001 and 2000 is summarized below. Certain estimates and judgements were
required to develop the fair value amounts. The fair value amounts shown below
are not necessarily indicative of the amounts that the Company would realize
upon disposition nor do they indicate the Company's intent or ability to dispose
of the financial instrument.
2001 2000
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
$000 $000 $000 $000
Primary financial instruments held or issued
to finance the Company's operations:
Cash and cash equivalents 2,240 2,240 3,286 3,286
Short-term debt 158 158 35,314 35,314
Long-term debt (excluding the Convertible 38,123 38,123 209 209
Capital Bond)
Convertible Capital Bond 50,000 17,000 50,000 12,532
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
Cash and cash equivalents: The estimated fair value of these financial
instruments approximates their carrying values due to their short maturities.
Short-term debt: The estimated fair value of these financial instruments
approximates their carrying value due to their short maturities.
Long-term debt: The estimated fair values of the Company's fixed long-term debt
is based on current interest rates available to the Company for debt instruments
with similar terms and remaining maturities. The estimate of fair values of the
Company's long-term variable rate debt approximates fair value due to the
variable nature of the interest charged.
Convertible Capital Bonds: The estimates fair values of the
Company's-Convertible Capital Bond is based on market prices.
7. Other Long-Term Liabilities
2001 2000
$000 $000
Pension liabilities - 1,434
Other 174 383
--------------- ---------------
174 1,817
--------------- ---------------
8. Commitments and Contingencies
Operating leases
Operating lease expenses were as follows
2001 2000 1999
$000 $000 $000
Hire of plant and equipment 924 1,184 277
Other operating leases 127 69 32
The Company has commitments payable under operating leases as follows:
Plant and
machinery
Year ended December 31 $000
2002 1,051
2003 490
2004 268
2005 60
2006 47
-----------------
1,916
-----------------
Contingencies
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any government agency.
9. Shareholders' Equity
Share capital
As of December 31, 2001 and 2000, Huntingdon had 293,510,294 and 292,184,962
respectively, of Ordinary Shares of 5 pence each.
Warrants issued in conjunction with long term debt
In October 2001, on behalf of the Company, LSR issued warrants to purchase up to
704,425 shares of LSR Common Voting Stock at a purchase price of $1.50 per
share. These warrants arose out of the refinancing of the bank loan by the
Stephens Group Inc. in January 2001. These warrants are exercisable at any time
and will expire on October 9, 2011.
In addition, the Board of LSR intends to ask LSR shareholders at the next LSR
shareholders meeting to approve the issuance of warrants to purchase up to
410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share. These warrants arose out of negotiations regarding the provision of the
$2,910,000 ((pound)2,000,000) loan facility made available to the Company on
September 25, 2000 by Mr. Baker who controls FHP.
In accordance with the APB 14 these loans and warrants were recorded at their
pro rata fair values in relation to the proceeds received with the portion
allowable to the warrants accounted for as additional paid-in-capital. See note
6.
The pro rata fair value of the warrants was $680,000 using a Black-Scholes
option-pricing method with the following weighted average assumptions: dividend
yield 0%; risk free interest rate 3.72%; expected life of 5 years, and;
estimated volatility of 40%.
Share option plans
Under the following Plans options were granted to acquire Ordinary Shares of
Huntingdon. The ability to exercise these options lapsed on March 26, 2002,
except for those granted under the Unapproved Share Option Plan.
Unapproved Share Option Plan
On April 8, 1983, Huntingdon adopted the Unapproved Share Option Plan (the
"Unapproved Plan") pursuant to which options to acquire Ordinary Shares may be
granted to any person who is required to devote substantially the whole of his
time (being not less than 25 hours per week) to serve as a Director or employee
of Huntingdon or one of its subsidiaries. The maximum number of Ordinary Shares
which may be issued under the Unapproved Plan according to the rules thereof is
10% of the issued share capital of Huntingdon from time to time, less options
outstanding under the Approved Plan from time to time.
An option granted pursuant to the Unapproved Plan may be exercised two years
after the grant in respect of not more than 50% of the Ordinary Shares subject
to the option. An option may be exercised in full between three and seven years
after the grant in respect of the unexercised balance of the Ordinary Shares
subject to the option.
Approved Management Share Option Plan
On January 29, 1985, Huntingdon adopted a second share option plan, the Approved
Management Share Option Plan (the "Approved Plan"), which has been approved by
the Board of Inland Revenue in the UK (the "Inland Revenue") pursuant to the UK
Finance Act 1984. The rules of the Approved Plan broadly follow those of the
Unapproved Plan, except that an option may be exercised, subject to certain
exceptions, only between three and ten years after it is granted.
Pursuant to the Approved Plan, options to acquire Ordinary Shares may be granted
to any Director or employee of Huntingdon whose terms of employment require him
to work for at least thirty-seven and one-half hours per week. Approval of the
Approved Plan by the Inland Revenue means that important personal tax
concessions are available to participants who reside in the UK. The maximum
number of Ordinary Shares which may be issued under the Approved Plan according
to the rules thereof is 10% of the issued share capital from time to time, less
options outstanding under the Unapproved Plan from time to time.
Both the Unapproved Plan and the Approved Plan terminated on December 31, 1997
with respect to the grant of new options. Options outstanding at that date are
not affected by such termination.
The grant of options under both the Unapproved Plan and the Approved Plan was a
matter for the discretion of the Board of Directors of Huntingdon. The exercise
price per share at which an option may be exercised is equal to the average of
the middle market quotations on the International Stock Exchange of the United
Kingdom and Republic of Ireland Ltd. for the Ordinary Shares on the five dealing
days prior to the date of grant or, if no established market in the Ordinary
Shares exists, the fair value of an Ordinary Share as determined by the Board.
Generally, an option may not be exercised unless at the date of exercise the
participant is then, and has been continuously since the grant of the option, in
the full-time employ of Huntingdon. This rule, however, is subject to alteration
in specific cases at the discretion of the Board.
Under the terms of the plans, the following Options to purchase Ordinary Shares
of 5 pence in Huntingdon have been granted and vested, but not relinquished or
exercised as at December 31, 2001.
Date of grant Number of shares outstanding Option price
UNAPPROVED PLAN
December 18, 1995 112,500 (pound)0.77
November 21, 1996 50,000 $1.60
December 1, 1997 100,000 (pound)0.50
December 31, 1997 260,600 (pound)0.465
December 31, 1997 295,000 $0.77
APPROVED PLAN
February 13, 1995 110,000 (pound)0.49
December 11, 1995 380,000 (pound)0.78
December 11, 1995 80,000 $1.19
December 18, 1995 35,750 (pound)0.77
November 21, 1996 367,500 (pound)0.95
December 31, 1997 360,000 (pound)0.465
Huntingdon Life Sciences Group Incentive Option Plan
The Huntingdon Life Sciences Group Incentive Option Plan ("Incentive Plan"), was
adopted on June 3, 1999. The Incentive Plan was designed to reward short-term
improvement in financial performance. Options are available for grant to
management and senior staff, and may be subject to the achievement of a
performance measure and personal performance conditions. Options may generally
be exercised from the third anniversary of the date of grant. Options lapse on
the tenth anniversary.
Date of grant Number of shares outstanding at Option Price
December 31, 2001
April 27, 2001 7,750,000 (pound)0.05
Huntingdon Life Sciences Sharesave Scheme
The Huntingdon Life Sciences Sharesave Scheme ("Sharesave Scheme") was also
adopted at the Annual General Meeting held on June 3, 1999. Approximately 55% of
eligible employees, who will fund the exercise of their options with the
proceeds of a related Save As You Earn (SAYE) savings contract, accepted the
invitation to join the Sharesave Scheme. Options granted pursuant to the Scheme
may generally be exercised from the Bonus Date, which falls on November 1, 2002.
Options generally lapse six months after the Bonus Date.
