UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10173
------------------------
LIFE SCIENCES RESEARCH INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-2340150
IRS Employer Identification No.
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649-9961
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
- ------------------------------------ ---------------------------------
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
Voting Common Stock $0.01 par value OTCBB
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. [ x ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes _ No X
The aggregate market value of the Voting Common Stock held by non-affiliates of
the Registrant at March 24, 2004 was approximately $20,514,815 at a per share
price of $2.22, the closing market price of the Voting Common Stock on the
OTCBB.
Indicate the number of outstanding shares of each of the Registrant's classes of
common stock as of the latest practicable date.
12,049,534 Voting Common Stock of $0.01 each as at March 24, 2004
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business ........................................................................ 3
2. Properties ...................................................................... 12
3. Legal Proceedings ............................................................... 12
4. Submission of Matters to a Vote of Security Holders.............................. 12
PART II
5. Market For Registrant's Common Equity, Related Stockholder Matters and
Issuer Repurchases of Equity Securities.......................................... 13
6. Selected Financial Data ......................................................... 17
7. Management's Discussion and Analysis of Financial Condition and Results
of Operation .................................................................... 20
7A. Quantitative and Qualitative Disclosures About Market Risk....................... 32
8. Financial Statements and Supplementary Data ..................................... 33
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................... 61
9(a) Controls and Procedures.......................................................... 61
PART III
10. Directors and Executive Officers of the Registrant............................... 62
11. Executive Compensation .......................................................... 63
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters...................................................... 69
13. Certain Relationships and Related Transactions .................................. 70
14. Principal Accountant Fees and Services........................................... 71
PART IV
15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................ 72
PART I
ITEM 1. BUSINESS
INTRODUCTION
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global contract research organization, offering worldwide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that humans use, eat and are
otherwise exposed to. In addition, the Company tests the effect of such
compounds on the environment and also performs work on assessing the safety and
efficacy of veterinary products.
As the Company continues to build on improving fundamentals, we have the
following strategy and goals:
o To grow to significant profitability and improved return on investment for
our shareholders.
o To be appreciated as the listening, understanding and reliable partner in
creative compound development and safety assessment and 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 recognized positively in the local communities in which we operate.
LSR was incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer (the
"Offer") for Life Sciences Research Ltd (LSR Ltd) formerly Huntingdon Life
Sciences Group plc ("Huntingdon"). The Offer was made on October 16, 2001 and
was declared unconditional on January 10, 2002, at which time LSR acquired
approximately 89% of the outstanding ordinary shares of Huntingdon in exchange
for approximately 5.3 million shares of LSR Voting Common Stock. The subsequent
offer period expired on February 7, 2002, by which time approximately 92% of the
outstanding ordinary shares had been offered for exchange. LSR completed its
compulsory purchase under UK law of the remaining outstanding ordinary shares of
Huntingdon on March 26, 2002 at which time Huntingdon became a wholly owned
subsidiary of LSR, in exchange for a total of approximately 5.9 million shares
of LSR Voting Common Stock (the "Exchange Offer").
Under accounting principles generally accepted in the United States ("US GAAP"),
the Company whose stockholders retain the majority interest in a combined
business must be treated as the acquirer for accounting purposes. Accordingly,
the Exchange Offer is accounted for as a reverse acquisition for financial
reporting purposes. The reverse acquisition is deemed a capital transaction and
the net assets of Huntingdon (the accounting acquirer) are carried forward to
LSR (the legal acquirer and the reporting entity) at their carrying value before
the combination. Although Huntingdon was deemed to be the acquiring corporation
for financial accounting and reporting purposes, the legal status of LSR as the
surviving corporation does not change. The relevant acquisition process utilizes
the capital structure of LSR and the assets and liabilities of Huntingdon are
recorded at historical cost. The equity of LSR is the historical equity of
Huntingdon, retroactively restated to reflect the number of shares issued in the
Exchange Offer.
LSR's executive office is based at the Princeton Research Center in New Jersey,
US.
HISTORY
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 and in 1988 it was floated on the
London Stock Exchange. In early 1989 Huntingdon obtained a listing for its ADR's
on the New York Stock Exchange.
In 1995, it acquired the toxicology business of APBI, which included
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 Center Limited and the name of that company changed to Huntingdon Life
Sciences Limited. The US business acquired operates as Huntingdon Life Sciences
Inc.
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. Given the medium to long term element of many of Huntingdon's
activities and the reluctance of clients to place new work until its finances
were stabilized, Huntingdon required a substantial injection of finance to both
initially restore confidence and then to fund operations during the period until
it returned to profitability.
On September 2, 1998 a group of new investors subscribed (pound)15 million ($25
million) for 120 million ordinary shares while existing shareholders and
institutional investors took up a further 57 million shares, contributing
(pound)7.1 million ($11.8 million). After expenses of (pound)1.7 million ($2.9
million), the issue of shares raised (pound)20.4 million ($33.9 million). On the
same date Huntingdon's bankers agreed to confirm Huntingdon's facilities at
(pound)24.5 million ($40.8 million) until August 31, 2000 and this amount was
fully drawn down. This 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 debt to an unrelated third
party. It is now repayable on June 30, 2006.
Since the involvement of the new investor group in 1998, the management team,
led by Brian Cass, believes that LSR has successfully addressed many of the
Company's past difficulties. Relationships with customers have been restored and
sales are growing at an encouraging rate.
In November 1999, a new so called "animal rights" group known as "Stop
Huntingdon Animal Cruelty" (SHAC) was formed in the UK with Huntingdon as its
target. Since then, activists in both the UK and the US have continued focusing
on Huntingdon (now LSR), its staff and directors, but also many other
stakeholders in the business, including shareholders, financial institutions,
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 re-domicile Huntingdon's corporate and legal existence to
the US. As a US company incorporated in Maryland, LSR benefits from a more
hospitable corporate environment, including 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
most 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 as a result, the Company's
US operations have enjoyed substantial growth in the last few years.
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.
In April 2002, LSR began trading its common stock on the US Over the Counter
Bulletin Board (OTCBB).
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, principally
through organic growth. In doing so, the Company expects to benefit from strong
drug pipelines in the pharmaceutical industry, a growing trend towards
outsourcing as clients focus more internal resources on research in the search
for new compounds, and the growing amount of legislation concerning the safety
and environmental impact of agrochemicals and industrial chemicals.
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
Pre-Clinical
Toxicology
Pharmacology
Drug Metabolism
Pharmacokinetics
Chemical Synthesis Phase I Phase II Phase III Phase IV
Safety Efficacy Long Term Post marketing
efficacy surveillance
------------------ --------------- -------------
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 humans. Pre-clinical testing
includes studies conducted prior to the compound's exposure to humans. 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 three-quarters of the
Company's orders are derived from this pharmaceutical sector. 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 centralized 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
invivo models for lead candidate drug characterization and optimization. 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 late stage clinical trials (Phase 3 and beyond) is
also relevant to the Company. While the Company does not preclude entering this
market in the future, it has no plan to do so in the foreseeable future, as it
is a very different business and one in which a number of major companies are
already firmly established.
Market Growth
It is estimated that the pharmaceutical industry annual research and development
(R & D) spending is over $40 billion per year and is growing at around 10% per
annum. Approximately one quarter of this is devoted solely to pre-clinical
testing. The Company believes that approximately 20-25% of this is outsourced
which means that the Company is today competing in a market which exceeds $2
billion. It is widely believed that the percent, as well as the absolute dollar
that is outsourced should continue to grow.
The market for these services is growing, among other things, due to the
following:
o New drug discovery is growing 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.
o Preclinical development services should experience the higher growth first,
as they are at the front end to receive the anticipated wave of new drug
candidates generated by advances in drug discovery technologies.
o The need to replace earnings from drugs coming off patent is driving
increases in the number of drugs being put into development.
o It is estimated there has been a 50% increase in the numbers of projects in
the R & D pipeline versus five years ago.
o 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.
o The biotechnology industry has become a significant source of business for
the 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 utilize contract research organizations to perform these services. This
frees them from the inefficient utilization of in-house capabilities due to
their sporadic and varied demand for these capabilities.
o 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 rationalized
and a focus on integration rather than development, longer-term resources
are increasingly invested in in-house facilities for discovery and lead
optimization rather than development and regulatory safety evaluation. The
outsourcing of development and safety evaluation is the Company's core
business.
As a result of these, amongst other factors, it is believed that the overall
market for outsourced services is estimated to be growing at a rate at least
equal to the growth of research and development expenditure by the
pharmaceutical industry.
Non-Pharmaceuticals
The Company has historically generated one third or more of its orders from
safety and efficacy testing of compounds for the agrochemical, industrial
chemical, and veterinary and food industries. During 2003 non-pharmaceutical
orders were one quarter of the total, this decreasing share of our business is
predicted to continue. 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.
Market Growth
It is estimated that the worldwide market for outsourced contract research from
non-pharmaceutical industries is around $300 million. The growth in the
non-pharmaceutical business is driven both by the introduction of novel
compounds, this number has decreased in recent years in response to increased
legislation concerning the safety and environmental impact of existing products.
The Company believes that a number of market segments included in this broad
area of business have the potential for some growth in coming years, due to the
following:
o Introduction of new testing requirements for `high production volume' (HPV)
chemical products in the US and a similar program in Europe (REACH).
o 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 children's toys).
o More stringent regulations affecting compounds, which have the potential to
adversely affect the environment, (e.g. biocides and endocrine disrupters).
o Growth in concerns over food safety, (e.g. additives and genetically
modified foods, and the introduction of `nutraceuticals').
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 not growing, we believe that
increased outsourcing could provide business opportunities in this market.
Customers
The Company offers worldwide pre-clinical and non-clinical testing for
biological safety evaluation research services to pharmaceutical, biotechnology,
agrochemical and industrial chemical companies. In 2003 the Company received
orders from companies ranging from the largest in their industries to small and
start-up organizations. 25 clients placed over $1 million of orders with the
Company and the ten largest clients accounted for approximately 45% of orders.
For net revenues from clients, assets attributable to each of the Company's
business segments, other segment information and a geographical analysis of
revenues from clients (based on the location of the client) for each of the last
three fiscal years, see note 11 to the audited consolidated financial statements
included elsewhere in this Annual Report.
Backlog
The majority of the Company's net revenues are 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 contract as services are
rendered. The Company maintains an order backlog to track anticipated net
revenues for work that has yet to be earned. Aggregate backlog at December 31,
2003 was $93.5 million compared to $95 million at December 31, 2002.
COMPETITION
Competition in both the pharmaceutical and non-pharmaceutical market segments
ranges from the in-house R&D divisions of large pharmaceutical, agrochemical and
industrial chemical companies who perform their own safety assessments, to "full
service" providers - contract research organizations like LSR, who provide a
full range of services to the industries (such as Covance Inc., Inveresk,
Quintiles Transnational Corp., Charles River Laboratories International, Inc.)
and "niche" suppliers focusing on specific services or industries (such as
Bioreliance Corporation).
GOVERNMENT REGULATION OF OPERATIONS
Regulatory agencies
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. During 2003 the
Company in the UK had one GLP, one Good Clinical Practice (GCP) and one Official
Recognition Inspection (for pesticide efficacy); and in the US one GLP and one
FDA Bioequivalence inspection. The Company has had numerous such inspections
since 1995.
The Company's laboratory in the US 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 US there is a voluntary certification program run by an
independent and internationally recognized organization, the Association for
Assessment and Accreditation of Laboratory Animal Care (AAALAC). The Company's
laboratories in both the US and UK are accredited under this program. The
Company's pre-clinical services are subject to industry standards for the
conduct of research and development studies that are embodied in the regulations
for GLP. The FDA and other regulatory authorities require the test results
submitted to such authorities be based on studies conducted in accordance with
GLP. The Company must also maintain reports for each study for specified periods
for auditing by the study sponsor and by FDA or other regulatory authorities.
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 animals and
regulation of their environment. Personal licenses (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
authorized 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 20 such inspections annually.
At each of its research centers, the Company ensures the availability of
suitably experienced and qualified veterinary staff backed by a 24-hour call out
system.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
While 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 organizations and agencies such as the FDA, the EPA, the UK Department
of Health, and the World Health Organization.
To ensure that this experience and expertise is transmitted throughout the
organization, the Company conducts 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, 2003 and 2002 were as
follows:
2003 2002
US ................... 223 224
UK ................... 1,233 1,205
Japan................. 11 10
----------- -----------
1,467 1,439
----------- -----------
Management and Labor Relations
The Company's labor 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 labor relations,
policies and practices and management structure are appropriate to support its
competitive position.
Acquisition of Huntingdon Life Sciences KK (HLS KK)
On July 1, 2003, the remaining 50% of the shares in HLS KK, not previously owned
by Huntingdon, was purchased, resulting in HLS KK becoming a wholly owned
subsidiary of Huntingdon. The purchase price is payable over a three year
period, and is equal to the greater of (a) $1 million or (b) the commission
which would have been paid if the purchase had not happened at rates of between
2.5% and 4.5% of billings generated. Payments during that three year period
shall be made at the rate which had been in effect for commissions prior to the
acquisition, and is payable semi-annually. Commissions paid to the previous
owner of the acquired 50% of HLS KK during the 12 months to June 30, 2003 were
$0.3 million.
