LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-33505
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LIFE SCIENCES RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-2340150
(I.R.S. Employer Identification No.)
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649 9961
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
At May 8, 2003: 11,932,338 Voting Common Stock of $0.01 each
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2002. 3
Condensed Consolidated Balance Sheets at March 31,
2003 and December 31, 2002. 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 and 2002. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
Item 3 Quantitative and Qualitative Disclosures
about Market Risk. 15
Item 4 Controls and Procedures 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 16
Certifications 17
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended
March 31
(Dollars in thousands, except per share data) 2003 2002
Net revenues $31,901 $26,135
Cost of revenues (25,373) (21,646)
--------------- -----------------
Gross profit 6,528 4,489
Selling, general and administrative expenses (4,921) (4,302)
----------------- ---------------
Operating income 1,607 187
Interest income 16 6
Interest expense (1,708) (1,627)
Other expense (450) (2,623)
--------------- ----------------
Loss before income taxes (535) (4,057)
Income tax benefit 177 742
---------------- ---------------
Net loss $(358) $(3,315)
----------------- ---------------
----------------- ---------------
Loss per common share
- - Basic $(0.03) $(0.48)
- - Diluted $(0.03) $(0.48)
Weighted average common shares outstanding
- - Basic (000's) 11,932 6,872
- - Diluted (000's) 11,932 6,872
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands, except per share data) March 31, December 31,
2003 2002
ASSETS Unaudited Audited
Current assets:
Cash and cash equivalents $11,098 $14,644
Accounts receivable, net of allowance of $307 and $287 in
2003 and 2002 respectively 19,998 20,176
Unbilled receivables 9,157 9,108
Inventories 1,756 1,556
Prepaid expenses and other current assets 3,635 3,075
---------------- ----------------
Total current assets $45,644 $48,559
---------------- ----------------
Property and equipment, net 93,279 94,574
Investments 234 248
Unamortized Capital Bonds issue costs 503 563
Deferred income taxes 4,316 4,466
---------------- ----------------
Total assets $143,976 $148,410
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $10,366 $8,574
Accrued payroll and other benefits 1,716 1,773
Accrued expenses and other liabilities 10,653 12,990
Fees invoiced in advance 24,662 26,066
--------------- ----------------
Total current liabilities $47,397 $49,403
--------------- ----------------
Long-term debt 82,137 83,717
Related party loans 415 358
Pension liabilities 17,059 17,712
Deferred income taxes 4,692 5,024
--------------- ----------------
Total liabilities $151,700 $156,214
--------------- ----------------
Commitments and contingencies - -
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized 50,000,000
Issued and outstanding at March 31, 2003: 11,932,338 (December
31, 2002: 11,932,338) 119 119
Non-Voting Common Stock, $0.01 par value. Authorized 5,000,000 - -
Issued and oustanding: None
Preferred Stock, $0.01 par value. Authorized at 5,000,000 - -
Issued and outstanding: None
Paid in capital 75,098 75,098
Less: Promissory notes for the issuance of common stock (621) (684)
Accumulated comprehensive loss, including minimum pension (18,201) (18,576)
liability of $13,264 at March 31, 2003 ($13,507 on December 31,
2002) - deficiency on UK defined benefit pension plan, net of
deferred tax
Accumulated deficit (64,119) (63,761)
--------------- ----------------
Total shareholders' equity /(deficit) (7,724) $(7,804)
--------------- ----------------
Total liabilities and shareholders' equity /(deficit) $143,976 $148,410
--------------- ----------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three months ended March 31
(Dollars in thousands) 2003 2002
Cash flows from operating activities:
Net loss $(358) $(3,315)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,129 1,897
Foreign exchange loss on Capital Bonds 860 1,068
Gain on repurchase of Capital Bonds (410) -
Deferred income taxes (177) (742)
Provision for losses on accounts receivable 20 22
Amortization of warrants 209 39
Amortization of Capital Bonds issue costs 39 37
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (1,763) (953)
Inventories (228) (19)
Accounts payable, accrued expenses and other liabilities 297 (814)
Fees invoiced in advance (950) 887
---------------- ----------------
---------------- ----------------
Net cash used in operating activities $(332) $(1,893)
---------------- ----------------
---------------- ----------------
Cash flows used in investing activities:
Purchase of property and equipment (2,280) (810)
---------------- ----------------
---------------- ----------------
Net cash used in investing activities $(2,280) $(810)
---------------- ----------------
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from issue of Voting Common Stock 63 4,399
Proceeds from issue of Non Voting Common Stock - 1,500
Repayments of long-term borrowings (642) -
Repayments of short term borrowings (127) (83)
---------------- ----------------
---------------- ----------------
Net cash (used in)/provided by financing activities $(706) $5,816
---------------- ----------------
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (228) (287)
---------------- ----------------
---------------- ----------------
(Decrease)/increase in cash and cash equivalents (3,546) 2,826
Cash and cash equivalents at beginning of period 14,644 2,240
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period $11,098 $5,066
---------------- ----------------
Supplementary disclosures
Interest paid in the quarter $2,292 $2,406
Non cash transactions:
Conversion of debt to equity $- $2,400
Issuance of common stock for promissory notes $- $825
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
Unaudited
1. THE COMPANY AND ITS OPERATIONS
Business
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global Contract Research Organization, offering world-wide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that man uses, eats, and is
otherwise exposed to. In addition, it tests the effect of such compounds on the
environment and also performs work on assessing the safety and efficacy of
veterinary products.