Date of grant Number of shares outstanding at Option Price
December 31, 2001
April 27, 2001 3,982,456 (pound)0.05
The Huntingdon Life Sciences Group Unapproved Share Option Scheme ("Unapproved
Scheme")
7,500,000 Founder Options had been granted but not relinquished or exercised at
December 31, 2001 at an option price of 12.5 pence per Ordinary Share. Such
options are exercisable from the third anniversary of the date of the grant
subject to the share price reaching the following pre-determined targets for a
period of seven consecutive dealing days at any time after January 1, 1999.
Target price per share Proportion of options exercisable
25p 25%
50p 50%
75p 75%
100p 100%
1,500,000 options, other than Founder Options, which are generally exercisable
between the third and tenth anniversary of the date of grant subject to the
attainment of performance related conditions, were granted on March 29, 1999 at
a Subscription Price of 19.25 pence each and remained outstanding on December
31, 2001.
Option Agreement
Mr Baker, a related party, was granted Options over 5,000,000 Ordinary Shares of
5 pence in Huntingdon, the principal terms of which are the same as those
applicable to the Founder Options referred to above.
The following table sets forth certain information relative to the changes to
options outstanding in the periods presented:
Option Price
------------------------------
Unapproved Approved Unapproved Dollars(pound) Sterling
Plan Plan Scheme* per Share per Share
Outstanding at December 31, 1998 2,272,120 2,583,850 13,500,000 0.77 - 1.60 0.125 -0.95
Granted - - 2,000,000 - -
Forfeited (796,700) (407,350) (500,000) 0.77 - 1.60 0.465 -0.95
-----------------------------------------------------------------------------
Outstanding at December 31, 1999 1,475,420 2,176,500 15,000,000 0.77-1.60 0.125-0.95
Granted - - - - -
Forfeited (106,250) (410,000) - 0.77 - 1.60 0.465-0.95
-------------- -------------- -------------- -------------- --------------
Outstanding at December 31, 2000 1,369,170 1,766,500 15,000,000 0.77 - 1.60 0.125 - 0.95
Granted - - - - -
Forfeited (551,070) (433,250) (1,000,000) 0.77-1.60 0.125-0.95
-----------------------------------------------------------------------------
Outstanding at December 31, 2001 818,100 1,333,250 14,000,000 0.77 - 1.19 0.125-0.95
=============================================================================
<FN>
*and Option Agreement
</FN>
Option Price
-----------------------------------
Incentive Sharesave Dollars Sterling
Plan Scheme per Share per Share
Outstanding at December 31, 1998 - - - -
Granted 2,650,000 7,193,520 - 0.175 - 0.1925
Forfeited - (91,312) - 0.14
-----------------------------------------------------------------------------
Outstanding at December 31, 1999 2,650,000 7,102,208 - 0.14 - 0.1925
Granted 4,250,000 - - 0.1625
Forfeited (2,650,000) (1,031,068) - 0.14 - 0.1925
---------------- ---------------- -------------- ----------------
Outstanding at December 31, 2000 4,250,000 6,071,140 - 0.14 - 0.1625
Granted 7,750,000 - - 0.05
Forfeited (4,250,000) (2,088,684) - 0.14 - 0.1625
-----------------------------------------------------------------------------
Outstanding at December 31, 2001 7,750,000 3,982,456 - 0.05 - 0.14
=============================================================================
A summary of the status of Huntingdon's option plans, schemes and agreements for
the years ended December 31, 2001, December 31, 2000 and December 31, 1999 and
changes during the years then ended is presented in the table and narrative
below:
Years ended
December 31, 2001 December 31, 2000 December 31, 1999
Shares Wtd Avg. Shares Wtd Avg. Shares Wtd Avg.
(000) Ex Price (000) Ex Price (000) Ex Price
Outstanding at start of period 28,457 0.19 28,404 (pound)0.21 18,356 (pound)0.26
Granted 7,750 0.05 4,250 (pound)0.16 11,843 (pound)0.16
Exercised - - - - - -
Forfeited (8,323) 0.22 - - - -
Expired - - - - - -
Cancelled - - (4,197) 0.25 (1,795) (pound)0.46
------------ ----------- ---------- ----------- ----------- ------------
Outstanding at end of period 27,884 0.13 28,457 0.19 28,404 (pound)0.21
------------ ----------- ---------- ----------- ----------- ------------
Exercisable at end of year 2,151 3,136 2,420
Weighted average fair value of
options granted (pound)0.004 (pound)0.087 (pound)0.105
The 27,883,806 options outstanding at December 31, 2001 have an exercise price
between (pound)0.05 and (pound)0.95, with a weighted average exercise price of
(pound)0.13 and a weighted average remaining contractual life of 6.7 years.
2,151,350 of these options are exercisable. The 7,750,000 options granted in
2001 have an exercise price of (pound)0.05 and a weighted average remaining
contractual life of 9.3 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the option grants in 2001, 2000 and 1999 respectively:
risk-free interest rates of 3.72 per cent, 4.70 per cent and 5.68 per cent;
expected dividend yields of 0.00 per cent (in all years); expected life of 7.0
years for the Unapproved Scheme, 3.0 years for the Sharesave Scheme and 5.0
years for the Incentive Plan (in all years); expected volatility of 40.0 per
cent, 57.0 per cent and 57.4 per cent. The Company accounts for share options
under APB 25, under which no compensation cost has been recognised. Had
compensation cost for stock options awarded under the plans been determined
consistent with SFAS 123 the Company's net income and earnings per share would
have been restated as follows:
Year ended Year Ended Year Ended December
December 31, 2001 December 31, 2000 31, 1999
----------------------- --------------------- ----------------------
Net loss: As Reported (8,446) (9,763) (6,605)
Proforma (9,554) (11,336) (8,025)
Basic and Diluted EPS: As Reported $(0.03) $(0.03) $(0.02)
Proforma $(0.03) $(0.04) $(0.03)
Loss Per share
The computation of loss per share is as follows:
2001 2000 1999
Numerator
Net loss ($000) (8,446) (9,763) (6,605)
Denominator
Weighted average
basic and diluted
shares outstanding (000) 293,421 291,206 291,010
Basic and diluted loss per share $ (0.03) (0.03) (0.02)
Diluted loss per share is equal to basic loss per share for the years ended
December 31, 2001, 2000 and 1999 as the exercise of the Convertible Capital
Bonds and share options are excluded from the computation of diluted loss per
share as the effect of inclusion is anti-dilutive. For the year ended 31
December, the number of potentially dilutive shares that were excluded from the
computation of diluted loss per share as follows:
2001 2000 1999
Convertible Capital Bonds (000s) 12,265 12,265 12,265
Share options (000s) 27,754 28,964 22,696
10. Pensions
The Company operates the Huntingdon Life Sciences Pension and Life Assurance
Scheme (the 'Scheme') a funded pension scheme providing benefits, based on final
pensionable salary, for Company employees in the UK. This Scheme was closed to
new entrants from April 5, 1997.
On April 6, 1997 the Company established a defined contribution plan, the Group
Personal Pension Plan, for Company employees in the UK. Additionally, a defined
contribution plan (401-K plan) is also available for employees in the US. The
net pension expense for these plans for the year ended December 31, 2001 were
$1,275,000 (2000, $786,000; 1999, $682,000).
The components of the net periodic benefit cost of the Scheme for the years
ended December 31, are as follows:
2001 2000 1999
$000 $000 $000
Service cost, benefits earned during the year 1,493 1,548 3,473
Interest cost on projected benefit obligation 5,720 5,823 5,942
Expected return on plan assets (7,071) (7,757) (7,177)
Amortisation of prior service cost 44 90 97
Amortisation of transition asset (230) (237) (254)
------------- ------------ -------------
Net periodic (cost)/benefit (44) (533) 2,081
------------- ------------ -------------
The major assumptions used in calculating
the pension expense were:
2001 2000 1999
Discount rate 6.00% 6.00% 6.25%
Rate of increase of future compensation 3.75% 3.75% 4.00%
Long-term rate of return on plan assets 7.25% 7.25% 7.50%
The net asset at transition, prior service cost and net (loss)/gain subject to
amortisation are being amortised on a straight-line basis over periods of 15
years, 10 years and 10 years respectively.