Prior to this date, the shares owned by Huntingdon in HLS KK were held as an
investment, as the day to day control of HLS KK was not exercised by the
Company. The Company's share of the profits of HLS KK from the date of
incorporation, January 2, 1996, to June 30, 2003 of $208,000 was recognized in
the third quarter of 2003.
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, trademarks, 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.
Animal Rights Activism
In parallel with an increase in so called "animal rights" activity
internationally targeting organizations in the CRO, academic, and medical
research community, a new campaign group (Stop Huntingdon Animal Cruelty or
SHAC) was formed in the UK during November 1999 with Huntingdon as its target.
SHAC's broad aim is to end all animal research, while its immediate and publicly
stated goal at that time was to "shut HLS down within three years". 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 many forms, including 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; and in some cases
violence.
During 2001 and 2002 the incidents 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 unsuccessful attempts to deprive
Huntingdon of its bank financing and to defeat the re-domiciling transaction to
the US. During the same period, in large part due to the successful US
re-domiciling, animal rights activities of SHAC and the other groups expanded to
the US, with a focus on the Company's stakeholders and suspected stakeholders,
market makers and senior staff and directors.
To counter this "animal rights" campaign, the Company has adopted a strategy of
openness and direct cooperation 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
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 media
coverage has become increasingly positive throughout the duration of the
campaign, particularly in the US where the media coverage has consistently
condemned the actions of the SHAC campaign.
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. In June 2002, in further recognition of his
contribution to science and professional achievements, Mr. Cass was appointed as
a Commander in the Most Excellent Order of the British Empire (CBE). The highly
prestigious CBE is awarded on merit, for exceptional achievement or service; it
is recommended by the Prime Minister of England but decided by the Queen of
England.
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. This national initiative continues to develop, particularly as the
government and police deal with protecting other animal rights targets in the
UK, including academic institutions.
In April 2003 the Company obtained from the London High Court of Justice a
groundbreaking legal injunction protecting its employees against harassment from
SHAC and similar animal rights activists. The order, obtained under the
Protection from Harassment Act, bans protesters from approaching within 50 yards
of employees homes and sets up similar exclusion zones around the Company's two
UK research centers. Several months later, a group of five large Japanese
companies followed a similar course in obtaining protective injunctions for
their employees who were being harassed.
Although the animal rights movement is more recent and less developed in the US
and appears to enjoy less public support than in the UK, the Company is
addressing it proactively with actions similar to those it has utilized in the
UK. These steps include a strategy of openness and media cooperation;
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 including
close cooperation with law enforcement authorities at all levels. For example,
following incidents of vandalism at or following home protests against the
Company's US employees, the Company obtained orders of the New Jersey Superior
Court, the New York Supreme Court and the California Supreme 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 Center. During 2002,
criminal indictments were brought against SHAC extremists in New York City and
Boston. In the New York prosecution, felony convictions, including prison terms,
have been handed down. In Washington D.C., legislation was enacted in May 2002
which significantly increased the penalties under the Animal Enterprise
Terrorism Act for acts of vandalism against medical research and animal based
research facilities.
Management recognizes that there has long been, and expects that there will
continue to be, individuals with strong views that animals should not be used
under any circumstances for the betterment of humanity, including for animal
based research. Regardless of whether there continues to be a direct impact from
this political issue on the Company's business, the Company remains committed to
continuing its initiatives to educate the community to the value of animal based
medical research, to advancing the important strides our industry has made in
animal welfare, and to supporting with state of the art science and techniques
our clients' desire to maximize the safety of vital new compounds being
developed for the betterment of society.
Available Information
Our Internet website is located at http://www.lsrinc.net. The reference to our
Internet website does not constitute incorporation by reference of the
information contained on or hyperlinked from our Internet website and should not
be considered part of this document.
The public may read and copy any materials we file with the Securities and
Exchange Commission ("SEC") at the SEC's Public Reference Room at 450 Fifth
Street, N.W.. Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. The SEC's Internet website is located at
http://www.sec.gov.
ITEM 2. PROPERTIES
The Company's head office is situated within the Princeton Research Center in
New Jersey.
The Company believes that its facilities, described below, are adequate for its
operations and that suitable additional space will be available if and when
needed.
The following table shows the location of the facilities of the Company,
approximate size, based on occupancy, and the principal activities conducted at
such facilities each of which is owned by the Company.
Laboratories
Location and Offices Size Principal Activities
- -------- ----------- ---- --------------------
Princeton Research Center, East 135,000 sq.ft. 53.5 acres Laboratories, animal accommodation and
Millstone, NJ, US offices
Huntingdon Research Center, 559,000 sq.ft. 80 acres Laboratories, animal accommodation and
Huntingdon, England offices
Eye Research Center, Eye, England 257,000 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, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
LSR's Voting Common Stock trades on the Over the Counter Bulletin Board (OTCBB)
Market under the symbol "LSRI". The closing market price of the Voting Common
Stock on March 24, 2004 was $2.22 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".
The company completed its re-domiciling from the UK to the US on March 26, 2002
and commenced trading of LSR common stock on the OTCBB on April 8, 2002.
The Company's common stock traded on the OTCBB during 2003. The high and low
quarterly sales price of LSR's common stock on the OTCBB from April 8, 2002 to
December 31, 2003 were as follows:
HIGH SALES LOW SALES
QUARTER ENDED PRICE PRICE
- ------------- ------------------ -----------------
$ $
June 30, 2002 2.25 0.50
September 30, 2002 2.85 1.80
December 31, 2002 1.35 1.40
March 31, 2003 2.80 1.80
June 30, 2003 2.90 1.80
September 30, 2003 3.50 1.80
December 31, 2003 2.70 1.50
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 March 24, 2004, LSR had 2,024 holders of record of Voting Common Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and Focused Healthcare Partners ("FHP") ($0.3 million) and $825,000 was
paid with promissory notes. $141,000 of such promissory notes were repaid during
2002, and $23,000 were repaid during 2003.
Equity Incentive Plans
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 enables LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key personnel.
This stock option plan was approved by the shareholders of LSR, prior to the
acquisition of Huntingdon.
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 administers the 2001 LSR Equity Incentive
Plan, has 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 percent 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 favorable 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.
The LSR Board has designated the Compensation Committee of the Board to serve as
the stock option committee. LSR made grants under the LSR 2001 Equity Incentive
Plan on March 1, 2002 to certain directors and key employees at the time.
Grants to Directors
- -------------------
Name Number Granted
- ---- --------------
Gabor Balthazar 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
- ----------------------------------
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted during 2002 to employees and directors, on the terms set
forth above, are listed below.
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
In 2003, options to purchase an aggregate of 11,000 shares of LSR Common Stock
were issued, all at an exercise price of $1.80, the market price at the date of
grant:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
February 14, 2003 11,000 $1.80
Securities Authorized for Issuance under 2001 Equity Incentive Plan
- -------------------------------------------------------------------
Shares Wtd Avg. Ex Price Number of securities remaining
(000) available for future issuance
Outstanding at start of period 1,177 $1.52
Granted 11 $1.80
----------- ------------------ ----------------------------------
December 31, 2003 1,188 $1.52 912,000
----------- ------------------ ----------------------------------
Exercisable at end of year 1,188 $1.52
Weighted average fair value of
options granted (000) $922
Huntingdon Life Sciences Group plc Stock Option Plans
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and as
such are considered to have no value.
Other Option Grants
In addition to the options granted under the Share Option Plans, the Company has
issued options outside of the plans, pursuant to various employment, consulting
and separation agreements.
Warrants
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. Stephens Group Inc. subsequently sold the
warrants to independent third parties. The LSR warrants 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., (Stephens' Loan) in January 2001. In accordance with APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
("APB 14") the warrants were recorded at their pro rata fair values in relation
to the proceeds received on the date of issuance. As a result, the value of the
warrants was $430,000.
On 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.
On October 24, 2003, 100,000 warrants were issued at the market price on the day
of $2.05. These warrants were issued to an independent consultant in connection
with financial advice.
A summary of warrants outstanding at December 31, 2003 is as follows:
Warrants Exercise price Expiration Date
-------- -------------- ---------------
October 9, 2001 704,425 $1.50 October 9, 2011
June 11, 2002 410,914 $1.50 June 11, 2012
October 24, 2003 100,000 $2.05 October 24, 2013
Share purchase loan
Brian Cass, President and Managing Director of LSR, acquired 400,000 shares of
LSR Common Stock in the Private Placement. Mr. Cass acquired such shares through
the delivery of two promissory notes. Both such promissory notes, each in the
amount of (pound)211,679 ($377,995), are due on March 28, 2007; bear interest at
the rate of 5% per annum; and are secured by the 200,000 shares of LSR Common
Stock purchased with the proceeds of each such loan. The due date of each
promissory note would be accelerated if Mr. Cass voluntarily resigned from his
employment with LSR or had his employment terminated. Repayment of one of the
promissory notes will be made by automatic deduction of (pound)44,000 ($78,570)
per year from the (pound)66,000 ($117,856) per year pension contribution made by
the Company to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($383,033) accrued in such pension account.
In addition, one-third of any yearly bonus received by Mr. Cass will be used to
reduce principal of the promissory notes. Total amount of this loan as of
December 31, 2003 is (pound)370,082 ($660,855 at year-end foreign exchange
rates).
Julian Griffiths, a former director of LSR and current Finance Director of
Huntingdon, acquired 50,000 shares of LSR Common Stock in the Private Placement.
Mr. Griffiths acquired such shares through the delivery of a promissory note in
the principal amount of (pound)52,817 ($94,315), which was due on March 28,
2007; bore interest at the rate of 5% per annum; and was secured by the 50,000
shares of LSR Common Stock purchased with the proceeds of the loan. Repayment of
the promissory note was made by automatic monthly deduction of (pound)943.56
($1,684.92) from Mr. Griffith's salary. This loan was paid in full in 2003.
Repurchase of equity securities
The Company did not repurchase any equity securities during the fourth quarter
of 2003.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included elsewhere in this report. For the
purpose of this report, it is assumed that LSR is the ultimate parent company
for periods prior to July 19, 2001, since before this date, LSR had no
substantive operations on a stand-alone basis.
The selected consolidated financial information as of December 31, 2003 and 2002
and for each of the two years in the period ended December 31, 2003 has been
derived from LSR's audited consolidated financial statements and the related
notes included in this Annual Report on Form 10-K beginning on page 33. Such
financial statements have been prepared in accordance with US GAAP.
The selected consolidated financial information as of December 31, 2001 and 2000
and for each of the two 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 33.
Such financial statements have been prepared in accordance with US GAAP.
The selected consolidated financial information as of December 31,1999 and for
the one year in the period ended December 31, 1999 has been derived from
Huntingdon's consolidated financial statements which was 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. These financial
statements have been translated into US dollars.
As of and for the year ended December 31
------------- --------------- -------------- ------------- --------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------
($000, except per share data)
Statement of Operations Data
Revenues $132,434 $115,742 $99,206 $95,964 $94,186
Cost of revenues (104,798) (93,403) (84,133) (80,740) (82,890)
------------- --------------- -------------- ------------- --------------
Gross profit 27,636 22,339 15,073 15,224 11,296
Selling, general and administrative (20,867) (18,075) (15,966) (15,140) (14,603)
------------- --------------- -------------- ------------- --------------
Operating income/(loss) before
other operating income/(expense) 6,769 4,264 (893) 84 (3,307)
Other operating income/(expense) (3,522) - (750) - 825
------------- --------------- -------------- ------------- --------------
Operating income/(loss) 3,247 4,264 (1,643) 84 (2,482)
Interest expense (net) (5,990) (6,238) (6,510) (7,204) (6,363)
Other income/(expense)
Foreign exchange gain/(loss) on
Convertible Capital Bonds etc. 4,760 4,977 (1,386) (3,544) (1,550)
Gain on repurchase of Convertible
Capital Bonds 602 1,191 - - -
Merger/Offer costs - (1,246) (2,868) - -
Refinancing costs - - (217) (1,819) -
------------- --------------- -------------- ------------- --------------
Income/(loss) before income taxes 2,619 2,948 (12,624) (12,483) (10,395)
Income tax benefit/(expense) 1,109 (251) 2,996 2,720 3,790
------------- --------------- -------------- ------------- --------------
Net income/(loss) $3,728 $2,697 ($9,628) ($9,763) ($6,605)
------------- --------------- -------------- ------------- --------------
Income/(loss) per share
- basic $0.31 $0.25 ($1.64) ($1.68) ($1.13)
- diluted $0.29 $0.24 ($1.64) ($1.68) ($1.13)
Weighted average number of
Common stock (000)
- basic 11,958 10,679 5,868 5,824 5,820
- diluted 12,700 11,083 5,868 5,824 5,820
Balance Sheet Data
Working capital* $(3,911) $(844) $(1,896) $(33,214) $(28,853)
Total assets 156,273 148,410 133,964 146,107 158,970
Long term debt and related party loans 87,560 84,075 88,123 50,209 50,000
Total shareholders deficit (8,446) (7,804) (4,724) 4,066 14,850
Common stock and paid in capital 75,221 75,217 66,094 65,330 65,242
Book value per share ($0.71) ($0.73) ($0.81) $0.70 $2.55
Other Financial Data
Depreciation and amortization $9,049 $8,108 $8,307 $9,093 $9,675
Capital expenditure 8,716 4,177 3,295 3,648 4,893
Cash generated/(used) in the year 2,627 12,404 (1,046) (5,189) (13,709)
Net days sales outstanding (DSO) 17 9 46 36 34
Gross profit % 20.9% 19.3% 15.2% 15.9% 12.0%
Operating income/(expense) before
other operating income/(expense)% 5.1% 3.7% (0.9)% 0.1% (3.5)%
Operating income/(expense) % 2.5% 3.7% (1.7)% 0.1% (2.6)%
Net income/(loss) % 2.8% 2.3% (9.7)% (10.2)% (7.0)%
<FN>
*Working capital is defined as current assets less current liabilities.