Organization
LSR was incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer (the
"Offer") for Huntingdon Life Sciences Group Plc ("Huntingdon"). The Offer was
made on October 16, 2001 and was declared unconditional on January 10, 2002, at
which time LSR acquired approximately 89% of the outstanding ordinary shares of
Huntingdon in exchange for approximately 5.3 million shares of LSR Voting Common
Stock. The subsequent offer period expired on February 7, 2002, by which time
approximately 92% of the outstanding ordinary shares had been offered for
exchange. The Company completed its compulsory purchase under UK law of the
remaining outstanding ordinary shares of Huntingdon on March 26, 2002 at which
time Huntingdon became a wholly owned subsidiary of LSR, in exchange for a total
of approximately 5.9 million shares of LSR Voting Common Stock (the "Exchange
Offer").
Under the accounting principles generally accepted in the United States of
America ("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 was accounted for as a "reverse acquisition" for
financial reporting purposes. This reverse acquisition was deemed a capital
transaction and the net assets of Huntingdon (the accounting acquirer) were
carried forward to LSR (the legal acquirer and the reporting entity) at their
carrying value before the combination. Although Huntingdon was deemed to be the
acquiring corporation for financial accounting and reporting purposes, the legal
status of LSR as the surviving corporation does not change. The relevant
acquisition process utilizes the capital structure of LSR and the assets and
liabilities of Huntingdon are recorded at historical cost. In these financial
statements, Huntingdon is the operating entity for financial reporting purposes
and the financial statements for all periods presented represent Huntingdon's
financial position and results of operations. The equity of LSR is the
historical equity of Huntingdon, retroactively restated to reflect the number of
shares issued in the Exchange Offer, and all other stock offerings subsequent to
the Exchange Offer.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The condensed consolidated financial statements are
unaudited and are subject to such year-end adjustments as may be considered
appropriate and should be read in conjunction with the historical consolidated
financial statements of LSR years ended December 31, 2002, 2001 and 2000
included in LSR's Annual Report on Form 10-K for the fiscal year ended December
31, 2002. Operating results for the three-month period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
These financial statements have been prepared in accordance with US GAAP and
under the same accounting principles as the financial statements included in the
Annual Report on Form 10-K. Certain information and footnotes disclosures
related thereto normally included in the financial statements prepared in
accordance with the US GAAP have been omitted in accordance with Rule 10-01 of
Regulation S-X.
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States. The Company has one continuing activity,
Contract Research.
The analysis of the Company's net revenues and operating income/(loss) by
segment for the three-month periods ended March 31, 2003 and March 31, 2002 is
as follows:
Three months ended
March 31
(Dollars in thousands) 2003 2002
Net revenues
UK $25,375 $20,584
US 6,526 5,551
------------- ------------
$31,901 $26,135
============= ============
Operating income/(loss)
UK $1,430 $682
US 177 (495)
------------- ------------
------------- ------------
$1,607 $187
============= ============
4. REFINANCING
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and Focused Healthcare Partners ("FHP") ($0.3 million) and $825,000 was
paid with promissory notes. $222,000 of such promissory notes was repaid during
2002, and a further $63,000 was repaid in the first quarter of 2003.
5. CONTINGENCIES
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. RESULTS OF OPERATIONS
a) Three months ended March 31, 2003 compared with three months ended March
31, 2002.
Net revenues for the three months ended March 31, 2003 were $31.9 million, an
increase of 22.2% on net revenues of $26.1 million for the three months ended
March 31, 2002. Excluding the effect of exchange rate movements, the increase
was 11.5%. UK net revenues increased by 23.3%; at constant exchange rates the
increase was 9.8%. In the US, net revenues increased by 17.6%. These both
reflect the growth in orders in 2002, particularly in the volume of toxicology
orders. New signings for the three months ended March 31, 2003 were flat on the
same period last year.