A reconciliation of the projected benefit obligation for the Scheme to the
accrued pension expense recorded as of December 31 is as follows:
2001 2000 1999
$000 $000 $000
Projected benefit obligation (91,467) (99,003) (101,755)
Plan assets at market value 86,492 100,083 110,740
Funded status (4,975) 1,080 8,985
Unrecognised net actuarial loss/(gain) 5,712 (1,733) (11,857)
Unrecognised prior service cost - 45 145
Unrecognised net asset at transition (574) (826) (1,146)
Accrued pension expense 163 (1,434) (3,873)
Change in plan assets
Fair value of assets, beginning of year 100,083 110,740 99,407
Foreign currency changes (2,573) (8,101) (3,511)
Actual return on plan assets (10,571) (2,571) 15,255
Employer contributions 1,517 1,622 1,507
Employee contributions 728 708 532
Benefit payments (2,692) (2,315) (2,450)
Fair value of assets, end of year 86,492 100,083 110,740
Change in projected benefits obligation
Projected benefit obligation, beginning of year 99,003 101,755 99,407
Foreign currency changes (2,545) (7,445) (3,113)
Service cost 1,493 1,548 3,473
Interest cost 5,720 5,823 5,942
Actuarial (gains)/losses (10,240) (1,071) (2,036)
Employee contributions 728 708 532
Benefit payments (2,692) (2,315) (2,450)
Projected benefit obligation, end of year 91,467 99,003 101,755
11. Geographical analysis
During each of the years ended December 31, 2001, 2000 and 1999, the Company
operated from within two segments based on geographical markets, the United
Kingdom and the United States. The Company had one continuing activity, Contract
Research, throughout these periods.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Transactions
between segments, which are immaterial, are carried out on an arms-length basis.
Interest income, interest expense and income taxes are also not reported on an
operating segment basis because they are not considered in the performance
evaluation by the Company's chief operating decision-maker.
Geographical segment information is as follows:
US UK Total
$000 $000 $000
2001 Revenues 23,501 75,705 99,206
Operating loss before other operating
income/expense (109) (784) (893)
Other operating expense - (2,653) (2,653)
Operating loss (109) (3,437) (3,546)
Identifiable assets (A) 20,622 122,287 142,909
Property and equipment, net 10,132 80,221 90,353
Depreciation & amortisation 1,416 6,891 8,307
Capital expenditure
(1,151) (2,144) (3,295)
Total assets 22,008 124,034 146,042
2000 Revenues 22,929 73,035 95,964
Operating profit/(loss) before
other
operating expense 1,699 (1,615) 84
Other operating expense - (1,819) (1,819)
Operating profit/(loss) 1,699 (3,434) (1,735)
Identifiable assets (A) 20,324 121,395 141.719
Property and equipment, net 10,403 87,257 97,660
Depreciation & amortisation 1,598 7,495 9,093
Capital expenditure (1,752) (1,896) (3,648)
Total assets 21,950 124,157 146,107
1999 Revenues 17,342 76,844 94,186
Operating loss before other
operating
(expense)/ income (454) (2,853) (3,307)
Other (expense)/income (300) 1,125 825
Operating loss (754) (1,728) (2,482)
Identifiable assets (A) 25,924 123,330 149,254
Property and equipment, net 10,251 100,903 111,154
Depreciation & amortisation 1,567 8,108 9,675
Capital expenditure (2,069) (2,824) (4,893)
Total assets 24,822 134,148 158,970
<FN>
(A) Identifiable assets exclude cash and cash equivalents, investments and
unamortised costs of raising long term debt.
</FN>
Revenues from customers (based on location of customers)
2001 2000 1999
$000 $000 $000
United States 34,705 39,733 32,936
Europe 39,082 32,919 40,770
Far East 19,430 19,455 17,198
Rest of World 5,989 3,857 3,282
------------- -------------- ------------
99,206 95,964 94,186
------------- -------------- ------------
12. Other operating (expense)/income
2001 2000 1999
$000 $000 $000
Asset write downs - - (2,018)
Animal Rights legal and professional costs (400) - -
Bankruptcy of Foreign Exchange Broker (350) - -
Refinancing costs (217) (1,819) -
Exchange offer costs (1,686) - -
Profit on sale of Wilmslow - - 2,843
----------- ------------ ----------
(2,653) (1,819) 825
----------- ------------ ----------
In 2001, expenses totalling $1,686,000 were incurred and expensed in connection
with the Exchange Offer. In addition there was a write off in connection with
foreign exchange dealings resulting from the bankruptcy of an exchange broker
($350,000), special legal and other costs were incurred in connection with the
Animal Rights campaign ($400,000) and unamortised costs of $217,000 relating to
the refinanced bank loan was written off.
In 2000, costs incurred in the refinancing of the Company's bank debt amounting
to $1,819,000 were written off. Such costs were incurred on elements of the
refinancing which did not proceed, or on facility extensions prior to the
year-end.
In 1999, as a result of the Company's Year 2000 compliance program a number of
assets that were not Year 2000 compliant were identified, principally computer
hardware and software. A charge of $2,018,000 was made to write these assets
off. The Company also disposed of its Wilmslow research site in 1999. The site
was sold for $6,792,000 net of expenses, a gain of $2,843,000 over its written
down value.
13. Allowance for uncollectible accounts
Balance as of Exchange Charged to Accounts Balance as
beginning of Adjustment operations written off of end of
period period
$000 $000 $000 $000 $000
Allowance for uncollectible accounts
deducted from trade debtors
December 31, 1999 185 (6) 97 (90) 186
December 31, 2000 186 (14) 108 (194) 86
December 31, 2001 86 (2) 80 - 164
14. Subsequent Events
LSR was incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer for
Huntingdon. The Offer was made on October 16, 2001 and was declared
unconditional on January 10, 2002, at which time LSR acquired approximately 89%
of the outstanding ordinary shares of Huntingdon in exchange for approximately
5.3 million shares of LSR Voting Common Stock. The subsequent offer period
expired on February 7, 2002, by which time approximately 92% of the outstanding
ordinary shares had been offered for exchange. The Company completed its
compulsory purchase under UK law of the remaining outstanding ordinary shares of
Huntingdon on March 26, 2002 at which time Huntingdon became a wholly owned
subsidiary of LSR, in exchange for a total of approximately 5.9 million shares
of LSR Voting Common Stock ("Exchange Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly
the Exchange Offer will be accounted for as a 'reverse acquisition' for
financial reporting purposes. The reverse acquisition is deemed a capital
transaction and the net assets of Huntingdon (the accounting acquirer) will be
carried forward to LSR (the legal acquirer and the reporting entity) at their
carrying value before the combination. Although Huntingdon is deemed to be the
acquiring corporation for financial accounting and reporting purposes, the legal
status of LSR as the surviving corporation does not change. The relevant
acquisition process will utilize the capital structure of LSR and the assets and
liabilities of Huntingdon will be recorded at historical cost.
The Company is the operating entity for financial reporting purposes, and the
financial statements prior to the date of consummation of the Exchange Offer
represents the Company's financial position and results of operations. The
assets and liabilities and results of operations of the Company will be included
as of the date of consummation of the Exchange Offer. Although Huntingdon will
be deemed to be the acquiring corporation for financial accounting and reporting
purposes, the legal status of LSR as the surviving corporation will not change.
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock to Mr
Stapfer, a Director of LSR, and 900,000 shares of Non-Voting Common Stock
(convertible into shares of LSR Voting Common Stock) to two other investors, at
a purchase price of $1.50 per share (or an aggregate of $1,499,850).