</FN>
Note:
Other operating income/(expense) is comprised of:
Restructuring costs ($3,551) - - - -
Animal rights costs (575) - (400) - -
Recovery/bad debt relating to
bankruptcy of an exchange broker 396 - (350) - -
Share of associate company income 208 - - - -
Write off of assets not year 2000
compliant - - - - (2,018)
Sale of Wilmslow property - - - - 2,843
------------- --------------- -------------- ------------- --------------
(3,522) - (750) - 825
------------- --------------- -------------- ------------- --------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following should be read in conjunction with the consolidated financial
statements of LSR as presented in "Item 8, Financial Statements and
Supplementary Data".
The Company is a global provider of pre-clinical and non-clinical safety testing
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 recognized as services are
rendered towards the preparation of the final report. Contracts are generally
terminable upon notice by the client with the client being responsible for
reimbursing the Company for the value of work performed 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 characterized by high fixed costs, in particular staff
and facility related costs. Such a high proportion creates favorable conditions
for the Company as excess capacity is utilized, such as has been the case during
the last three years. However, during periods of declining revenue, careful
planning is required to reduce costs without impairing revenue-generating
activities.
RESULTS OF OPERATIONS
Year ended December 31, 2003 compared with year ended December 31, 2002
Revenues in the year ended December 31, 2003 were $132.4 million, an increase of
14% on revenues of $115.7 million for the year ended December 31, 2002. The
underlying increase, after adjusting for the impact of the movement in exchange
rates was 7%; with the UK showing a 6% increase and the US a 12% increase.
Orders for the year ended December 31, 2003, at constant exchange rates, were 8%
below the previous year. A weakening in the market for toxicology services due
to extra capacity coming on stream at competitors, combined with a reduction in
non pharmaceutical work in Europe, were responsible for this fall. After a
record growth in orders in 2002, backlog at December 31, 2002 amounted to
approximately $95 million and this sustained the growth in revenues.
Cost of sales in the year ended December 31, 2003 were $104.8 million, an
increase of 12% on cost of sales of $93.4 million for the year ended December
31, 2002. This increase was partly due to exchange rate movements, which
increased cost of sales in the year by $6.4 million. Without these movements
cost of sales would have increased by 5%. In the UK cost increases in sterling
were only 5%, which is lower than the revenue growth as capacity is filled
without the corresponding increase in fixed costs. The main increase was in
labor costs reflecting increases in staffing. Increases in costs in the US were
only 6%, mainly due to lower increases in direct materials costs compared to the
UK.
Selling, general and administrative expenses rose by 15% to $20.9 million for
the year ended December 31, 2003 from $18.1 million in the year ended December
31, 2002. Of this increase, $1.3 million related to exchange rate movements.
This growth was due to a continuation of the build-up of the sales activity
during the year and higher labor costs.
Other operating expenses in the year ended December 31, 2003 were $3.5 million
compared with $0 in the year ended December 31, 2002. In the year ended December
31, 2003, other operating expenses comprised $0.6 million in connection with
specific legal actions taken against animal rights groups and $3.5 million in
respect of a restructuring of the business. These restructuring costs comprise
redundancy (severance) payments and asset write downs in the UK arising from a
consolidation of duplicate facilities in response to changes in the market,
particularly for non pharmaceutical services and a closure of excess and
outdated toxicology capacity. This restructuring will improve the efficiency of
the Company's operations and not impair its ability to service clients' needs.
These expenses were offset by income of $0.2 million representing the Group's
share of an associated company's income (recognized following its acquisition in
June 2003) and $0.4 million from the recovery of funds, written off in 2001
following the bankruptcy of an exchange broker.
Interest expense declined by 5% to $6.0 million for the year ended December 31,
2003 from $6.3 million in the year ended December 31, 2002. The main reasons for
this reduction were the repayment of the former Stephens loan and Baker loan,
and the repurchase of $1.4 million (principal amount) of the bonds, together
with lower interest rates on the non-bank debt (down from an average in 2002 of
5.77% to 5.5% in 2003).
Other income of $5.4 million for the year ended December 31, 2003 comprised $4.8
million from the non-cash foreign exchange remeasurement gain on the Capital
Bonds denominated in US dollars (the functional currency of the financing
subsidiary that holds the bonds is UK sterling) and a $0.6 million gain on the
partial repurchase of the Capital Bonds. In the year ended December 31, 2002
there was other income of $4.9 million which was comprised of a non-cash foreign
exchange remeasurement gain on the Capital Bonds of $5.0 million and a $1.2
million gain made on the partial repurchase of the Capital Bonds; offset against
a $1.3 million charge relating to the finalization of the 2001 US redomiciling
Exchange Offer.
Taxation benefit on income for the year ended December 31, 2003 was $1.1 million
representing a benefit at 42% compared to a taxation expense of $0.3 million
representing expense at 8% for the year ended December 31, 2002. A
reconciliation between the US statutory tax rate and the effective rate of
income tax benefit on losses before income taxes for the year ended December 31,
2003 and December 31, 2002 is shown below:
% of income before
income taxes
2003 2002
% %
US statutory rate 35 35
Foreign rate differential (3) (9)
Non-deductible items 13 (31)
State taxes 2 2
Change in estimate (89) 11
---------------- --------------
Effective tax rate (42) 8
---------------- --------------
The main reason for the change in estimate above relates to the Huntingdon 2002
tax provision. The UK government in its 2002 budget introduced a new tax
allowance, `Research and Development (R & D) Tax Credit', for large companies.
At the end of 2002, it was not certain how this would apply to Huntingdon. When
submitting Huntingdon's 2002 corporation tax computation, and following
discussions with the UK Inland Revenue, Huntingdon has made a claim for the R &
D Tax Credit. Pending the outcome of the 2002 claim, the 2003 provision has
excluded any further allowance.
The overall net income for the year ended December 31, 2003 was $3.7 million
compared to $2.7 million in the year ended December 31, 2002. The diluted income
per share for the year ended December 31, 2003 was $0.29 compared to $0.24 for
the year ended December 31, 2002.
Year ended December 31, 2002 compared with the year ended December 31, 2001
Revenues in the year ended December 31, 2002 were $115.7 million, an increase of
17% on revenues of $99.2 million for the year ended December 31, 2001. The
underlying increase, after adjusting for the impact of the movement in exchange
rates was 13%; with the UK showing a 15% increase and the US a 7% increase. The
year 2002 saw a record growth in orders, representing an increase of 25% over
last year. At December 31, 2002, backlog amounted to approximately $95 million.
Cost of sales in the year ended December 31, 2002 were $93.4 million, an
increase of 11% on cost of sales of $84.1 million for the year ended December
31, 2001. This increase was partly due to exchange rate movements, which
increased cost of sales in the year by $3.0 million. Without these movements
cost of sales would have increased by 8%. In the UK cost increases in sterling
were only 8%, which is lower than the revenue growth as capacity is filled
without the corresponding increase in fixed costs. The main increase was in
labor costs reflecting actions taken to adjust salaries to allow retention and
recruitment of key employees. Increases in costs in the US were only 3%, mainly
due to lower increases in direct materials costs compared to the UK.
Selling, general and administrative expenses rose by 13% to $18.1 million for
the year ended December 31, 2002 from $16.0 million in the year ended December
31, 2001. Of this increase, $0.6 million related to exchange rate movements.
This growth was due to a continuation of the build-up of the sales activity
during the year and higher labor costs.
There were no other operating expenses in the year ended December 31, 2002,
compared with $0.75 million in the year ended December 31, 2001. In the year
ended December 31, 2001, other operating expenses comprised $0.4 million in
connection with specific legal actions taken against animal rights groups and
$0.35 million in connection with the write off of foreign exchange dealings
resulting from the bankruptcy of an exchange broker.
Interest expense declined by 5% to $6.3 million for the year ended December 31,
2002 from $6.6 million in the year ended December 31, 2001. The main reasons for
the reduction are the repayment of the former Stephens' loan and Baker loan, the
repurchase of $2.4 million (principal amount) of the bonds, together with lower
interest rates on the non-bank debt (down from an average in 2001 of 7.13% to
5.77% in 2002).
Other income of $4.9 million for the year ended December 31, 2002 comprised $5.0
million from the non-cash foreign exchange remeasurement gain on the Capital
Bonds denominated in US dollars (the functional currency of the financing
subsidiary that holds the bonds is UK sterling); a $1.2 million gain was made on
the partial repurchase of the Capital Bonds; offset against these was a $1.3
million charge relating to the finalization of the Exchange Offer. In the year
ended December 31, 2001 there were other operating expenses of $4.5 million
which was comprised of a non-cash foreign exchange remeasurement loss on the
Capital Bonds of $1.4 million; $2.9 million relating to the Exchange Offer; and
$0.2 million to the write off of the unamortized refinancing costs.
Taxation expense on income for the year ended December 31, 2002 was $0.3 million
representing a charge at 8% compared to a taxation benefit of $3.0 million
representing benefit at 26% for the year ended December 31, 2001. A
reconciliation between the US statutory tax rate and the effective rate of
income tax benefit on losses before income taxes for the year ended December 31,
2002 and December 31, 2001 is shown below:
% of income/(loss) before
income taxes
2002 2001
---- ----
% %
US statutory rate 35 (35)
Foreign rate differential (9) 6
Non-deductible items including
foreign exchange loss (31) 3
State taxes 2 -
Prior year adjustments 11 -
--------------- --------------
Effective tax rate 8 (26)
--------------- --------------
The overall net income for the year ended December 31, 2002 was $2.7 million
compared to a loss of $9.6 million in the year ended December 31, 2001. The
diluted income per share for the year ended December 31, 2002 was $0.24 compared
to a diluted loss per share of $(1.64) for the year ended December 31, 2001.
Excluding other income and expense, net of income tax, the income/(loss) per
share would have been a net loss per share of $(0.20) for the year ended
December 31, 2002 and $(0.96) for the year ended December 31, 2001.
SEGMENT ANALYSIS
The analysis of the Company's revenues and operating loss between segments for
the three years ended December 31, 2003 is as follows:
The performance of each segment is measured by revenues and operating
income/(loss) before other operating expenses.
Company 2003 2002 2001
$000 $000 $000
Revenues
UK 104,324 90,851 75,705
US 28,110 24,891 23,501
----------- ------------- -------------
$132,434 $115,742 $99,206
----------- ------------- -------------
Operating income/(loss) before other
operating expenses
UK 5,404 3,963 (784)
US 1,365 301 (109)
----------- ------------- -------------
$6,769 $4,264 $(893)
----------- ------------- -------------
Other operating expense
UK (3,351) - (750)
US (171) - -
----------- ------------- -------------
$(3,522) $- $(750)
----------- ------------- -------------
Operating income/(loss)
UK 2,053 3,963 (1,534)
US 1,194 301 (109)
----------- ------------- -------------
$3,247 $4,264 $(1,643)
----------- ------------- -------------
UK
2003 v 2002
Revenues increased by 15% in the year ended December 31, 2003 compared with the
year ended December 31, 2002. After allowing for the effect of exchange rate
movements the increase was 6%. Orders for the year ended December 31, 2003 at
constant exchange rates were 9.8% below the previous year and 2.3% below
revenues for the year. The Company believes that a weakening in the market for
toxicology services due to extra capacity coming on stream at competitors,
combined with a decline in work being outsourced by the Agrochemical industry,
both on new chemical entities and as reregistration work under European
Directive 91/414/EEC diminished, were responsible for this fall. Backlog at
December 31, 2002 was 29% higher than a year previously and this sustained the
growth in revenues.
Costs increased by 14% in the year ended December 31, 2003 compared with the
year ended December 31, 2002. After allowing for the effect of exchange rate
movements, the increase was 5%. The main cost increases were in labor where
staff numbers were built up in response to the growth in orders in 2002. With
the softness in orders in 2003 steps were taken to reduce staffing levels in the
second half of the year, but the average headcount for the year was 28 higher
than in 2002. Changes to Social Security charges, which took effect from April
1, 2003, also added to labor costs.
The operating income before other operating expenses for the year ended December
31, 2003 was $5.4 million compared with $4.0 million in the year to December 31,
2002.
Other operating expenses in the year ended December 31, 2003, were $3.3 million
compared with $0 in the year ended December 31, 2002. In the year ended December
31, 2003, other expenses comprised $0.4 million in connection with specific
legal actions taken against animal rights groups, and $3.5 million in respect of
a restructuring of the business. These restructuring costs comprise redundancy
(severance) payments and asset write downs arising from a consolidation of
duplicate facilities in response to changes in the market, particularly for non
pharmaceutical services, and a closure of excess and outdated toxicology
capacity. These expenses were offset by income of $0.2 million representing the
Group's share of an associated company's income (recognised following its
acquisition in June 2003) and $0.4 million from the recovery of funds, written
off in 2001, following the bankruptcy of an exchange broker.