Cost of revenues for the three months ended March 31, 2003 were $25.4 million,
an increase of 17.1 % on cost of revenue of $21.7 million for the three months
ended March 31, 2002. Excluding the effects of exchange rate movements, the
increase was 7.1%. This increase was driven by the improvement in net revenues
though it was lower than the proportionate increase in net revenues as the
business is characterized generally by a high level of fixed costs. UK cost of
revenues increased by 20.3%, at constant exchange rates the increase was 7.1%,
reflecting the increase in volume, mainly due to labor and subcontract cost
increases. US cost of revenues increased by 7.2%, also as a result of the
increase in volume, mainly due to labor cost increases and higher depreciation
expense offset by lower subcontract costs.
Selling, general and administrative expenses (S G & A) rose by 14.0% to $4.9
million for the three months ended March 31, 2003 from $4.3 million in the
corresponding period in 2002. Excluding the effects of exchange rate movements,
the increase was 4.7%. The increase was due to higher labor costs of $0.4
million and higher commission charges of $0.1 million. UK S G & A increased by
20.9%; at constant exchange rates the increase was 7.6%. This increase was due
to the factors outlined above.
Net interest expense for the three months ended March 31, 2003 was $1.7 million,
which is $0.1 million higher than the net interest expense for the three months
ended March 31, 2002. Excluding the effects of exchange rate movements, there
was a net decrease of 5.6%, due to both lower interest rates and lower
borrowings.
Other expense in the three months ended March 31, 2003 of $0.5 million relates
to the non-cash foreign exchange remeasurement loss of $0.9 million which arose
on the Convertible Capital Bonds denominated in US dollars (the functional
currency of the financial subsidiary that holds the bonds in UK sterling), with
the strengthening of the dollar against sterling; offset by $0.4 million gain on
the repurchase of Capital Bonds. In the three months to March 31, 2002, other
expense of $2.6 million related to merger/offer costs of $1.5 million together
with the non-cash foreign exchange remeasurement loss of $1.1 million that arose
on the Convertible Capital Bonds with the strengthening of the dollar against
sterling.
The income tax benefit on losses for the three months ended March 31, 2003 was
$0.2 million, as a change in the UK tax laws meant that the foreign exchange
gains and losses on the Convertible Capital Bonds are brought into the tax
charge from January 1, 2003. The income tax benefit for the three months ended
March 31, 2002 was $0.7 million, when the exchange gains on the Convertible
Capital Bonds and merger costs were non-taxable. The disallowance of these items
for tax purposes reduced the benefit by $0.2 million and $0.5 million
respectively.
The overall net loss for the three months ended March 31, 2003 was $0.4 million
compared to $3.3 million for the three months ended March 31, 2002. The
improvement in the net income of $2.9 million is due to an increase in the
operating income of $1.4 million, a reduction in merger/offer costs of $1.5
million, the gain on the repurchase of the Capital Bonds of $0.4 million and a
reduction in non-cash foreign exchange remeasurement loss of $0.2 million,
offset by a reduction in the income tax benefit of $0.5 million.
Basic loss per common share was 3 cents, compared to 48 cents last year.
2. LIQUIDITY & CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's current net non-bank loan of (pound)22.6
million ($36.0 million approximately) was refinanced by Stephens' Group Inc. and
other parties. 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 held by
Huntingdon Life Sciences Group Plc and is secured by the guarantees of the
wholly owned subsidiaries of the Company including, Huntingdon Life Sciences
Group Plc, Huntingdon Life Sciences Ltd., and Huntingdon Life Sciences Inc., and
collateralized by all the assets of these companies. The loan was transferred
from Stephens Group Inc., to an unrelated third 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. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc., in
January 2001. In accordance with APB Opinion No. 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants ("APB 14") the warrants were
recorded at their pro rata fair values in relation to the proceeds received on
the date of issuance. As a result, the value of the warrants was $430,000. The
warrants were subsequently transferred to an unrelated third party.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par. They carry interest at a rate of 7.5% per
annum, payable biannually in March and September. During the three months ending
March 31, 2003, the Company repurchased and cancelled $945,000 principal amount
of such bonds resulting in a $0.4 million gain recorded in other income/expense.
On April 11, 2003, the Company repurchased and cancelled a further $450,000
principal amount of such bonds resulting in a gain of $0.2 million. At the
current conversion rate, the number of shares of Voting Common Stock to be
issued on conversion and exchange of each unit of $10,000 comprised in a Bond
would be 49. The conversion rate is subject to adjustment in certain
circumstances.