On February 11, 2002, `the bank loan amounting to $32,441,000 and the Stephens
Group loan facility amounting to $2,910,800 ((pound)2,000,000) were transferred
to a third party. The loan is repayable on July 19, 2002, although it is
subordinated to the bank loan. The loan is secured and interest is payable
monthly at a rate of 10% per annum.
On March 28, 2002 LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a per share price of $1.50 per share.
Of the aggregate proceeds of approximately $7.6 million, $4.4 million was in
cash, $2.4 million represented the conversion into equity of debt owed to Mr
Baker ($2.1 million) and FHP ($0.3 million) and $825,000 was paid with
promissory notes. The $2.1 million of Mr Baker's loan was converted into
1,400,000 shares of LSR Voting Common Stock and $300,000 of FHP's loan was
converted into 200,000 shares of LSR Voting Common Stock. As a result of such
conversions approximately $260,000 remains payable to Mr Baker and $250,000
remains payable to FHP.
15. Unaudited Quarterly Financial information
The following is a summary of unaudited quarterly financial information for the
12 months ended December 31, 2000 and December 31, 1999.
Year ended 31 December, 2001 Quarter Ended
March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues 22,689 24,012 25,707 26,798
Cost of sales (20,915) (20,454) (21,648) (21,116)
--------------------------------------------------------------------------
Gross profit 1,774 3,558 4,059 5,682
Selling and administrative expenses (4,006) (4,178) (3,786) (3,996)
Other operating (expenses)/income (174) 169 - (2,648)
--------------------------------------------------------------------------
Operating (loss)/profit (2,406) (451) 273 (962)
Interest income 39 36 13 16
Interest expense (1,668) (1,616) (1,620) (1,710)
Other (expense)/income (2,071) (346) 1,837 (806)
--------------------------------------------------------------------------
(Loss)/income before taxes (6,106) (2,377) 503 (3,462)
Income tax benefit 1,770 705 300 221
--------------------------------------------------------------------------
Net (loss)/income (4,336) (1,672) 803 (3,241)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Loss)/earnings per share $(0.01) $(0.01) - $(0.01)
Quarter Ended
Year ended 31 December, 2000 March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues 24,826 24,458 23,768 22,912
Cost of sales (20,456) (20,201) (19,562) (20,521)
--------------------------------------------------------------------------
Gross profit 4,370 4,257 4,206 2,391
Selling and administrative costs (3,800) (3,513) (3,669) (4,158)
Other operating loss - - - (1,819)
--------------------------------------------------------------------------
Operating profit/(loss) 570 744 537 (3,586)
Interest income 82 51 24 24
Interest expense (1,740) (1,716) (1,807) (2,122)
Other (expense)/income (444) (2,620) (1,115) 635
--------------------------------------------------------------------------
Loss before taxes (1,532) (3,541) (2,361) (5,049)
Income tax benefit/(expense) 218 275 (233) 2,460
--------------------------------------------------------------------------
Net loss (1,314) (3,266) (2,594) (2,589)
--------------------------------------------------------------------------
Loss per share - $(0.01) $(0.01) $(0.01)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth certain information with respect to the current
directors and executive officers of LSR, all of whom were appointed on January
10, 2002 when the Offer became unconditional.
Name Age Office Held
Andrew Baker 53 Director
Chairman of the Board and Chief Executive Officer
Brian Cass 54 Director, Managing Director/President
Gabor Balthazar 60 Director
Frank Bonner 49 Director
Director of Science and Technology
John Caldwell 55 Director
Kirby Cramer 64 Director
Julian Griffiths 49 Director, Finance Director of Huntingdon Life
Sciences Group plc
Richard Michaelson 50 Chief Financial Officer & Secretary
(a) Identification of Directors
Andrew Baker became a director and Chairman and Chief Executive Officer of LSR
on January 10, 2002. He was appointed to the Board of Huntingdon as Executive
Chairman in September 1998. He is a chartered accountant and has operating
experience in companies involved in the delivery of healthcare ancillary
services. He spent 18 years until 1992 with Corning Incorporated ("Corning") and
held the posts of President and CEO of MetPath Inc., Corning's clinical
laboratory subsidiary, from 1985 to 1989. He became President of Corning
Laboratory Services Inc. in 1989, which at the time controlled MetPath Inc. (now
trading as part of Quest Diagnostics Inc.), and Hazleton Corporation,
G.H.Besselaar Associates and SciCor Inc., all three now trading as part of
Covance Inc. Since leaving Corning in 1992, Andrew Baker has focused on
investing in and developing companies in the healthcare sector including Unilab
Corporation, a clinical laboratory services provider in California, and Medical
Diagnostics Management, which is a US based provider of radiology and clinical
laboratory services to health care payers. In 1997, he formed Focused Healthcare
Partners ("FHP"), an investment partnership which acts as general partner for
healthcare startup and development companies.
Brian Cass, FCMA, became a director and Managing Director/President of LSR on
January 10, 2002. He was appointed to the Board of Huntingdon as Managing
Director/Chief Operating Officer in September 1998. Prior to joining Huntingdon
he was a Vice President of Covance Inc. and Managing Director of Covance
Laboratories Ltd (previously Hazleton Europe Ltd) for nearly 12 years, having
joined the company in 1979 as Controller. Brian Cass worked at Huntingdon
Research Centre between 1972 and 1974 and has previous experience with other
companies in the electronics and heavy plant industries. He has also held
directorships with North Yorkshire Training & Enterprise Council Ltd and
Business Link North Yorkshire Ltd.
Gabor Balthazar became a director of LSR on January 10, 2002. He was appointed
to the Board of Huntingdon as the Senior Independent Non-Executive Director in
March 2000. He has been active in international marketing and management
consulting for almost 30 years. He was a founding Board member of Unilab
Corporation, serving as President from 1989 to 1992, and continuing to sit on
Unilab's Board until November 1999. From 1985 to 1997 Gabor Balthazar served as
a consultant to Frankfurt Consult, the merger/acquisition subsidiary of
BHF-Bank, Frankfurt, Germany and to Unilabs Holdings SA, a Swiss clinical
laboratory testing holding company, from 1987 to 1992. Mr Balthazar also serves
as a director of Decora Industries, Inc. He is a graduate of the Columbia Law
School in New York City.
Frank Bonner, BSc., PhD., became a director of LSR on January 10, 2002. He was
appointed to the Board of Huntingdon as Director of Science & Technology in
September 1998. He studied Biochemistry and Toxicology at the University of
Surrey, Guildford (1973-1979). After post-doctoral research in the Institute of
Industrial and Environmental Health, he joined Sterling Winthrop to establish a
Drug Safety department. Following the acquisition of Sterling by Sanofi, he was
appointed Scientific and Administrative Director of the UK Research Centre in
Northumberland, a position he held until joining Huntingdon in 1997. He is past
Chairman of the British Toxicology Society and serves on the Research and
Development Committee of the Association of the British Pharmaceutical Industry.
John Caldwell, B.Pharm., PhD., D.Sc., C.Biol., F.I.Biol., became a director of
LSR on January 10, 2002. He was appointed to the Board of Huntingdon as an
Independent Non-Executive Director in December 1997. He is Professor of
Biochemical Toxicology and Head of the Division of Biomedical Sciences of the
Imperial College School of Medicine. His distinguished career includes
membership of the UK Committee on Safety of Medicines, Ministry of Agriculture
Fisheries and Food Steering Group for Food Surveillance, permanent membership of
the International Scientific Committee of the International Symposia on Chiral
Discrimination, Honorary Membership of the Royal College of Physicians,
Representative on the Court of the University of Surrey for the British
Pharmacological Society and he is a Past President of the International Society
for the Study of Xenobiotics. He is also a member of the Institute of Directors.