The operating income for the year ended December 31, 2003 was $2.1 million
compared with $4.0 million in the previous year.
2002 v 2001
Revenues increased by 20% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. After allowing for the effect of exchange rate
movements the increase was over 15%. This was a result of continued growth in
orders.
The operating income before other operating (expenses)/income for the year ended
December 31, 2002 was $4.0 million compared to an operating loss of $0.8 million
in the year ended December 31, 2001. The increase in revenues had a major impact
on the improvement in operating income, with the filling of capacity without the
corresponding increase in fixed costs. There were some additional costs,
including salary increases both to reflect market rates and additional staff
($2.6 million); and a reduction in exchange gains ($0.2 million).
US
2003 v 2002
Revenues increased by 13% in the year ended December 31, 2003 as compared to the
year ended December 31, 2002. Orders for the year ended December 31, 2003 were
4% below the previous year, but 6.9% above revenues for the year. A weakening in
the market for toxicology services was responsible for the fall in orders, but
the level of orders combined with the high level of backlog at December 31, 2002
sustained the growth in revenues.
Costs increased by 9% in the year ended December 31, 2003 as compared with the
year ended December 31, 2002. This cost increase was mainly driven by the
increase in revenues; however, there were also additional costs due to the
increase in sales activity.
Operating income before other operating expense improved from $0.3 million in
the year ended December 31, 2002 to $1.4 million in the year ended December 31,
2003. This was as a result of the increased revenues.
Other operating expenses in the year ended December 31, 2003 of $0.2 million
were in connection with specific action taken against animal rights groups.
The operating income for the year ended December 31, 2003 was $1.2 million
compared with $0.3 million in the previous year.
2002 v 2001
Revenues increased by 5.9% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. This increase in the rate of growth of revenues
was due to a recovery in orders after the reduction level last year. Revenues
from the US toxicology operations remained constant, but revenues derived from
the analysis of samples from clinical trials returned to their normal levels
following the decrease last year.
Operating (loss)/income before other operating expense improved from a loss of
$(0.1) million in the year ended December 31, 2001 to income of $0.3 million in
the year ended December 31, 2002. This was as a result of the increased
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's net non-bank loan of (pound)22.5 million
($40.1 million approximately), was refinanced by Stephens' Group Inc. and other
parties. The loan was transferred from Stephens Group Inc., to an unrelated
third party effective February 11, 2002. It is now repayable on June 30, 2006
and interest is payable quarterly at LIBOR plus 1.75%. At the same time the
Company was required to take all reasonable steps to sell off 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 LSR Ltd., and is secured by the guarantees of wholly owned
subsidiaries of the Company including, LSR Ltd, Huntingdon Life Sciences Ltd,
and Huntingdon Life Sciences Inc., and collateralized by all the assets of these
companies.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. The warrants were subsequently transferred to
an unrelated third party. The LSR warrants are exercisable at any time and will
expire on October 9, 2011. These warrants arose out of negotiations regarding
the refinancing of the bank loan by the Stephens Group Inc., in January 2001. In
accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants ("APB 14") the warrants were recorded at
their pro rata fair values in relation to the proceeds received on the date of
issuance. As a result, the value of the warrants was $430,000.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par and at December 31, 2003, $46.2 million
were outstanding. They carry interest at a rate of 7.5% per annum, payable
biannually in March and September. During 2002, the Company repurchased and
cancelled $2,410,000 principal amount of such bonds resulting in a $1.2 million
gain recorded in other income/expense. In 2003 the Company further repurchased
and cancelled $1,345,000 principal amount of such bonds resulting in a gain of
$0.6 million recorded in other income/expense. At the current conversion rate,
the number of shares of Voting Common Stock to be issued on conversion and
exchange of each unit of $10,000 comprised in a Bond would be 49. The conversion
rate is subject to adjustment in certain circumstances.
Related Party Loans
Financing which totaled $5.7 million was provided to the company in 2000 and
2001 and was fully repaid in 2002. Other financing has been provided by a $2.9
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 a 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. On March 28, 2002, $2.1 million
of Mr. Baker's loan was converted into 1,400,000 shares of LSR Voting Common
Stock and $300,000 of FHP's loan was converted into 200,000 shares of LSR Voting
Common Stock; in each case as part of LSR's private placement of approximately
5.1 million shares of Voting Common Stock. The remaining principal amounts were
repaid in full to Mr. Baker and FHP, inclusive of 10% interest, respectively, in
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.
$141,000 of such promissory notes were repaid during 2002 and $23,000 were
repaid during 2003.
Cash flows
During the year ended December 31, 2003 funds generated were $2.7 million,
increasing cash on hand and on short-term deposit from $14.6 million at December
31, 2002 to $17.3 million at December 31, 2003. The cash generated from
operating, investing and financing activities were generated as follows (in
millions):
2003 2002 2001
Operating income/(loss) before other operating
(expense) /income $6.8 $4.3 $(0.9)
Depreciation, loss on disposal and impairment of fixed assets 11.3 8.1 8.3
Working capital movement (0.6) 9.0 0.2
Interest (6.0) (6.1) (6.5)
Capital expenditure (8.7) (4.2) (3.3)
Cash acquired on business acquisition 1.9 - -
Other (expense)/income (1.5) (1.2) (3.1)
Loan repayments net of shares issued (1.1) 1.7 5.0
Effect of exchange rate changes on cash 0.6 0.8 (0.7)
-------------- ------------- --------------
$2.7 $12.4 $(1.0)
-------------- ------------- --------------
Net days sales outstanding (DSOs) at December 31, 2003 were 17 days, up from 9
days at December 31, 2002. DSO is calculated as a sum of accounts receivable,
unbilled receivables and fees in advance over total revenue. The impact on
liquidity from a one-day change in DSO is approximately $400,000.
At December 31, 2003, the Company had a working capital deficiency of $3.9
million. The Company believes that projected cash flow from operations will
satisfy its contemplated cash requirements for at least the next 12 months.
Commitment and Contingencies
2003 2002 2001
$000 $000 $000
Operating lease expenses were as follows:
Hire of plant and equipment 451 904 924
Other operating leases 410 392 127
The Company leases certain equipment under various non-cancelable operating and
capital leases. Future minimum lease payments required under operating and
capital leases are as follows:
Total Less than 1-3 4-5 After
1 year years years 5 years
$000 $000 $000 $000 $000
Capital lease obligations 771 235 278 258 -
Operating leases 964 333 630 1 -
------------ ------------- ----------- ----------- -----------
1,735 568 908 259 -
------------ ------------- ----------- ----------- -----------
All operating leases are for Plant & Equipment
The total cost of equipment capitalized under these capital leases is $546,000
and $20,000, at December 31, 2003 and 2002, respectively. Depreciation on these
capital leases amounted to $68,000 and $5,000 and $5,000 for the years ended at
December 31, 2003, 2002 and 2001, respectively. Accumulated depreciation on the
capital leases amounted to $87,000, $20,000 and $15,000 for the years ended at
December 31, 2003, 2002 and 2001, respectively.
Contingencies
The Company is party to certain legal actions arising in 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.
ORDERS
New business signings totaled $123.7 million for the year ended December 31,
2003, a decrease of 8.5% respectively from the prior year. 2002 saw a rapid
growth in business from the Pharmaceutical industry and this business was
maintained in 2003. However there was a decline in the amount of work outsourced
from the Agrochemical industry, both on new chemical entities and as
registration work under European Directive 91/414/EEC diminished.
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The Company operates on a worldwide basis and generally invoices its clients in
the currency of the country in which the Company operates. Thus, for the most
part, exposure to exchange rate fluctuations is limited as sales are denominated
in the same currency as costs. Trading exposures to currency fluctuations do
occur as a result of certain sales contracts, performed in the UK for US
clients, which are denominated in US dollars and contribute approximately 11% of
total revenues. Management has decided not to hedge against this exposure.
Also, exchange rate fluctuations may have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars. Such fluctuations also have an impact on the
translation of the 7.5% Convertible Capital Bonds payable in September 2006.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pound sterling and the US
dollar will affect the translation of the UK subsidiary's financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and 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 has decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating sterling into US dollars were as follows:
At December 31 Average rate (1)
2001 1.4554 1.4403
2002 1.6099 1.5039
2003 1.7857 1.6354
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On March 24, 2004 the noon buying rate for sterling was (pound)1.00 = $1.8351.
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
December 31, 2003:
Expected Maturity Date
2003 2004 2005 2006 2007 Thereafter Total Fair
Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 6,380 6,380 6,380
- Euro 1,291 1,291 1,291
- Yen 3,526 3,526 3,526
Accounts
receivable - Pound Sterling 15,205 15,205 15,205
- Euro 582 582 582
- Yen 1,475 1,475 1,475
Debt - Pound Sterling 40,331 40,331 40,331
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 organizations 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 utilize capacity or through the loss of
studies to other competitors. As the Company operates on an international basis,
movements in exchange rates, particularly against sterling, can have a
significant impact on its price competitiveness.
CONSOLIDATION WITHIN PHARMACEUTICAL INDUSTRY
The process of consolidation within the pharmaceutical industry continues to
accelerate the move towards outsourcing work to contract research organizations
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 rationalized 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
Please refer to the detailed discussion under Item 1, on pages 10 to 11.
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
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 US GAAP. The Company considers the following
accounting policies to be critical accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts,
which generally range in duration from a few months to three years. Revenue from
these contracts is generally recognized over the term of the contracts as
services are rendered. Contracts may contain provisions for renegotiation in the
event of 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. Most service contracts may be terminated for a variety
of reasons by the Company's customers, either immediately or upon notice of a
future date. The contracts generally require payments to the Company to recover
costs incurred, including costs to wind down the study, and payment of fees
earned to date, and in some cases to provide the Company with a portion of the
fees or income that would have been earned under the contract had the contract
not been terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment schedules. Unbilled
receivables are billable to customers within one year from the respective
balance sheet date. Fees in advance are recorded for amounts billed to customers
for which, revenue has not been recognized at the balance sheet date (such as
upfront payments upon contract authorization, but prior to the actual
commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company's results of
operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the financial statements and the results of operations during the
reporting periods. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. Although these estimates are based upon management's best
knowledge of current events and actions, actual results could differ from those
estimates.
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment rate changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). This statement is effective for 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's early adoption of the
provisions of this statement, resulted in the inclusion of a $1.2 million gain
in other income/(expense) in 2002.
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. The Company's adoption of the
provisions of this statement, in conjunction with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, resulted in the inclusion of a
$3.5 million loss in other income (expense) in 2003.
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". The Company has no arrangements that would be
subject to this interpretation.
In April 2003, the FASB issued SFAS No. 149 "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) for hedging activities, and for SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." The changes in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement did not have a
material impact on LSR's results of operations, financial position or cash
flows.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equities" (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
SFAS 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this statement did not have a material impact on LSR's
results of operations, financial position or cash flows.
In December 2003, the FASB issued Statement No. 132 (R), "Employer's Disclosures
about Pensions and Other Postretirement Benefits". Statement No. 132 requires
new annual disclosures about the types of plan assets, investment strategy,
measurement date, plan obligations, cash flows and the components of the net
periodic benefit cost recognized in interim periods. The new annual disclosure
requirements apply to fiscal years ending after December 15, 2003, except for
the disclosure of expected future benefit payments, which must be disclosed for
fiscal years ending after June 15, 2004. The Company has a foreign plan for
which the effective date is June 15, 2004, after which the Company will comply
with this statement.
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
LSR is subject to market risks arising from changes in interest rates and
foreign currency exchange rates.
Non-Bank Loans
The Company's (pound)22.5 million ($40.1 million) credit facility is UK sterling
denominated and does not contribute to transaction gains and losses on the
income statement due to the fact that, under US GAAP, the Company's functional
currency is sterling. Interest on all outstanding borrowings under this credit
facility is based upon LIBOR plus a margin, approximately 5.50% per annum for
the year ended December 31, 2003. At December 31, 2003 this credit facility was
fully drawn down.
In the year ended December 31, 2003, a 1% change in LIBOR would have resulted in
a fluctuation in interest expense of $403,000.
Revenue
For the year ended December 31, 2003, approximately 79% of the Company's net
revenues were from outside the US. The Company does not engage in derivative or
hedging activities related to its potential foreign exchange exposures.
Convertible Capital Bonds
The Company's $46.2 million principal amount of Convertible Capital Bonds are US
dollar denominated, but are 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Independent Auditors' Report - December 31, 2003 34
Independent Auditors' Report - December 31, 2002 and 2001 35
Consolidated Statements of Operations-
Years ended December 31, 2003, 2002 and 2001 36
Consolidated Balance Sheets - December 31, 2003 and 2002 37
Consolidated Statements of Shareholders' (Deficit)/Equity and
Comprehensive Loss - Years ended December 31, 2003, 2002 and 2001 39
Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001 40
Notes to Consolidated Financial Statements 41
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Life Sciences Research, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Life Sciences
Research, Inc. and Subsidiaries ("Company") as of December 31, 2003, and the
related consolidated statements of operations, shareholders' (deficit)/equity
and comprehensive loss, and cash flows for the year then ended. 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. The financial statements of the Company as of December 31, 2002 and
for the two years then ended were audited by other auditors whose report dated
March 26, 2003 expressed an unqualified opinion on those statements.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 2003, and the results of their operations and cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Hugh Scott P.C.