Related Party Loans
Other financing has been provided by a $2.952 million loan facility made
available on September 25, 2000 by a director, Mr. Baker. In connection with
this financing, the company authorized, subject to shareholder approval, the
issuance of warrants to purchase 410,914 shares of LSR Voting Common Stock at
purchase price of $1.50 per share to FHP, a company controlled by Mr. Baker.
Such shareholder approval was granted on June 12, 2002. Additionally, other
financing also includes a $2.8 million facility from the Stephens Group Inc.
made available on July 19, 2001. Effective February 11, 2002 the Stephens Group
Inc. debt was transferred to an unrelated third party. 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, $302,000 remained payable to Mr. Baker and $250,000 remained
payable to FHP as of December 31, 2002. On March 24, 2003, $128,000 of the loan
was repaid to Mr. Baker. On April 5, 2003 the Company repaid the remainder of
both of these loans. Interest was payable monthly at a rate of 10% per annum.
One half of the facility was repaid on July 1, 2002, and the remainder was
repaid on October 1, 2002.
As noted above, on June 11, 2002 LSR issued to FHP warrants to purchase up to
410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share. The LSR warrants are exercisable at any time and will expire on June 11,
2012. These warrants arose out of negotiations regarding the provision of the
$2.9 million 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 warrants was $250,000.
Common Shares
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and FHP ($0.3 million) and $825,000 was paid with promissory notes.
$222,000 of such promissory notes was repaid during 2002 and a further $63,000
was repaid in the first quarter 2003.
Cash flows
During the three months ended March 31, 2003, funds used were $3.5 million,
reducing cash and cash equivalents from $14.6 million at December 31, 2002 to
$11.1 million at March 31, 2003.
Net days sales outstanding ("DSOs") at March 31, 2003 were 13 days, up slightly
from the 9 days at December 31, 2002. DSO is calculated as a sum of accounts
receivables, unbilled receivables and fees in advance over total revenue. Since
January 1999, DSOs at the quarter end have varied from 9 days to 47 days so they
are currently at a relatively low level. The impact on liquidity from a one-day
change in DSO is approximately $290,000.
3. SIGNIFICANT ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with US GAAP. The Company considers the following
accounting policies to be significant accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts,
which generally range in duration from a few months to three years. Revenue from
these contracts is generally recognized over the term of the contracts as
services are rendered. Contracts may contain provisions for renegotiation in the
event of cost overruns due to changes in the level of work scope. Renegotiated
amounts are included in net revenue when earned and realization is assured.
Provisions for losses to be incurred on contracts are recognized in full in the
period in which it is determined that a loss will result from performance of the
contractual arrangement. The Company's customers may terminate most service
contracts for a variety of reasons, either immediately or upon notice of a
future date. The contracts generally require payments to the Company to recover
costs incurred, including costs to wind down the study, and payment of fees
earned to date, and in some cases to provide the Company with a portion of the
fees or income that would have been earned under the contract had the contract
not been terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment schedules. Unbilled
receivables are billable to customers within one year from the respective
balance sheet date. Fees in advance are recorded for amounts billed to customers
for which, revenue has not been recognized at the balance sheet date (such as
upfront payments upon contract authorization, but prior to the actual
commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company's results of
operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the financial statements and the results of operations during the
reporting periods. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. Although these estimates are based upon management's best
knowledge of current events and actions, actual results could differ from those
estimates.
Exchange rate fluctuations and exchange controls
The Company operates on a world-wide basis and generally invoices its clients in
the currency of the country in which 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 7.5% 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 LSR are denominated in US
dollars. Changes in exchange rates between the UK pounds sterling and the US
dollar will affect the translation of the UK subsidiary's financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and equity accounts are translated
at historical exchange rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated other
comprehensive loss account. Management have decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
At December 31 At March 31 3 months to March 31 Average
rate (1)
2001 0.6871 0.7034 0.6917
2002 0.6212 0.7022 0.7010
2003 - 0.6326 0.6238
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On May 8, 2003 the noon buying rate for sterling was $1.00 = (pound)0.6244.
The Company has not experienced difficulty in transferring funds to and
receiving funds remitted from those countries outside the US or UK in which it
operates and Management expects this situation to continue.
While the UK has not at this time entered the European Monetary Union, the
Company has ascertained that its financial systems are capable of dealing with
Euro denominated transactions.