Professor Caldwell has extensive involvement as a consultant with pharmaceutical
companies in Europe, North America and Japan.
Kirby L Cramer became a director of LSR on January 10, 2002. He was appointed to
the Board of Huntingdon as an Executive Director in September 1999. He served as
Chief Executive Officer of Hazleton Laboratories Corporation from 1968 and led
it to become the world's largest provider of pre-clinical testing services when
it was sold to Corning Inc in 1987. Following the acquisition he served as
Chairman of the Board of Directors of Hazleton from 1987 through 1991. The
Hazleton laboratories now form the pre-clinical segment of Covance. Mr Cramer
also currently serves as a director of D J Orthopedics, Immunex Corp., SonoSite
Inc., Array BioPharma, Commerce Bancorporation, Landec Corporation, Northwestern
Trust Company and Corus Pharma. Previously Mr Cramer was a director of ATL
Ultrasound Inc., Unilab Corporation, Pharmaceutical Product Development Inc.,
and Kirschner Medical.
Julian Griffiths, M.A., F.C.A., became a director of LSR on January 10, 2002. He
was appointed to the Board of Huntingdon as Finance Director in April 1999 and
Secretary in February 2000. Prior to joining Huntingdon he was most recently
Vice President of Analytical Services in the European pre-clinical division of
Covance Inc., having spent the previous nine years as Vice President of Finance
in the same organisation. Prior to that he held various positions with KPMG.
Richard Michaelson became Chief Financial Officer and Secretary of LSR effective
January 10, 2002. Mr. Michaelson was Director of Strategic Finance of Huntingdon
from September 1998 to December 2001. He served as Senior Vice President of
Unilab Corporation, a clinical laboratory testing company based in Los Angeles,
California, from September 1997 to December 1997, Senior Vice President-Finance,
Treasurer and Chief Financial Officer of Unilab from February 1994 to September
1997, and Vice President-Finance, Treasurer and Chief Financial Officer of
Unilab from November 1993 to February 1994. Mr. Michaelson also served as Vice
President of Unilab beginning in October 1990. Mr. Michaelson joined MetPath,
Inc., the clinical laboratory subsidiary of Corning Incorporated, in 1980 and
served as Vice President of MetPath from 1983 and Treasurer of Corning Lab
Services, Inc. from 1990 through, in each case, September 1992.
The Articles of Amendment and Restatement of the LSR provide that the directors
shall be not less than one in number and there shall be no maximum number of
directors. Any director appointed by the board of directors holds office only
until the next following annual meeting, at which time he shall be eligible for
re-election by the stockholders. Directors may be removed from office only for
cause.
No director or executive officer has a family relationship with any other
director or executive officer.
ITEM 11. EXECUTIVE COMPENSATION
In the 12 months ended December 31, 2001 the aggregate compensation of the
Executive Directors as a group, paid or accrued, was $1,271,312.
The services of Mr Baker are provided through a management services agreement
with Focused Healthcare Partners ("FHP"), the vehicle through which Mr Baker
provides his services. The agreement provides for a minimum notice of
termination by LSR of twelve months.
Mr Cass has a service contract providing for a minimum notice of termination by
LSR of two years. The contract provides for liquidated damages amounting to two
years' basic salary and an amount equal to twice the annual average of bonuses,
if any, received during the two financial years of LSR immediately preceding a
change of control of LSR (as defined in the service contract) or in the event of
termination in certain circumstances. The Board has determined that both the
period of notice required for termination of Mr Cass' contract and the change of
control provisions are warranted by Mr Cass' value to LSR.
Dr Bonner, Mr Michaelson, Mr Cramer and Mr Griffiths each have service contracts
providing for a minimum notice of termination by LSR of twelve months.
Professor Caldwell, and Mr Balthazar each have service contracts providing for a
minimum notice of termination by LSR of three months.
The Company operates a discretionary bonus plan for executive officers and key
managers based upon improvements to operating income and achievement of
pre-defined targets. Bonus awards are administered by the Compensation
Committee. The Committee believes that the discretionary bonus payments to Mr
Baker, Mr Cass, Dr Bonner and Mr Griffiths in 1999 reflect their respective
contribution to the development of Huntingdon . No bonus awards were made in
respect of 2000 or 2001.
The following table shows the remuneration of Executive Directors in the 12
Months ended December 31, 2001, December 31, 2000, and December 31, 1999;
Annual Compensation Long Term Compensation
Awards
Name And Principal Year Salary Bonus Other Annual Number Of Shares
Position Compensation Underlying Options
Mr A H Baker 2001 288,006 - 95,990 -
Chairman 2000 288,000 - 95,040 -
1999 216,000 72,000 71,280 -
Dr F W Bonner 2001 211,680 - 20,395 10,000
Director of Science & 2000 211,680 - 19,367 7,500
Technology 1999 201,600 14,400 26,450 5,000
Mr B Cass 2001 280,741 - 153,311 -
Managing Director 2000 288,800 - 153,936 -
1999 216,000 72,000 130,992 463
Mr K L Cramer 2001 60,000 - - -
Director 2000 60,000 - - -
1999 60,000 - - 20,000
Mr J T Griffiths 2001 120,960 - 40,229 10,000
Financial Director 2000 120,960 - 44,070 7,500
Company Secretary 1999 113,435 14,400 53,562 15,000
All Directors, except Mr Cramer are paid in UK pounds sterling. The amounts have
been converted at the rate of $1.44 to (pound)1.00 for the purposes of the above
table.
One Director is a member of the Group Personal Pension Plan. The other
Directors' pension contributions are privately invested.
OPTIONS TO PURCHASE SECURITIES FROM THE HUNTINGDON AND LSR
Under the following Plans options were granted to acquire Ordinary Shares of
Huntingdon. The ability to exercise options lapsed on March 26, 2002, except for
those granted under the Unapproved Share Option Plan.
The Unapproved Share Option Plan. On April 8, 1983, Huntingdon adopted the
Unapproved Share Option Plan (the "Unapproved Plan") pursuant to which options
to acquire Ordinary Shares may be granted to any person who is required to
devote substantially the whole of his time (being not less than 25 hours per
week) to serve as a Director or employee of Huntingdon or one of its
subsidiaries. The maximum number of Ordinary Shares which may be issued under
the Unapproved Plan according to the rules thereof is 10% of the issued share
capital of Huntingdon from time to time, less options outstanding under the
Approved Plan from time to time.
An option granted pursuant to the Unapproved Plan may be exercised two years
after the grant in respect of not more than 50% of the Ordinary Shares subject
to the option. An option may be exercised in full between three and seven years
after the grant in respect of the unexercised balance of the Ordinary Shares
subject to the option.
The Approved Management Share Option Plan. On January 29, 1985, Huntingdon
adopted a second share option plan, the Approved Management Share Option Plan
(the "Approved Plan"), which has been approved by the Board of Inland Revenue
(the "Inland Revenue") pursuant to the Finance Act 1984. The rules of the
Approved Plan broadly follow those of the Unapproved Plan, except that an option
may be exercised, subject to certain exceptions, only between three and ten
years after it is granted.
Pursuant to the Approved Plan, options to acquire Ordinary Shares may be granted
to any Director or employee of Huntingdon whose terms of employment require him
to work for at least thirty-seven and one-half hours per week. Approval of the
Approved Plan by the Inland Revenue means that important personal tax
concessions are available to participants who reside in the UK. The maximum
number of Ordinary Shares which may be issued under the Approved Plan according
to the rules thereof is 10% of the issued share capital from time to time, less
options outstanding under the Unapproved Plan from time to time.