Lakewood, New Jersey
April 14, 2004
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Life Sciences Research, Inc. and
Subsidiaries, East Millstone New Jersey
We have audited the accompanying consolidated balance sheet of Life Sciences
Research, Inc. and Subsidiaries (the "Company") as of December 31, 2002, and the
related consolidated statements of operations, shareholders' (deficit)/equity
and comprehensive loss, and cash flows for each of the two years in the period
ended December 31, 2002. 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 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 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 Life Sciences Research, Inc. and
Subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
/s/Deloitte & Touche LLP
Princeton, New Jersey
March 26, 2003
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Operations
Dollars in (000's), except per share amounts
Year Ended December 31,
2003 2002 2001
Revenues $132,434 $115,742 $99,206
Cost of sales (104,798) (93,403) (84,133)
------------------- ----------------- ---------------
Gross profit 27,636 22,339 15,073
Selling, general and administrative expenses (20,867) (18,075) (15,966)
Other operating expense (3,522) - (750)
------------------- ----------------- ---------------
Operating income/(loss) 3,247 4,264 (1,643)
Interest income 94 66 104
Interest expense (6,084) (6,304) (6,614)
Other income/(expense) 5,362 4,922 (4,471)
------------------- ----------------- ---------------
Income/(loss) before income taxes 2,619 2,948 (12,624)
Income tax benefit/(expense) 1,109 (251) 2,996
------------------- ----------------- ---------------
Net income/(loss) $3,728 $2,697 $(9,628)
=================== ================= ===============
Income/(loss) per share
-basic $0.31 $0.25 $(1.64)
-diluted $0.29 $0.24 $(1.64)
Weighted average number of common stock outstanding
-basic 11,957,760 10,678,890 5,868,421
-diluted 12,699,576 11,083,416 5,868,421
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Life Sciences Research Inc. & Subsidiaries
Consolidated Balance Sheets
Dollars in (000's), except per share amounts
December 31,
ASSETS 2003 2002
Current assets:
Cash and cash equivalents $17,271 $14,644
Accounts receivable, net of allowance of $561 and $287 in 2003 and 2002,
respectively 17,515 20,176
Unbilled receivables 8,246 9,108
Inventories 1,901 1,556
Prepaid expenses and other current assets 4,610 3,075
------------- --------------
------------- --------------
Total current assets $49,543 $48,559
------------- --------------
------------- --------------
Property and equipment, net $101,547 $94,574
Investments - 248
Goodwill 832 -
Unamortized capital bonds issue costs 429 563
Deferred income taxes 3,922 4,466
------------- --------------
Total assets $156,273 $148,410
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $12,508 $8,574
Accrued payroll and other benefits 4,152 1,773
Accrued expenses and other liabilities 13,695 12,765
Short-term debt 338 225
Fees invoiced in advance 22,761 26,066
------------- --------------
------------- --------------
Total current liabilities $53,454 $49,403
------------- --------------
Long-term debt $87,560 $83,717
Related party loans - 358
Pension liabilities 21,414 17,712
Deferred income taxes 2,291 5,024
------------- --------------
Total liabilities $164,719 $156,214
------------- --------------
Commitments and contingencies
Shareholders' equity/(deficit)
Voting Common Stock, $0.01 par value. Authorized: 50,000,000
Issued and outstanding at December 31, 2003: 12,034,883
(December 31, 2002: 11,932,338) 120 119
Non-Voting Common Stock, $0.01 par value. Authorized: 5,000,000
Issued and outstanding: None - -
Preferred Stock, $0.01 par value. Authorized: 5,000,000
Issued and outstanding: None - -
Paid in capital 75,101 75,098
Less: Promissory notes for issuance of common stocks (661) (684)
Accumulated comprehensive loss (22,973) (18,576)
Accumulated deficit (60,033) (63,761)
------------- --------------
------------- --------------
Total shareholders' (deficit) $(8,446) $(7,804)
------------------------------
------------- --------------
Total liabilities and shareholders' equity/(deficit) $156,273 $148,410
------------- --------------
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Shareholders' (Deficit)/Equity and Comprehensive Loss
(000's) Common Common Promissory Additional Accummulated Accumulated Total
Stock Stock Notes for Paid in Deficit Other
at Par Issuance of Capital Comprehensive
Common Stock Loss
Balance, December 31, 2000 5,833 $58 $ $65,272 $(56,830) $(4,434) $4,066
Issues of shares 14 1 - 83 - - 84
Issue of warrants (note 5) - - - 680 - - 680
Accumulated
comprehensive loss:
- - Net loss for the year - - - - (9,628) -
- - Translation
adjustments, - - - - - 74
net of $263 tax (9,554)
Total Comprehensive Loss
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Balance, December 31, 2001 5,847 $59 $- $66,035 $(66,458) $(4,360) $(4,724)
Issue of Shares 5,585 55 8,384 - - 8,439
Promissory notes for issuance
of common stock 500 5 (684) 679 - - -
Accumulated
comprehensive loss:
- - Net income for the - - - - 2,697 -
year
- - Minimum pension
liability, net of $5,903
tax -Deficiency on UK
defined benefit pension
plan. - - - - - (13,507)
- - Translation
adjustments, - - - - - (709)
net of $569 tax (11,519)
Total Comprehensive Loss
-----------------------------------------------------------------------------------------
Balance, December 31, 2002 11,932 $119 $(684) $75,098 $(63,761) $(18,576) $(7,804)
Issue of shares 103 1 - 3 - - 4
Repayment of Promissory notes
- - 23 - - - 23
Accumulated comprehensive loss:
Net income for the year - - - - 3,728 - -
Minimum pension liability,
net of $971 deferred tax -
Deficiency on UK defined
benefit pension plan
- - - - - (2,265) -
Translation adjustments,
net of $123 tax - - - - - (2,132) -
Total comprehensive loss - - - - - - (669)
-----------------------------------------------------------------------------------------
Balance, December 31, 2003 12,035 $120 $(661) $75,101 $(60,033) $(22,973) $(8,446)
-----------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Life Sciences Research Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Dollars in (000's)
Year Ended December 31,
2003 2002 2001
Cash flows from operating activities:
Net income/(loss) $3,728 $2,697 $(9,628)
Adjustments to reconcile net income/(loss) to net cash from
operating activities
Depreciation 9,049 8,108 8,307
Impairment of fixed assets 2,014 - -
Loss on disposals of fixed assets 271 - -
Foreign exchange (gain)/loss on Capital Bonds (4,760) (4,977) 1,272
Deferred income taxes/(benefits) (1,234) 188 (2,996)
Gain on repurchase of Capital Bonds (602) (1,191) -
Share of profit on acquisition (208) - -
Provision for losses on accounts receivable 244 123 80
Amortization of capital bonds issue costs 165 191 157
Amortization of warrants 290 156 -
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses 5,063 4,605 (8,329)
Inventories (157) (127) 44
Accounts payable, accrued expenses and other liabilities 2,048 (1,728) 7,131
Fees invoiced in advance (5,972) 5,988 1,898
------------ ------------ ------------
Net cash provided by/(used in) operating activities $9,939 $14,033 $(2,064)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (8,716) (4,177) (3,295)
Cash acquired with Subsidiary 1,893 - -
------------ ------------ ------------
Net cash used in investing activities $(6,823) $(4,177) $(3,295)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issue of common shares 4 6,039 84
Proceeds from issue of warrants - - 680
Proceeds from issue of Promissory Notes 23 - -
Proceeds from long-term borrowings 444 334 4,321
Repayments of long-term borrowings (1,328) (4,627) (93)
Repayments of short term borrowings (253) - -
------------ ------------ ------------
Net cash provided by financing activities $(1,110) $1,746 $4,992
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 621 802 (679)
------------ ------------ ------------
Increase/(decrease) in cash and cash equivalents 2,627 12,404 (1,046)
Cash and cash equivalents at beginning of year 14,644 2,240 3,286
------------ ------------ ------------
Cash and cash equivalents at end of year $17,271 $14,644 $2,240
------------ ------------ ------------
Supplementary disclosures:
Interest paid $5,544 $6,110 $6,267
Non-cash transactions:
Conversion of debt to equity $- $2,400 $-
Issuance of common stocks for promissory notes $- $684 $-
<FN>
The accompanying notes are an integral part of these consolidated financial
statement.
</FN>
1. THE COMPANY AND ITS OPERATIONS
Life Sciences Research Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global contract research organization, offering worldwide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that humans use, eat, and are
otherwise exposed to. In addition, it tests the effect of such compounds on the
environment and also performs work on assessing the safety and efficacy of
veterinary products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies, is set out below:
Basis of Presentation
These financial statements are prepared in conformity with the accounting
principles generally accepted in the United States of America ("US GAAP"). Under
US GAAP, the company whose stockholders retain the majority interest in a
combined business must be treated as the acquirer for accounting purposes.
Accordingly, the Exchange Offer is accounted for as a "reverse acquisition" for
financial reporting purposes. The reverse acquisition is deemed a capital
transaction and the net assets of Huntingdon Life Sciences Group plc
("Huntingdon") (the accounting acquirer) are carried forward to LSR (the legal
acquirer and the reporting entity) at their carrying value before the
combination. Although Huntingdon was deemed to be the acquiring corporation for
financial accounting and reporting purposes, the legal status of LSR as the
surviving corporation does not change. The relevant acquisition process utilizes
the capital structure of LSR and the assets and liabilities of Huntingdon are
recorded at historical cost. In these financial statements, Huntingdon is the
operating entity for financial reporting purposes and the financial statements
for all periods presented represent Huntingdon's financial position and results
of operations. The equity of LSR is the historical equity of Huntingdon,
retroactively restated to reflect the number of shares issued in the Exchange
Offer. Certain reclassifications and eliminations have been recorded in the
current year presentation to retroactively consolidate Huntingdon and LSR.
Principles of Consolidation
The consolidated financial statements incorporate the accounts of LSR and each
of its subsidiaries. All inter-company balances have been eliminated upon
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.
Allowance for Uncollectible Accounts
The Company establishes an allowance for uncollectible accounts which it
believes is adequate to cover anticipated losses on the collection of all
outstanding trade receivable balances. The adequacy of the uncollectible account
allowance is based on historical information, a review of customer accounts and
related receivable balances, and management's assessment of current economic
conditions. The Company reassesses the allowance for uncollectible accounts
annually.
Inventories
Inventories are valued on a FIFO (first-in, first out) method at the lower of
cost, or market value. They comprise materials and supplies.
Property, Plant and Equipment
Property, plant 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:
Buildings and facilities 15 - 50 years
Plant and equipment 4 - 25 years
Vehicles 5 years
Computers and software 3 - 5 years
Amounts spent to repair and maintain these assets arising out of the normal
course of business are expensed in the period incurred.
Concentration of Credit Risk
The Company maintains cash and cash equivalents in US financial institutions,
which, at times, may exceed federally insured limits. Based on the nature of the
financial instruments and/or historical realization of these instruments, the
Company believes they bear minimal risk.
Income Taxes
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 carry forwards. Deferred tax assets and
liabilities are measured using enacted rates in effect for the year in which the
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of changes in tax rates is recognized in the statement of
operations in the period in which the enactment rate changes. Deferred tax
assets and liabilities are reduced through the establishment of a valuation
allowance at such time as, based on available evidence, it is more likely than
not that the deferred tax assets will not be realized.
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 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. Most service contracts may be terminated for a variety
of reasons by the Company's customers either immediately or upon notice at 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 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
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).
Foreign Currencies
Transactions in currencies other than the functional currency of the entity are
recorded at the rates of exchange at the date of the transaction. Monetary
assets and liabilities in currencies other than the functional currency are
translated at the rates of exchange at the balance sheet date and the related
transaction gains and losses are reported in the statements of operations.
Exchange gains and losses on foreign currency transactions are recorded as other
income or expense. Certain intercompany loans are determined to be of a
long-term investment nature. The Company records 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 and capital accounts are translated at historical
exchange rate, and retained earnings are translated at the weighted average of
historical rates. Translation adjustments are presented as a separate component
of other accumulated comprehensive loss in the financial statements.
Goodwill and Other Intangible Assets
Effective 2003, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting standards for
acquired goodwill and other intangible assets (Note 4). In accordance with SFAS
No. 142, goodwill and indefinite-lived intangible assets are no longer amortized
but are reviewed at least annually for impairment. Separate intangible assets
that have finite useful lives continue to be amortized over their estimated
useful lives.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment. The
second step of the impairment test measures the amount of the impairment loss.
The Company, after completing the first step of the process, concluded there was
no impairment of goodwill at December 31, 2003.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". The Company evaluates long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposal are less than its carrying
amount. In such instances, the carrying value of long-lived assets is reduced to
the estimated fair value, as determined using an appraisal or discounted cash
flows, as appropriate.
Restructuring Costs
The Company recognizes obligations associated with restructuring activities in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The Company adopted the provisions of SFAS No. 146 as of
the beginning of fiscal 2003, which generally requires a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred.
The overall purpose of the Company's restructuring actions is to lower overall
operating costs and improve profitability by reducing excess capacities.
Restructuring costs (Note 8) are typically recorded in other operating expenses
in the period in which the plan is approved by the Company's senior management
and, where material, the Company's Board of Directors, and when the liability is
incurred.