The following table summarizes the financial instruments denominated in
currencies other than the US dollar held by LSR and its subsidiaries as of March
31, 2003:
Expected Maturity Date
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(In US Dollars, amounts in
thousands)
Cash - Pound Sterling 5,268 5,268 5,268
- Euro 1,832 1,832 1,832
Accounts
receivable - Pound Sterling 13,564 13,564 13,564
- Euro 480 480 480
Debt - Pound Sterling 35,702 35,702 35,702
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment date changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
4. NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). This statement is effective for financial statements
issued for fiscal years beginning on or after June 15, 2002. 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 LSR's results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). This statement is effective fiscal years beginning after May 15,
2002. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" (SFAS 4), which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. SFAS 145 also
amends Statement 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. The Company early adopted the
provisions of this statement, resulting in the inclusion of a $0.4 million gain
in other income/(expense) in 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 eliminates the definition and requirement for
recognition of exit costs in Emerging Issues Task Force (EITF) Issue No. 94-3
where a liability for an exit costs was recognized at the date of an entity's
commitment to an exit plan. This statement is effective for exit or disposal
activities initiated after December 31, 2002. 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 June 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). This statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
amendments to Statement 123 of this statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of this
statement had no impact on LSR's results of operations, financial position or
cash flows.
In November 2002, the FASB issued FASB interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others". In the normal course of business, the
Company does not issue guarantees to third parties; accordingly, this
interpretation has no effect on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the equity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 15, 2003. The Company has no
arrangements that would be subject to this interpretation.
5. SUBSEQUENT EVENTS
On April 5, 2003, the Company fully repaid the remainder of the Baker loan and
FHP loan of $122,000 and $302,000 respectively.
On April 11, 2003, the Company repurchased and cancelled $450,000 principal
amount of the Convertible Capital Bonds, repayable in September 2006. This
resulted in a gain of $0.2 million.
6. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
7. FORWARD LOOKING STATEMENTS
Statements in this management's discussion and analysis of financial condition
and results of operations, as well as in certain other parts of this Quarterly
Report on Form 10-Q (as well as information included in oral statements or other
written statements made or to be made by the Company) that look forward in time,
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, expectations, predictions, and assumptions and other
statements which are other than statements of historical facts. Although the
Company believes such forward-looking statements are reasonable, it can give no
assurance that any forward-looking statements will prove to be correct. Such
forward-looking statements are subject to, and are qualified by, known and
unknown risks, uncertainties and other factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by those statements. These risks, uncertainties and other factors include, but
are not limited to the Company's ability to estimate the impact of competition
and of industry consolidation and risks, uncertainties and other factors more
fully described in the Company's Registration Statement on Form S-1, dated July
12, 2002, and Annual Report on Form 10-K for the year ended December 31, 2002,
each as filed with the Securities and Exchange Commission.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's (pound)22.6 million ($35.7 million) credit facility is sterling
denominated and does not contribute to transaction gains and losses on the
income statement. Interest on all outstanding borrowings under this credit
facility is based upon LIBOR plus a margin and approximated 5.74% per annum for
the three months ended March 31, 2003. At March 31, 2003 this credit facility
was fully drawn down.
In the three months ended March 31, 2003, a 1% change in LIBOR would have
resulted in a fluctuation in interest expense of $88,000.
For the three months ended March 31, 2003, approximately 72% of the Company's
net revenues were from outside the United States. The Company does not engage in
derivative or hedging activities related to its potential foreign exchange
exposures.
On March 31, 2003, the Company's $46.6 million principal amount of Convertible
Capital Bonds is US dollar denominated, but is held by a non-US subsidiary of
the Company. As a result, with respect to these bonds, the Company experiences
exchange related gains and losses which only has a non-cash impact on the
financial statements, based on the movement of exchange rates. Hence, the
Company does not take any actions to hedge against such risks. The Company is
unable to predict whether it will experience future gains or future losses from
such exchange-related risks on the bonds.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 4 CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated May 12, 2003, announcing the first
quarter earnings results for 2003.
Exhibit 99.2 - Sarbanes-Oxley Certification.
(B) Reports on Form 8-K
(i) Current Report on Form 8-K dated February 28, 2003 with respect to
Items 4 and 7.
(ii) Current Report on Form 8-K/A dated March 13, 2003 with respect to
Items 4 and 7.
(iii)Current Report on Form 8-K/A dated April 14, 2003 with respect to
Items 4 and 7.
(iv) Current Report on Form 8-K/A dated April 17, 2003 with respect to
Items 4 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFE SCIENCES RESEARCH, INC.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: Chief Financial Officer
Date: May 12, 2003
CEO Certification
I, Andrew Baker, as Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Andrew H Baker
------------------------
Andrew H Baker
Chief Executive Officer
CFO Certification
I, Richard Michaelson, as Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Life Sciences
Research, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Richard Michaelson
-------------------------
Richard Michaelson
Chief Financial Officer