Both the Unapproved Plan and the Approved Plan terminated on December 31, 1997
with respect to the grant of new options. Options outstanding at that date are
not affected by such termination. The grant of options under both the Unapproved
Plan and the Approved Plan was a matter for the discretion of the Board of
Directors of Huntingdon. The exercise price per share at which an option may be
exercised is equal to the average of the middle market quotations on the
International Stock Exchange of the United Kingdom and Republic of Ireland Ltd.
for the Ordinary Shares on the five dealing days prior to the date of grant or,
if no established market in the Ordinary Shares exists, the fair value of an
Ordinary Share as determined by the Board. Generally, an option may not be
exercised unless at the date of exercise the participant is then, and has been
continuously since the grant of the option, in the full-time employ of
Huntingdon. This rule, however, is subject to alteration in specific cases at
the discretion of the Board.
At the Extraordinary General Meeting held on September 2, 1998 the Shareholders
approved a new option scheme (the rules of which were amended at the Annual
General Meeting held on June 3, 1999) and a separate Option Agreement with Mr
Baker:
(a) The Huntingdon Life Sciences Group Unapproved Share Option Scheme (the
"Unapproved Share Option Scheme").
(i) 7,500,000 Founder Options had been granted but not relinquished or
exercised as at December 31, 2001 at an option price of 12.5 pence per
Ordinary Share. The Options may be exercised from the third anniversary of
the date of the grant subject to the share price reaching the following
pre-determined targets for a period of seven consecutive dealing days at
any time after January 1, 1999.
Target Price Per Share Proportion of Options
Exercisable
25p 25%
50p 50%
75p 75%
100p 100%
(ii) 1,500,000 options, other than Founder Options, which are generally
exercisable between the third and tenth anniversary of the date of grant
subject to the attainment of performance related conditions were granted on
March 29, 1999 at a subscription price of 19.25 pence each and remained
outstanding on December 31, 2001.
(b) An Option Agreement
Mr Baker, a related party, was granted Options over 5,000,000 Ordinary
Shares of 5 pence in the Company, the principal terms of which are the same
as those applicable to the Founder Options referred to above.
The Huntingdon Life Sciences Group Incentive Option Plan (the "Incentive Option
Plan") The Incentive Option Plan was adopted on June 3, 1999. The Plan was
introduced to run alongside the Unapproved Share Option Scheme described above
and is designed to reward short term improvement in financial performance in the
Company's turn around phase. Options are available for grant to management and
senior staff, and may be subject to the achievement of a performance measure and
personal performance conditions; they may generally be exercised from the third
anniversary of the date of grant and they lapse on the tenth anniversary.
The Huntingdon Life Sciences Sharesave Scheme (the "Sharesave Scheme") The
Sharesave Scheme was adopted at the Annual General Meeting held on June 3, 1999.
Approximately 55% of eligible employees, who will fund the exercise of their
options with the proceeds of a related Save As You Earn (SAYE) savings contract,
accepted the invitation to join the Scheme. Options may generally be exercised
from the Bonus Date which falls on November 1, 2002. Options generally lapse six
months after the Bonus Date.
Any US subsidiary of the Company, which received the services in respect of
which an option was granted, will be entitled to a deduction in an amount equal
to the compensation taxable to the optionee, in computing its US Federal income
tax. Generally this is in the calendar year in which the optionee is deemed to
have received such compensation.
Under the terms of the various share option arrangements the following options
to purchase Ordinary Shares in the Company have been granted and vested (net of
expired options), but not exercised as of March 20, 2002.
(i) The Unapproved Share Option Plan
Date of Grant Number of shares Option Price Expiry Date
outstanding
December 18, 1995 112,500 (pound)0.77 December 17, 2002
November 21, 1996 50,000 $1.60 November 20, 2003
December 1, 1997 100,000 (pound)0.50 November 30, 2004
December 31, 1997 164,900 (pound)0.465 December 30, 2004
December 31, 1997 240,000 $0.77 December 30, 2004
(ii) The Approved Management Share Option Plan
Date of Grant Number of Shares Option Price Expiry Date
Outstanding
February 13, 1995 105,000 (pound)0.49 February 12, 2005
December 11, 1995 370,000 (pound)0.78 December 10, 2005
December 11, 1995 80,000 $1.19 December 10, 2005
December 18, 1995 35,750 (pound)0.77 December 17, 2005
November 21, 1996 357,500 (pound)0.95 November 20, 2006
December 31, 1997 360,000 (pound)0.465 December 30, 2007
(iii) The Unapproved Share Option Scheme and Mr Baker's Option Agreement
Date of Grant Number of Shares Option Price Expiry Date
Outstanding
September 2, 1998 5,000,000 (pound)0.125 September 1, 2008
December 3, 1998 7,000,000 (pound)0.125 December 2, 2008
December 31, 1998 500,000 (pound)0.125 December 30, 2008
March 29, 1999 1,500,000 (pound)0.1925 March 28, 2009
(iv) Incentive Option Plan
Date of Grant Number of Shares Option price Expiry Date
Outstanding
April 27, 2001 7,750,000 (pound)0.05 April 27 2011
(v) Sharesave Scheme
Date of Grant Number of Shares Option price Expiry Date
Outstanding
September 9, 1999 3,341,168 (pound)0.14 May 1, 2003
In the period since options to acquire shares have been capable of being
exercised to March 20, 2002 options for 3,798,856 shares have been exercised and
the shares issued. The total number of Huntingdon options held by Directors and
Officers as a group as at March 20, 2002 is 13,123,142.
The following table shows the number of share options held by Directors as at
March 20, 2002.
Date of Grant Number Granted Exercise Price Date First Exercisable Expiry Date
A H Baker
September 2, 1998 5,000,000 (pound)0.125 September 2, 2001 September 1, 2008
F W Bonner
December 1, 1997 100,000 (pound)0.50 December 1, 1999 November 30, 2004
December 31, 1998 500,000 (pound)0.125 December 31, 2001 December 30, 2008
April 27, 2001 500,000 (pound)0.05 April 27, 2004 April 27, 2011
B Cass
December 3, 1998 5,000,000 (pound)0.125 December 3, 2001 December 2, 2008
September 9, 1999 23,142 (pound)0.14 November 21, 2002 April 30, 2003
K Cramer
March 29, 1999 1,000,000 (pound)0.1925 March 29, 2002 March 28, 2009
J T Griffiths
March 29, 1999 500,000 (pound)0.1925 March 29, 2002 March 28, 2009
April 27, 2001 500,000 (pound)0.05 April 27, 2004 April 27, 2011
Under the following plan options may be granted to acquire Voting Common Stock
in LSR.
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR Board has adopted the LSR 2001 Equity Incentive Plan. Adoption of the
LSR 2001 Equity Incentive Plan will enable LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key personnel.
Awards under the LSR 2001 Equity Incentive Plan may be granted by a committee
designated by the LSR Board pursuant to the terms of the LSR 2001 Equity
Incentive Plan and may include: (i) options to purchase shares of LSR Voting
Common Stock, including incentive stock options ("ISOs"), non-qualified stock
options or both; (ii) stock appreciation rights ("SARs"), whether in conjunction
with the grant of stock options or independent of such grant, or stock
appreciation rights that are only exercisable in the event of a change in
control or upon other events; (iii) restricted stock consisting of shares that
are subject to forfeiture based on the failure to satisfy employment-related
restrictions; (iv) deferred stock, representing the right to receive shares of
stock in the future; (v) bonus stock and awards in lieu of cash compensation;
(vi) dividend equivalents, consisting of a right to receive cash, other awards,
or other property equal in value to dividends paid with respect to a specified
number of shares of LSR Voting Common Stock or other periodic payments; or (vii)
other awards not otherwise provided for, the value of which are based in whole
or in part upon the value of the LSR Voting Common Stock. Awards granted under
the LSR 2001 Equity Incentive Plan are generally not assignable or transferable
except pursuant to a will and by operation of law.
The flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among
other things, permit the stock option committee to impose performance conditions
with respect to any award, thereby requiring forfeiture of all or part of any
award if performance objectives are not met or linking the time of
exercisability or settlement of an award to the attainment of performance
conditions. For awards intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the United States Internal Revenue Code
such performance objectives shall be based solely on (i) annual return on
capital; (ii) annual earnings or earnings per share; (iii) annual cash flow
provided by operations; (iv) changes in annual revenues; (v) stock price; and/or
(vi) strategic business criteria, consisting of one or more objectives based on
meeting specified revenue, market penetration, geographic business expansion
goals, cost targets, and goals relating to acquisitions or divestitures.
LSR's stock option committee, which will administer the 2001 LSR Equity
Incentive Plan, will have the authority, among other things, to: (i) select the
directors, officers and other employees and independent contractors entitled to
receive awards under the 2001 LSR Equity Incentive Plan; (ii) determine the form
of awards, or combinations of awards, and whether such awards are to operate on
a tandem basis or in conjunction with other awards; (iii) determine the number
of shares of LSR Voting Common Stock or units or rights covered by an award; and
(iv) determine the terms and conditions of any awards granted under the 2001 LSR
Equity Incentive Plan, including any restrictions or limitations on transfer,
any vesting schedules or the acceleration of vesting schedules, any forfeiture
provision or waiver of the same and including any terms and conditions necessary
or desirable to ensure the optimal tax result for participating personnel and
the Company including by way of example to ensure that there is no tax on the
grant of the rights and that such tax only arises on the exercise of rights or
otherwise when the LSR Voting Common Stock unconditionally vests and is at the
disposal of such participating personnel. The exercise price at which shares of
LSR Voting Common Stock may be purchased pursuant to the grant of stock options
under the 2001 LSR Equity Incentive Plan is to be determined by the option
committee at the time of grant in its discretion, which discretion includes the
ability to set an exercise price that is below the fair market value of the
shares of LSR Voting Common Stock covered by such grant at the time of grant.
The number of shares of LSR Voting Common Stock that may be subject to
outstanding awards granted under the 2001 LSR Equity Incentive Plan (determined
immediately after the grant of any award), may not exceed 20 per cent of the
aggregate number of shares of LSR Voting Common Stock then outstanding.
The 2001 LSR Equity Incentive Plan may be amended, altered, suspended,
discontinued, or terminated by the LSR Board without LSR Voting Common
Stockholder approval unless such approval is required by law or regulation or
under the rules of any stock exchange or automated quotation system on which LSR
Voting Common Stock is then listed or quoted. Thus, LSR Voting Common
Stockholder approval will not necessarily be required for amendments which might
increase the cost of the plan or broaden eligibility. LSR Voting Common
Stockholder approval will not be deemed to be required under laws or regulations
that condition favourable tax treatment on such approval, although the LSR Board
may, in its discretion, seek LSR Voting Common Stockholder approval in any
circumstances in which it deems such approval advisable.
No awards were granted during 2001 pursuant to the 2001 LSR Equity Incentive
Plan. The LSR Board has designated the Compensation Committee of the Board to
serve as the stock option committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS AT
APRIL 8, 2002.
The following table sets forth, as of April 8, 2002, certain information
regarding the beneficial ownership of the shares of LSR Voting Common Stock, by
(a) each person or entity who is known by LSR to own beneficially 5% or more of
its outstanding shares of Voting Common Stock (none other than Messrs Baker and
Cramer who are both Directors and/or Executive Officers of LSR); (b) each
Director or Executive Officer of LSR; and (c) all Directors and Executive
Officers as a group.
Name No. of Shares Percent of Outstanding
Shares
Mr A Baker 2,699,175 (1) 24.4%
Mr G Balthazar 10,000 (2) *
Dr F W Bonner 17,855 (3) *
Mr B Cass 520,000 (4) 4.7%
Prof. J Caldwell 10,000 (5) *
Mr K Cramer 903,007 (6) 8.1%
Mr J Griffiths 80,000 (7) *
Mr R Michaelson 216,000 (8) 1.9%
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All Executive Officers and
Directors as a group 4,456,037 39.2%
* Signifies less than 1%. All percentages calculated on the basis of
11,032,578 outstanding shares of Voting Common Stock.
(1) Includes presently exercisable options to purchase 100,000 shares
(2) Includes presently exercisable options to purchase 10,000 shares
(3) Includes presently exercisable options to purchase 17,500 shares
(4) Includes presently exercisable options to purchase 100,000 shares
(5) Includes presently exercisable options to purchase 10,000 shares
(6) Includes presently exercisable options to purchase 20,000 shares
(7) Includes presently exercisable options to purchase 30,000 shares
(8) Includes presently exercisable options to purchase 45,000 shares
From time to time US depositary institutions hold shares on behalf of their
clients to enable a market to be made in the LSR's shares. No holdings of 5% or
more have been reported by those institutions at March 28, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(1) A $2,910,800 ((pound)2,000,000) facility was made available to the Company
on September 25, 2000 by a director. Mr Baker. This has been drawn down in
full. The loan is repayable on demand, although it is subordinate to the
bank loan, it is unsecured and interest is payable monthly at a rate of 10%
per annum. By Amendment No. 2 to that loan facility, dated March 20, 2001,
FHP became party to the loan and $550,000 of the amount loaned was
transferred to FHP. On March 28, 2002 $2.1 million of Mr Baker's loan was
converted into 1,400,000 shares of LSR Voting Common Stock and $300,000 of
FHP's loan was converted into 200,000 shares of LSR Voting Common Stock. As
a result of such conversions approximately $260,000 remains payable to Mr
Baker and $250,000 remains payable to FHP.
(2) On January 20, 2001 the Company's bank loan was refinanced by means of a
loan from HLSF, LLC a subsidiary company of the Stephens Group Inc., a
related party, and the other two banks who were part of the original loan
syndicate. That loan was transferred to another party effective February
11, 2002. The loan is now repayable on June 30, 2006 and interest is
payable in quarterly breaks at a rate of "LIBOR" plus 1.75% per annum. The
loan is secured by guarantees from LSR, Huntingdon Life Sciences Group plc,
Huntingdon Life Sciences Limited and Huntingdon Life Sciences Inc.,
collateralized by all the assets of those companies.
(3) In accordance with the terms of a facility agreement dated 19 July 2001 and
as amended on 5 October 2001, the Stephens Group Inc. made $2,910,800
((pound)2,000,000) available to the Company which is available for a period
of one year from 19 July 2001. That loan was transferred to another party
effective February 11, 2002. This amount, which is secured and subordinated
to the bank debt, has been drawn down in full. Interest is payable monthly
at a rate of 10% per annum.
(4) In October 2001 the Company issued warrants to purchase up to 704,425
shares of Common Voting Stock at a purchase price of $1.50 per share. These
warrants arose out of the refinancing of the bank loan by the Stephens
Group Inc. in January 2001. These warrants are exercisable at any time and
will expire on October 9, 2011.
In addition the Board intends to ask LSR shareholders at the next
shareholders meeting to approve the issuance of warrants to purchase up to
410,914 shares of Common Voting Stock at a purchase price of $1.50 per
share. These warrants arose out of negotiations regarding the provision of
the $2,910,800 ((pound)2,000,000) loan facility made available to the
Company on September 25, 2000 by Mr. Baker who controls FHP.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
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(1) Index to Financial Statements Page
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Life Sciences Research, Inc.