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
analyzed between amounts falling due within and after one year. Operating lease
rentals are charged to the Consolidated Statement of Operations as incurred.
Pension Costs
During the year the Company had two defined contribution plans. One of the
defined contribution pension plans covers all employees in the US; the other,
employees in the UK. Prior to December 31, 2002, a defined benefit pension plan
provided benefits to employees based on their final pensionable salary. As of
December 31, 2002, the defined benefit pension plan was curtailed. The gain on
curtailment was recognized in the Statement of Operations according to SFAS No.
88, "Employees' Accounting for Settlements and Curtailments of Deferred Benefit
Pension Plan and for Termination Benefits". 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 the currently
required provisions of SFAS No. 132, "Employers' Disclosures About Pensions And
Other Post Retirement Benefits". The net asset at transition, prior service cost
and net (loss)/gain subject to amortization, outside the corridor, are being
amortized on a straight-line basis over periods of 15 years, 10 years and 10
years respectively. The Company recognized all actuarial gains and losses
immediately for the purposes of its minimum pension liability.
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.
Income/(Loss) Per Share
Income/(loss) per share is computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic income/(loss) per share is computed by dividing net
income/(loss) available to common stockholders by the weighted average number of
common shares outstanding during the year. The computation of diluted
income/(loss) per share is similar to the computation of basic income/(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 income/(loss) per share
reflects the potential dilution that could occur if dilutive securities and
other contracts to issue common stock were exercised or converted into common
shares or resulted in the issuance of common shares that then shared in the
losses of the Company.
Segment Analysis
In accordance with the Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
131), the Company discloses financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Loans and Warrants
In accordance with Accounting Principles Board ("APB") Opinion No. 14
"Accounting for Convertible Debt and Debt issued with Share Purchase Warrants",
loans and warrants are recorded at their pro-rata fair values in relation to the
proceeds received with the portion allowable to the warrants accounted for as
paid-in-capital. The costs of raising long-term financing are capitalized as an
asset and are amortized, using the effective interest method, over the term of
the debt.
Stock-Based Compensation
The Company accounts for its stock option and stock-based compensation
arrangements plans using the intrinsic-value method. Under the intrinsic value
method, the difference between the amount the employee will pay the Company for
stock acquired under the Company's incentive plans and the stock's fair value on
the date of grant is charged to expense. Since employees must pay the Company
the grant date fair value for stock options, no expense is recorded for stock
options. Alternatively, since employees do not pay for stock issued for deferred
stock units granted, their grant date fair value is recorded as expense.
The following table reconciles net income and earnings per common stock (EPS),
as reported, to pro forma net income and EPS, as if the Company had expensed the
grant date fair value of both stock options and deferred stock units as
permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). These pro forma amounts may not be representative of the initial impact
of adopting SFAS 123 since, as amended, it permits alternative methods of
adoption.
Year ended December Year ended Year Ended
31, 2003 December 31, 2002 December 31, 2001
------------------------ --------------------- ----------------------
$000 $000 $000
Net income/(loss) As Reported $3,728 $2,697 $(9,628)
Less: Pro forma expense as
if stock options were
charged against net
income, net of tax
(67) (59) (1,108)
Pro forma $3,661 $2,638 $(10,736)
Basic and Diluted EPS: As Reported $0.31 and $0.29 $0.25 and $0.24 $(1.64) and $(1.64)
Pro forma $0.31 and $0.29 $0.25 and $0.24 $(1.83) and $(1.83)
The weighted average fair value of options granted at December 31, 2003 was
$921,912. The options granted prior to 2002 are considered to have no value.
These fair values were estimated using the Black-Scholes option-pricing model,
based on the following assumptions:
2003 2002
Dividend yield 0% 0%
Volatility 40% 40%
Risk-free interest rate 3.72% 3.72%
Expected term of options (in years) 10 years 10 years
New Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). This statement is effective for 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's early adoption of the
provisions of this statement resulted in the inclusion of a $1.2 million gain in
other income/(expense) in 2002.
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. The Company's adoption of
the provisions of this statement, in conjunction with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, resulted in the inclusion
of a $3.5 million loss in other income (expense) in 2003.
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". The Company has no arrangements that would be
subject to this interpretation.
In April 2003, the FASB issued SFAS No. 149 "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) for hedging activities, and for SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." The changes in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement did not have a
material impact on LSR's results of operations, financial position or cash
flows.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equities" (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
SFAS 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this statement did not have a material impact on LSR's
results of operations, financial position or cash flows.
In December 2003, the FASB issued Statement No. 132 (R), "Employer's Disclosures
about Pensions and Other Postretirement Benefits". Statement No. 132 requires
new annual disclosures about the types of plan assets, investment strategy,
measurement date, plan obligations, cash flows and the components of the net
periodic benefit cost recognized in interim periods. The new annual disclosure
requirements apply to fiscal years ending after December 15, 2003, except for
the disclosure of expected future benefit payments, which must be disclosed for
fiscal years ending after June 15, 2004. The Company has a foreign plan for
which the effective date is June 15, 2004, after which the Company will comply
with this statement.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
2003 2002
$000 $000
Property, plant and equipment at cost:
Building and facilities 116,981 105,635
Plant, equipment, vehicles, computers and software 108,658 93,686
Assets in the course of construction 1,045 47
-------------- ---------------
226,684 199,368
Less: Accumulated depreciation (125,137) (104,794)
-------------- ---------------
Property and equipment, net $101,547 $94,574
-------------- ---------------
Depreciation expense aggregated $9,049,000, $8,108,000 and $8,307,000 for 2003,
2002 and 2001 respectively.
The net book value of assets held under capital leases and included above is as
follows:
Cost Depreciation Net book
Value
$000 $000 $000
At December 31, 2003 958 259 699
At December 31, 2002 848 362 486
4. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations", which eliminates the pooling of interests method
of accounting for business combinations and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", or SFAS No. 142. The
Company adopted SFAS No. 142 as of January 1, 2003. SFAS No. 142 addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination, and for goodwill and other intangible
assets subsequent to their acquisition. This statement requires that goodwill be
separately disclosed from other intangible assets in the statement of financial
position, and no longer be amortized but tested for impairment on a periodic
basis.
On July 1, 2003, the remaining 50% of the shares in HLS KK, not previously owned
by Huntingdon, was purchased, resulting in HLS KK becoming a wholly owned
subsidiary of Huntingdon. The purchase price is payable over a three year
period, and is equal to the greater of (a) $1 million or (b) the commission
which would have been paid if the purchase had not happened. Payments during
that three year period shall be made at the rate which had been in effect for
commissions prior to the acquisition, and is payable semi-annually. Commissions
paid to the previous owner of the acquired 50% of HLS KK during the 12 months to
June 30, 2003 were $0.3 million. Goodwill on purchase was Japanese Yen
99,500,000 ($832,000 at year end rates).
Prior to this date, the shares owned by Huntingdon in HLS KK were held as an
investment, as the day to day control of HLS KK was not exercised by the
Company. The Company's share of the profits of HLS KK from the date of
incorporation, January 2, 1996, to June 30, 2003 of $208,000 was recognized in
the third quarter of 2003.
5. INCOME TAXES
The components of income/(loss) before taxes and the related (expense)/benefit
for tax for the years ended December 31 are as follows:
Income/(loss) before taxes 2003 2002 2001
$000 $000 $000
United Kingdom 1,452 4,110 (11,036)
United States 887 (1,162) (1,588)
Japan 280 - -
------------- ------------- -------------
$2,619 $2,948 $(12,624)
------------- ------------- -------------
The (expense)/benefit for income taxes by location 2003 2002 2001
of the taxing jurisdiction for the years ended $000 $000 $000
December 31, consisted of the following:
Current Taxation:
- - State Taxes - US (39) (63) -
- - Corporate Tax - Japan (86) - -
Deferred taxation:
- - United Kingdom 2,263 (45) 2,886
- - United States (1,029) (143) 110
------------- ------------- -------------
$1,109 $(251) $2,996
------------- ------------- -------------
Reconciliation between the US statutory rate and the effective rate is as
follows:
% of income/(loss) before income
taxes
2003 2002 2001
---- ---- ----
% % %
US statutory rate 35 35 (35)
Foreign rate differential (3) (9) 6
Non-deductible items including foreign exchange loss 13 (31) 3
State taxes 2 2 -
Change in estimate (89) 11 -
------------ ---------- ----------
Effective tax rate (42) 8 (26)
------------ ---------- ----------
The main reason for the change in estimate above relates to the Huntingdon 2002
tax provision. The UK government in its 2002 budget introduced a new tax
allowance, `Research and Development (R & D) Tax Credit, for large companies. At
the end of 2002, it was not certain how this would apply to Huntingdon. When
submitting Huntingdon's 2002 corporation tax computation, and following
discussions with the UK Inland Revenue, Huntingdon has made a claim for the R &
D Tax Credit. Pending the outcome of the 2002 claim, the 2003 provision has
excluded any further allowance.
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:
2003 2002
$000 $000
Current deferred tax assets:
Accrued liabilities - -
---------- -----------
$- $-
---------- -----------
Non-current deferred tax assets:
Net operating losses - US 4,827 4,466
Net operating losses - UK 17,624 12,576
Net pension plan minimum liability adjustment - UK 6,423 5,789
Capital losses - UK 15,228 13,729
Valuation allowance - UK (15,228) (13,729)
---------- -----------
Net non-current deferred tax assets $28,874 $22,831
---------- -----------
Non-current deferred tax liabilities:
Property and equipment - US 929 -
- UK 26,314 23,389
---------- -----------
Total $27,243 $23,389
---------- -----------
Net non-current deferred tax assets $3,922 $4,466
Net non-current deferred tax liabilities $2,291 $5,024
In accordance with SFAS No. 109, the Company nets all current and non-current
assets and liabilities by tax jurisdiction.
Of the gross amount of net operating losses in the US of $12,188,000, $3,881,000
expires in 2012, $6,163,000 expires in 2018, $523,000 expires in 2019,
$1,087,000 expires in 2021, $492,000 expires in 2022 and $42,000 expires in
2023. The gross amount of net operating losses in the UK of $57,380,000 have no
expiration date. 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 full 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. LONG-TERM DEBT AND RELATED PARTY LOANS
2003 2002
$000 $000
Non- bank loans 40,965 36,027
Capital leases 400 100
Convertible Capital Bonds 46,195 47,590
----------------- ---------------
87,560 83,717
Related party loans - 358
----------------- ---------------
----------------- ---------------
$87,560 $84,075
----------------- ---------------
Bank Loans and Non-Bank Loans
On January 20, 2001, the Company's non-bank loan of (pound)22.5 million ($40.1
million approximately), was refinanced by Stephens' Group Inc. and other
parties. The loan was transferred from Stephens Group Inc. to an unrelated third
party effective February 11, 2002. It is now repayable on June 30, 2006 and
interest is payable quarterly at LIBOR plus 1.75%. At the same time the Company
was required to take all reasonable steps to sell off 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 Company
is taking all reasonable steps to conduct these transactions. The loan is held
by LSR Ltd and is secured by the guarantees of the wholly owned subsidiaries of
the Company including LSR Ltd., Huntingdon Life Sciences Ltd and Huntingdon Life
Sciences Inc., and collateralized by all the assets of these companies.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. The warrants were subsequently transferred to
an unrelated third party. The LSR warrants are exercisable at any time and will
expire on October 9, 2011. These warrants arose out of negotiations regarding
the refinancing of the bank loan by the Stephens Group Inc., in January 2001. In
accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants ("APB 14") the warrants were recorded at
their pro rata fair values in relation to the proceeds received on the date of
issuance and treated as a debt discount. The value of the warrants was $430,000.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par and at December 31, 2003 $46.2 million was
outstanding. They carry interest at a rate of 7.5% per annum, payable biannually
in March and September. During 2002, the Company repurchased and cancelled
$2,410,000 principal amount of such bonds resulting in a $1.2 million gain
recorded in other income/expense. In January 2003, the Company further
repurchased and cancelled $1,345,000 principal amount of such bonds resulting in
a gain of $0.6 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 $2.9 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 a 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. On March 28, 2002, $2.1 million of Mr. Baker's
loan was converted into 1,400,000 shares of LSR Voting Common Stock and $300,000
of FHP's loan was converted into 200,000 shares of LSR Voting Common Stock; in
each case as part of LSR's private placement of approximately 5.1 million shares
of Voting Common Stock. The remaining principal amounts were repaid in full,
with a rate of 10% interest, to Mr. Baker and FHP, respectively, in 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.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instruments comprise cash and cash
equivalents, accounts receivables, unbilled receivables and long-term debt. The
Company does not hold financial instruments for trading purposes.
The estimated fair value of the Company's financial instruments as of December
31, 2003 and 2002 is summarized below. Certain estimates and judgments 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.
2003 2002
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: $17,271 $17,271 $14,644 $14,644
Accounts receivable 17,515 17,515 20,176 20,176
Short-term debt 338 338 225 225
Accounts payable 12,508 12,508 8,574 8,574
Fees invoiced in advance 22,761 22,761 26,066 26,066
Long-term debt (excluding the Convertible Capital
Bond) 41,365 41,365 36,485 36,485
Convertible Capital Bond 46,195 36,956 47,590 23,500
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
Cash and cash equivalents, capital leases - short term, accounts payable and
fees invoiced in advance: The estimated fair value of these financial
instruments approximates their carrying values due to their short maturities.
Accounts receivables: The estimated fair value of these financial instruments
approximates their carrying value due to their short maturities, less any
provision for bad debt.
Long-term debt: The carrying value of these financial instruments approximates
to the fair value due to their variable interest rates.
Convertible Capital Bond: The estimated fair values of the Company's Convertible
Capital Bond is based on market prices at year-end.
8. RESTRUCTURING COSTS
During the fourth quarter of 2003, the Company recorded restructuring charges of
$3,551,000 including impairment of fixed assets of $2,014,000, and employee
severance of $1,537,000 associated with the UK facilities. These charges arose
from the consolidation of duplicate facilities in response to changes in the
market, particularly for non-pharmaceutical services, and the closure of excess
and outdated toxicology capacity. This restructuring will improve the efficiency
of the Company's operations and will not impair its ability to service clients'
needs.
9. OTHER INCOME/(EXPENSE)
2003 2002 2001
$000 $000 $000
Exchange gain/(loss) on capital bonds 4,760 4,977 (1,386)
Gain on partial repurchase of Capital Bonds 602 1,191 -
Exchange offer costs - (1,246) (2,868)
Refinancing costs - - (217)
--------------- ----------- -----------
$5,362 $4,922 $(4,471)
--------------- ----------- -----------
10. COMMITMENTS AND CONTINGENCIES
Operating leases
Operating lease expenses were as follows:
2003 2002 2001
$000 $000 $000
Plant and equipment 451 904 924
Other operating leases 410 392 127
The Company leases certain equipment under various non-cancelable operating and
capital leases. Future minimum lease payments required under operating and
capital leases are as follows:
Operating Leases Capital Leases
For the years ended December 31,
$000 $000
2004 333 235
2005 349 141
2006 281 137
2007 1 129
2008 - 129
2009 and thereafter - -
----------------- ----------------
Total minimum lease payments 964 771
=================
Less amounts representing interest (212)
----------------
----------------
Present value of net minimum lease payments 559
Less current portion of capital lease obligations (159)
----------------
----------------
Non-current portion of capital lease obligations 400
================
All operating leases are for Plant & Equipment
The total cost of equipment capitalized under these capital leases is $546,000
and $20,000, at December 31, 2003 and 2002, respectively. Depreciation on these
capital leases amounted to $68,000, $5,000, and $5,000 for the years ended at
December 31, 2003, 2002 and 2001, respectively. Accumulated depreciation on the
capital leases amounted to $87,000, $20,000 and $15,000 for the years ended at
December 31, 2003, 2002 and 2001, respectively.
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.
11. SHAREHOLDERS' EQUITY
Common Stock
As of December 31, 2003 and 2002 LSR had outstanding 12,034,883 and 11,932,338
shares of Voting Common Stock of par value of $0.01 each respectively.
Warrants issued in conjunction with long-term debt and related party loans
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. The warrants were subsequently transferred to
an unrelated third party. The LSR warrants are exercisable at any time and will
expire on October 9, 2011. These warrants arose out of negotiations regarding
the refinancing of the bank loan by the Stephens Group Inc., in January 2001. In
accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants ("APB 14") the warrants were recorded at
their pro rata fair values in relation to the proceeds received on the date of
issuance. As a result, the value of the warrants was $430,000.
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 October 9, 2011. 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.
Share option plans
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR 2001 Equity Incentive Plan was adopted effective October 4, 2001.
Adoption of the LSR 2001 Equity Incentive Plan enables LSR to use stock options
(and other stock-based awards) as a means to attract, retain and motivate key
personnel. This stock option plan was approved by the shareholders of LSR, prior
to the acquisition of Huntingdon.
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 (which has designated the Compensation Committee for such
purpose) 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 Compensation Committee, which administers the 2001 LSR Equity Incentive
Plan, has 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 Compensation
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 percent 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 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 Common Stockholder approval
will not necessarily be required for amendments, which might increase the cost
of the plan or broaden eligibility. LSR Common Stockholder approval will not be
deemed to be required under laws or regulations that condition favorable tax
treatment on such approval, although the LSR Board may, in its discretion, seek
LSR Common Stockholder approval in any circumstances in which it deems such
approval advisable.
LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to
certain directors as of that date, and employees, including the Named Executive
Officers:
Grants to Directors
Name Number Granted
- ---- --------------
Gabor Balthazer 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted during 2002 to employees and directors, on the terms set
forth above, are listed below:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
In 2003, options to purchase an aggregate of 11,000 shares of LSR Common Stock
were issued, all at an exercise price of $1.80, the market price at the date of
grant:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
February 14, 2003 11,000 $1.80
Securities Authorized for Issuance under 2001 Equity Incentive Plan
Shares Wtd Avg. Ex Price Number of securities remaining
(000) available for future issuance
Outstanding at start of period 1,177 $1.52
Granted 11 $1.80
----------- ------------------ ----------------------------------
December 31, 2003 1,188 $1.52 912,000
----------- ------------------ ----------------------------------
Exercisable at end of year 1,188 $1.52
Weighted average fair value of
options granted (000) $922
Huntingdon Life Sciences Group plc Stock Option Plan
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and are
therefore considered to have no value.
Other Option Grants
In addition to the options granted under the Share Option Plans, the Company has
issued options outside of the plans, pursuant to various employment, consulting
and separation agreements.
Warrants
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. Stephens Group Inc. subsequently sold the
warrants to independent third parties. The LSR warrants 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., (Stephens' Loan) in January 2001. In accordance with APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
("APB 14") the warrants were recorded at their pro rata fair values in relation
to the proceeds received on the date of issuance. As a result, the value of the
warrants was $430,000.
On 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.
On October 24, 2003, 100,000 warrants were issued at the market price on the day
of $2.05. These warrants were issued to an independent consultant in connection
with financial advice.
A summary of warrants outstanding at December 31, 2003 is as follows:
Warrants Exercise price Expiration Date
-------- -------------- ---------------
October 9, 2001 704,425 $1.50 October 9, 2011
June 11, 2002 410,914 $1.50 June 11, 2012
October 24, 2003 100,000 $2.05 October 24, 2013
12. EMPLOYEE BENEFITS
Prior to December 31, 2002, the Company operated the Huntingdon Life Sciences
Pension and Life Assurance Scheme (the "HLS Defined Benefit Pension Plan") a
funded pension plan providing benefits, based on final pensionable salary, for
certain Company employees in the UK. The Plan had been closed to new entrants
from April 5, 1997 and as of December 31 2002, the accumulation of plan benefits
of employees in the plan was permanently suspended, and therefore, the HLS
Defined Benefit Pension Plan was curtailed. This suspension of benefits resulted
in a gain on curtailment of $8.41 million at December 31, 2002, which has been
recorded as a reduction of the Company's unrecognized net actuarial loss.
The components of the net periodic benefit cost of the HLS Defined Benefit
Pension Plan for the years ended December 31, are as follows:
2003 2002 2001
$000 $000 $000
Service cost, benefits earned during the year - 1,466 1,493
Interest cost on projected benefit obligation 6,101 5,581 5,720
Expected return on plan assets (7,279) (6,455) (7,071)
Amortization of prior service cost - - 44
Amortization of transition asset (277) (238) (230)
Amortization of actuarial loss 710 - -
------------- ------------ -------------
Net periodic benefit/(cost) $(745) $354 $(44)
------------- ------------ -------------
The major assumptions used in calculating the pension expense were:
2003 2002 2001
Discount rate 5.5% 5.75% 6.00%
Rate of increase of future compensation N/A N/A 3.75%
Long-term rate of return on plan assets 8.0% 8.25% 7.25%
A reconciliation of the projected benefit obligation for the HLS Defined Benefit
Pension Plan to the accrued pension expense recorded as of December 31 is as
follows:
2003 2002 2001
$000 $000 $000
Projected benefit obligation $(123,892) $(99,068) $(91,467)
Plan assets at market value 102,483 81,356 86,492
------------ ------------- --------------
Funded status $(21,409) $(17,712) $(4,975)
Unrecognized net actuarial loss/(gain) 24,875 19,678 5,712
Adjustment for minimum liability - pretax (24,734) (19,296) -
Unrecognized net asset at transition (141) (382) (563)
------------ ------------- --------------
(Accrued)/prepaid pension expense $(21,409) $(17,712) $174
------------ ------------- --------------
Change in plan assets
Fair value of assets, beginning of year $81,356 $86,492 $100,083
Foreign currency changes 8,884 8,238 (2,573)
Actual gain/(loss) on plan assets 16,202 (13,299) (10,571)
Employer contributions 809 1,654 1,517
Employee contributions - 752 728
Benefit payments (4,768) (2,481) (2,692)
------------ ------------ --------------
------------ ------------ --------------
Fair value of assets, end of year $102,483 $81,356 $86,492
------------ ------------ --------------
Change in projected benefits obligation
Projected benefit obligation, beginning of year $99,068 $91,467 $99,003
Foreign currency changes 10,819 10,013 (2,545)
Service cost - 1,466 1,493
Interest cost 6,216 5,581 5,720
Actuarial (gains)/losses 12,557 681 (10,240)
Gain on curtailment - (8,411) -
Employee contributions - 752 728
Benefit payments (4,768) (2,481) (2,692)
------------ ------------ --------------
------------ ------------ --------------
Projected benefit obligation, end of year $123,892 $99,068 $91,467
------------ ------------ --------------
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
retirement benefit expense for these plans for the year ended December 31, 2003,
2002 and 2001 were $2.5 million, $1.3 million and $1.3million respectively.
13. GEOGRAPHICAL ANALYSIS
During each of the years ended December 31, 2003, 2002 and 2001, 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
2003 Revenues $28,110 $104,324 $132,434
Operating income before other
operating income/(expense)
1,365 5,404 6,769
Operating income 1,194 2,053 3,247
Long-lived assets(A) 15,519 123,054 138,573
Property and equipment, net 9,405 92,142 101,547
Depreciation and amortization 1,898 9,436 11,334
Capital expenditure 1,912 6,804 8,716
Total assets 19,341 136,932 156,273
2002 Revenues $24,891 $90,851 $115,742
Operating income before other
operating expense 301 3,963 4,264
Operating income 301 3,963 4,264
Long-lived assets (A) 20,437 112,776 133,203
Property and equipment, net 9,615 84,959 94,574
Depreciation & amortization 1,335 6,773 8,108
Capital expenditure
996 3,181 4,177
Total assets 23,483 124,927 148,410
2001 Revenues $23,501 $75,705 $99,206
Operating (loss) before other
expense/income (109) (784) (893)
Other operating expense - (750) (750)
Operating (loss) (109) (1,534) (1,643)
Long-lived assets (A) 19,693 111,138 130,831
Property and equipment, net 10,132 80,221 90,353
Depreciation & amortization 1,416 6,891 8,307
Capital expenditure 1,151 2,144 3,295
Total assets 20,929 113,035 133,964
(A) Long-lived assets exclude cash and cash equivalents and unamortized costs
of raising long-term debt.
Revenues from customers (based on location of customers)
2003 2002 2001
$000 $000 $000
United States 38,820 37,316 34,705
Europe 61,110 51,551 39,082
Rest of World 32,534 26,875 25,419
------------- -------------- ------------
$132,464 $115,742 $99,206
------------- -------------- ------------
14. 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, 2003 287 29 250 (5) 561
December 31, 2002 164 17 294 (188) 287
December 31, 2001 86 (2) 80 0 164
15. OTHER RELATED PARTY TRANSACTIONS
Share purchase loan
Brian Cass, President and Managing Director of LSR, acquired 400,000 shares of
LSR Common Stock in the Private Placement. Mr. Cass acquired such shares through
the delivery of two promissory notes. Both such promissory notes, each in the
amount of (pound)211,679 ($377,995), are due on March 28, 2007; bear interest at
the rate of 5% per annum; and are secured by the 200,000 shares of LSR Common
Stock purchased with the proceeds of each such loan. The due date of each
promissory note would be accelerated if Mr. Cass voluntarily resigned from his
employment with LSR or had his employment terminated. Repayment of one of the
promissory notes will be made by automatic deduction of (pound)44,000 ($78,571)
per year from the (pound)66,000 ($117,856) per year pension contribution made by
the Company to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($383,033) accrued in such pension account.
In addition, one-third of any yearly bonus received by Mr. Cass will be used to
reduce principal of the promissory notes. Total amount of this loan as of
December 31, 2003 is (pound)370,082 ($660,855) at year-end foreign exchange
rates).
Julian Griffiths, a former director of LSR and current Finance Director of
Huntingdon, acquired 50,000 shares of LSR Common Stock in the Private Placement.
Mr. Griffiths acquired such shares through the delivery of a promissory note in
the principal amount of (pound)52,817 ($94,315), which is due on March 28, 2007;
bears interest at the rate of 5% per annum; and is secured by the 50,000 shares
of LSR Common Stock purchased with the proceeds of the loan. This loan was
totally repaid during 2003.
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for the
12 months ended December 31, 2003 and December 31, 2002.