Report of Deloitte & Touche - Report of Independent Auditors 27
Balance Sheet - December 31, 2001 28
Statement of Operations - Period from July 19, 2001
(date of inception) to December 31, 2001 29
Statement of Shareholder's Deficit - Period from July 19, 2001
(date of inception) to December 31, 2001 30
Statement of Cash Flows - Period from July 19, 2001
(date of inception) to December 31, 2001 31
Notes to Financial Statements 32
Huntingdon Life Sciences Group plc
Report of Deloitte & Touche - Report of Independent Auditors 35
Consolidated Balance Sheets - December 31, 2001 and 2000 36
Consolidated Statements of Operations and Comprehensive Loss -
Years ended December 31, 2001, 2000 and 1999 37
Consolidated Statements of Changes in Shareholders' (Deficit)/Equity -
Years ended December 31, 2001, 2000 and 1999 38
Consolidated Statements of Cash Flows - Years ended December 31, 2001,
2000 and 1999 39
Notes to Consolidated Financial Statements 40
(2) Financial Statement Schedules
Schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
(b) List of Exhibits
Exhibit
No. Description of Exhibit
2.1 Letter of Intent, dated August 27, 2001, between the Registrant and
HLS. INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT
ON FORM S-4, REGISTRATION NUMBER 333-71408.
3.1 Articles of Amendment and Restatement of the Registrant adopted on
November 7, 2001. INCORPORATED BY REFERENCE TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER 333-71408.
3.2 Bylaws of the Registrant. INCORPORATED BY REFERENCE TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER 333-71408.
4.1 Deposit Agreement dated June 21, 1983, amended and restated as of June
6, 1996, as of May 8, 2000 and as of July 10, 2000 between HLS
(formerly Huntingdon International Holdings plc) and The Bank of New
York and Holders of American Depositary Receipts. INCORPORATED BY
REFERENCE TO HLS' POST-EFFECTIVE AMENDMENT NO.1 TO REGISTRATION
STATEMENT ON FORM F-6, REGISTRATION NUMBER 333-11922.
4.2 Specimen Certificate for American Depositary Shares. INCORPORATED BY
REFERENCE TO HLS' POST-EFFECTIVE AMENDMENT NO.1 TO REGISTRATION
STATEMENT ON FORM F-6, REGISTRATION NUMBER 333-11922.
4.3 Subscription Agreement dated August 1, 1991 among HIH Capital Limited
("HCL"), HLS, Chase Manhattan Bank Luxembourg S.A. (the "Custodian"),
J Henry Schroder Wagg & Co.Limited and Others. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1991.
4.4 Trust Deed, dated August 12, 1991 among HCL, HLS and The Law Debenture
Trust Corporation plc INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1991.
4.5 Deed Poll, dated August 12, 1991, executed by HLS. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1991.
4.6 Custodian Agreement, dated August 1, 1991 among the Custodian, HCL,
and HLS. INCORPORATED BY REFERENCE TO HLS'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1991.
4.7 Deed Poll, dated October 16, 2001, executed by Registrant.
INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-4, REGISTRATION NO. 333-71408.
10.1 Security Agreement dated April 30, 1998 between Huntingdon Life
Sciences Inc., National Westminster Bank PLC and various other banks.
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998.
10.2 An agreement dated August 7, 1998 between, inter alia, HLS, Huntingdon
Life Sciences Limited, Huntingdon Life Sciences Inc. and National
Westminster Bank PLC replacing the facilities agreement dated
November, 1995. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON
FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.3 A bridging facility being made available by National Westminster Bank
PLC in favour of HLS and Huntingdon Life Sciences Limited.
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998.
10.4 An agreement between HLS, Huntingdon Life Sciences Limited, Huntingdon
Life Sciences Inc. and various banks replacing the third intercreditor
agreement between the parties dated March 17, 1998. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
10.5 A letter of appointment dated August 7, 1998 between HLS and Professor
J Caldwell. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM
20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.6 A Management Services Agreement dated August 7, 1998 between HLS and
Focused Healthcare Partners. INCORPORATED BY REFERENCE TO HLS' ANNUAL
REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.7 A Deed of Undertaking between HLS and Andrew Baker. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
10.8 Amendment dated January 26, 2000 to the Management Services Agreement
dated August 7, 1999 between HLS and Focused Healthcare Partners.
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999.
10.9 Service Contract dated April 29, 1999 between Huntingdon Life Sciences
Ltd and Mr B Cass INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON
FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.10 Service Contract dated April 29, 1999 between Huntingdon Life Sciences
Ltd and Mr J Griffiths. INCORPORATED BY REFERENCE TO HLS' ANNUAL
REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
10.11 Service Contract dated April 29, 1999 between Huntingdon Life Sciences
Ltd and Dr F Bonner. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT
ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. 10.12
Service Agreement dated September 17, 1999 between HLS and Mr K
Cramer. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
10.13 A letter of appointment dated March 21, 2000 between HLS and Mr G
Balthazar. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
10.14 Option Deed dated September 2, 1998 between HLS and Andrew Baker
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 20-F FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998.
10.15 Rules of the Huntingdon Life Sciences Group Unapproved Share Option
Scheme as amended on June 3, 1998. INCORPORATED BY REFERENCE TO HLS'
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1999.
10.16 Rules of the Huntingdon Life Sciences Group Incentive Option Plan
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999.
10.17 Rules of the Huntingdon Life Sciences Sharesave Scheme INCORPORATED
BY REFERENCE TO HLS'ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999.
10.18 The Rules of The HIH Share Option Plan. INCORPORATED BY REFERENCE TO
HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1999.
10.19 The Rules of The HIH Approved Management Share Option Plan.
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999.
10.20 Registrant's 2001 Equity Incentive Plan. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER
333-71408.
10.21 Loan Facility Letter, dated September 25, 2000, between HLS and
Andrew Baker. INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
10.22 Amendment No. 1 to Loan Facility Letter, dated as of February 22,
2001, between HLS and Andrew Baker. INCORPORATED BY REFERENCE TO HLS'
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
2000.
10.23 Amendment No. 2 to Loan Facility Letter, dated as of March 20, 2001,
by and among Andrew Baker, HLS and Focused Healthcare Partners. FILED
HEREWITH.
10.24 Amendment Agreement dated February 19, 2001 relating to a Facilities
Agreement dated August 7, 1998 among HLS, Huntingdon Life Sciences
Limited (HLSL), Huntingdon Life Sciences Inc. (HLSI), the Banks (as
defined therein) and Stephens Group Inc. as Agent. INCORPORATED BY
REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000.
10.25 Fifth Intercreditor Agreement, dated February 19, 2001 among Stephens
Group Inc. (as Agent), HLSF LLC, Allfirst Bank, Comerica Bank, the
Company, HLSL, HLSI, Andrew Baker and Stephens Group Inc. (as Funder).
INCORPORATED BY REFERENCE TO HLS' ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000.
10.26 Subscription and Investor Rights Agreement, dated October 9, 2001,
between LSR and Walter Stapfer. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION
STATEMENT NUMBER 333-71408.
10.27 Subscription and Investor Rights Agreement, dated October 9, 2001,
between LSR and the persons named therein as Investors. INCORPORATED
BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4,
REGISTRATION STATEMENT NUMBER 333-71408.
10.28 Warrant, dated October 9, 2001, issued by the Registrant.
INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-4, REGISTRATION STATEMENT NUMBER 333-71408.
10.29 Form of Director's Irrevocable Undertaking. INCORPORATED BY REFERENCE
TO REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION
STATEMENT NUMBER 333-71408.
10.30 Inducement Agreement, dated October 9, 2001 between the Registrant
and HLS. INCORPORATED BY REFERENCE TO REGISTRANT'S REGISTRATION
STATEMENT ON FORM S-4, REGISTRATION STATEMENT NUMBER 333-71408.
21.1 Subsidiaries FILED HEREWITH
99.1 Press Release, dated March 28, 2002, announcing fourth quarter and
full year 2001 results. INCORPORATED BY REFERENCE TO REGISTRANT'S
CURRENT REPORT ON FORM 8-K, DATED MARCH 28, 2002.
Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this Annual Report on Form 10-K has been signed below by the
following person on behalf of the Registrant and in the capacities and on the
dates indicated.
Life Sciences Research Inc.
(Registrant)
By: /s/ Brian Cass
Name: Brian Cass
Title: Managing Director/President
Date: April 12, 2002