Year ended December 31, 2003 Quarter Ended
March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues $31,901 $32,663 $32,723 $35,147
Cost of sales (25,373) (25,442) (26,164) (27,819)
--------------------------------------------------------------------------
Gross profit 6,528 7,221 6,559 7,328
Selling and administrative expenses (4,921) (5,395) (5,189) (5,362)
Other operating (expense)/income - (132) 387 (3,777)
--------------------------------------------------------------------------
Operating income 1,607 1,694 1,757 (1,811)
Interest income 16 23 10 45
Interest expense (1,708) (1,444) (1,464) (1,468)
Other (expense)/income (450) 2,179 308 3,325
--------------------------------------------------------------------------
(Loss)/income before taxes (535) 2,452 611 91
Income tax benefit/(expense) 177 (592) (215) 1,739
--------------------------------------------------------------------------
Net (loss)/income $(358) $1,860 $396 $1,830
--------------------------------------------------------------------------
(Loss)/earnings per share $(0.03) $0.16 $0.03 $0.15
Quarter Ended
Year ended December 31, 2002 March 31 June 30 September 30 December 31
$000 $000 $000 $000
Revenues $26,135 $28,590 $29,951 $31,066
Cost of sales (21,646) (23,120) (24,122) (24,515)
--------------------------------------------------------------------------
Gross profit 4,489 5,470 5,829 6,551
Selling and administrative costs (4,302) (4,324) (4,538) (4,911)
--------------------------------------------------------------------------
Operating income 187 1,146 1,291 1,640
Interest income 6 27 20 13
Interest expense (1,627) (1,524) (1,522) (1,631)
Other (expense)/income (2,623) 3,241 1,747 2,557
--------------------------------------------------------------------------
Loss before taxes (4,057) 2,890 1,536 2,579
Income tax benefit 742 26 (34) (985)
--------------------------------------------------------------------------
Net (loss)/income $(3,315) $2,916 $1,502 $1,594
--------------------------------------------------------------------------
(Loss)/earnings per share $(0.48) $0.24 $0.13 $0.13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9(a) CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company's Principal
Executive Officer and Principal Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered in this report. Based on that evaluation, the
Principal Executive Officer and the Principal Financial Officer have concluded
that the Company's current disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
the other factors that significantly affect those controls.
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.
Name Age Office Held
Andrew Baker 55 Director
Chairman of the Board and
Chief Executive Officer
Gabor Balthazar 62 Director
Brian Cass 56 Director, Managing Director/President
Afonso Junqueiras 47 Director, appointed January 15, 2003.
Richard Michaelson 52 Chief Financial Officer & Secretary
Yaya Sesay 61 Director, appointed January 10, 2003
(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, Mr. 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, 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 that acts as general partner for healthcare
startup and development companies.
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, Mr. 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. He is a graduate of the Columbia Law
School and the Columbia Business School in New York City.
Brian Cass, FCMA, CBE, 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 Center 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. In June 2002, Mr. Cass was also appointed as
a Commander in the Most Excellent Order of the British Empire (CBE).
Afonso Junqueiras became a director of LSR on January 15, 2003. He is a civil
engineer and has been President and a director of a South American private civil
engineering firm since 1997.
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.
Yaya Sesay, served as a senior government official of an African nation for
approximately 25 years, culminating in his service as Financial Secretary of the
Ministry of Finance for three years. For the past five years, Mr. Sesay has been
an international businessman with an interest in the development of
pharmaceutical products.
The Articles of Amendment and Restatement of 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.
(b) Code of Ethics
The Company has adopted a Senior Officer and Financial Personnel Code of Ethics.
A copy of such Code of Ethics is filed as exhibit 99.2 in this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
In the 12 months ended December 31, 2003 and 2002 the aggregate compensation of
the Executive Officers as a group, paid or accrued, was $1,194,388 and
$1,254,750 respectively.
Employment Agreements
Andrew Baker
The services of Mr. Baker are provided for not less than 100 days per year
through a management services contract between Huntingdon and FHP. Mr. Baker
controls FHP. Under the contract, FHP agrees to provide the services of Mr.
Baker as Chairman and CEO of the Company. The management services contract will
continue until terminated on 12 months' written notice from either party.
Under the management services contract FHP is paid an annual fee of
(pound)200,000. Mr Baker receives health and medical insurance benefits from the
company. He is also entitled to a non-pensionable car allowance of up to
(pound)1,000 per month. Mr. Baker receives contributions to his private pension
arrangements, equivalent to 33 percent of this basic annual fee. The management
services contract may be terminated if either FHP or Mr. Baker is guilty of
serious misconduct or is in material breach of the terms of the contract, among
other reasons. In the event of termination without "cause" following a "change
in control", as defined, FHP would receive a payment equal to 2.99 times this
annualized fee plus an amount equal to 2.99 times all incentive compensation
earned or received by FHP or Mr. Baker during the 12 months prior to
termination.
Both FHP and Mr. Baker are bound by confidentiality restrictions and a
restriction preventing Mr. Baker from holding any interests conflicting with
those of the Company, without the Company's consent. Mr. Baker has undertaken to
the Company that, during the continuance of the management services contract, he
will not without the prior consent of the Company, be concerned or interested in
any business, which competes, or conflicts with the business of the Company.
Brian Cass
The services of Mr. Cass are provided through a service agreement between
Huntingdon Life Sciences Limited (a wholly owned subsidiary of Huntingdon) and
Mr. Cass, which appoints Mr. Cass as President/Managing Director of the Company.
Mr. Cass' service agreement can be terminated on two years' written notice from
either party.
Mr. Cass receives a gross salary of (pound)200,000 per annum. Under the service
agreement, Mr. Cass is also entitled to health insurance, life insurance,
personal accident insurance and medical expenses insurance. Mr. Cass receives
contributions to his private pension arrangements, equivalent to 33 percent of
his basic annual salary. He is also entitled to a non-pensionable car allowance
of (pound)1,000 gross per month and (pound)2,000 per month as relocation
allowance. Mr. Cass' service agreement also provides for payment to Mr. Cass of
a bonus, at the absolute discretion of the Company's Board. In the event of
termination without "cause" following a "change in control", as defined, Mr.
Cass would receive a payment equal to 2.99 times his annual salary plus an
amount equal to 2.99 times all incentive compensation earned or received by Mr.
Cass during the 12 months prior to termination.
Mr. Cass' service agreement may be terminated if Mr. Cass is guilty of serious
misconduct or is in material breach of the terms of the service agreement or is
in breach of the model code for securities transactions by directors of listed
companies, among other reasons.
Mr. Cass is bound by confidentiality restrictions and a restriction preventing
him from being engaged, concerned or interested in any business that conflicts
with the business of the Company or any subsidiary unless either the Company's
Board otherwise consents or the interest is limited to a holding or other
interest of no more than 5 percent of the total amount of shares or securities
of any company quoted on a recognized investment exchange.
Richard Michaelson
The services of Mr. Michaelson are provided through a service agreement between
him and Huntingdon Life Sciences Inc. (a wholly owned subsidiary of Huntingdon).
The service agreement appoints Mr. Michaelson as Chief Financial Officer and
Secretary of the Company. Mr. Michaelson's service agreement will continue until
terminated by Mr. Michaelson on thirty days' written notice or by Huntingdon
Life Sciences Inc. on 12 months' written notice. In the event of termination
without "cause" following a "change in control", as defined, Mr. Michaelson
would receive a payment equal to 2.99 times his annual salary plus an amount
equal to 2.99 times all incentive compensation earned or received by Mr.
Michaelson during the 12 months prior to termination.
Mr. Michaelson receives an annual salary of $250,000 gross and is entitled to
health insurance, life insurance, personal accident insurance, medical expenses
insurance and participation in the 401(k) Plan of Huntingdon Life Sciences Inc.
Mr. Michaelson's service agreement also provides for the payment of a bonus to
Mr. Michaelson in the absolute discretion of the Company's Board.
In addition, Mr. Michaelson is entitled to a car allowance of $1,000 gross per
month.
The agreement may be terminated if Mr. Michaelson is guilty of serious
misconduct or is in material breach of the terms of the service agreement,
amongst other reasons.
Mr. Michaelson is bound by confidentiality restrictions and a restriction
preventing him from being engaged, concerned or interested in any business
conflicting with the business of the Company or any subsidiary unless the Board
otherwise consents or the interest is limited to a holding or other interest of
no more than 5 percent of the total amount of shares or securities of any
company quoted on a recognized investment exchange.
Discretionary bonus plan
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. No bonus awards were made in respect of 2001, 2002 or 2003.
The following table shows the remuneration of Executive Officers in the 12
months ended December 31, 2003, 2002, and 2001;
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 2003 327,050 108,918
Chairman and Chief 2002 300,780 - 100,160 200,000
Executive Officer 2001 288,006 - 95,990 -
Mr. B Cass 2003 327,080 175,843
Managing Director and 2002 300,780 - 160,327 200,000
President 2001 280,741 - 153,311 -
Mr. Richard A. Michaelson 2003 222,108 - 18,633
Chief Financial Officer 2002 196,923 - 11,917 90,000
and
Secretary
Mr K Cramer 2003 - - - -
Former Director of LSR 2002 36,898 - - 40,000
2001 60,000 - - -
Mr. J T Griffiths 2003 204,425 - 44,692
Financial Director 2002 187,988 - 54,547 60,000
Company Secretary of 2001 120,960 - 40,229 10,000
Huntingdon
Dr F W Bonner 2003 141,945 13,817
Former Director of 2002 221,073 - 20,053 30,000
Science &
Technology of Huntingdon 2001 211,680 - 20,395 10,000
Messrs. Baker, Bonner, Cass and Griffiths are paid in UK pounds sterling. The
amounts have been converted at the rate of 2003: $1.6354, 2002: $1.5039, and
2001: $1.4403, to (pound)1.00 for the purposes of the above table.
Dr. Bonner and Mr. Griffiths did not stand for re-election as directors of LSR
at the June 10, 2002 Annual Meeting of Stakeholders and accordingly ceased being
directors of LSR as of that date. Mr. Cramer resigned as a director effective
January 19, 2003. Dr Bonner ceased to be an employee of the Company on March 31,
2003.
The Officers' pension contributions are privately invested.
EQUITY INCENTIVE PLANS
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 enables LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key personnel.
This stock option plan is approved by the shareholders.
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 favorable 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.
LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to
certain directors as of that date, and employees, including the Named Executive
Officers:
Grants to Directors
- -------------------
Name Number Granted
- ---- --------------
Gabor Balthazar 20,000
John Caldwell 20,000
Kirby Cramer 40,000
Grants to Named Executive Officers
- ----------------------------------
Name Number Granted
- ---- --------------
Andrew Baker 200,000
Brian Cass 200,000
Frank Bonner 35,000
Julian Griffiths 60,000
Richard Michaelson 90,000
All such options have ten-year terms; 50% of the shares subject to grant are
immediately exercisable with the remaining 50% exercisable one year after the
grant date (meaning all such options, fully vested as of March 1, 2003); and all
have an exercise price of $1.50 per share, the price at which the Company sold
shares of Common Stock in the Private Placement. Options to purchase an
aggregate of 1,177,000 shares of LSR Common Stock (including those specified
above) were granted in 2002 to employees and directors, on the terms set forth
above, are listed below:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
March 1, 2002 1,142,000 $1.50
September 3, 2002 20,000 $2.40
October 21, 2002 15,000 $2.03
In 2003, options to purchase an aggregate of 11,000 shares of LSR Common Stock
were issued, all at an exercise price of $1.80, the market price at the date of
grant:
Date of Grant Numbers Granted Exercise Price
- ------------- --------------- --------------
February 14, 2003 11,000 $1.80
Securities Authorized for Issuance under 2001 Equity Incentive Plan
Shares Wtd Avg. Ex Price Number of securities remaining
(000) available for future issuance
Outstanding at start of period 1,177 $1.52
Granted 11 $1.80
----------- ------------------ ----------------------------------
December 31, 2003 1,188 $1.52 912,000
----------- ------------------ ----------------------------------
Exercisable at end of year 1,188 $1.52
Weighted average fair value of
options granted (000) $922
Huntingdon Life Sciences Group plc Stock Option Plans
Huntingdon Life Sciences Group plc issued options prior to December 31, 1997
pursuant to several stock option plans. However, the ability to exercise options
under all such Huntingdon plans lapsed on March 26, 2002 in connection with
LSR's acquisition of Huntingdon, except for those granted under the Unapproved
Stock Option Plan (the "Unapproved Plan"). Under the Unapproved Plan, some
options technically remain outstanding. However, such options are exercisable
only for shares of Huntingdon, a 100% wholly owned subsidiary of LSR, and as
such are considered to have no value.
Other Option Grants
In addition to the options granted under the Share Option Plans, the Company has
issued options outside of the plans, pursuant to various employment, consulting
and separation agreements.
Warrants
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. Stephens Group Inc. subsequently sold the
warrants to independent third parties. The LSR warrants 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., (Stephens' Loan) in January 2001. In accordance with APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
("APB 14") the warrants were recorded at their pro rata fair values in relation
to the proceeds received on the date of issuance. As a result, the value of the
warrants was $430,000.
On 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.
On October 24, 2003, 100,000 warrants were issued at the market price on the day
of $2.05. These warrants were issued to an independent consultant in connection
with financial advice.
A summary of warrants outstanding at December 31, 2003 is as follows:
Warrants Exercise price Expiration Date
-------- -------------- ---------------
October 9, 2001 704,425 $1.50 October 9, 2011
June 11, 2002 410,914 $1.50 June 11, 2012
October 24, 2003 100,000 $2.05 October 24, 2013
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF
MARCH 24, 2004
The following table sets forth, as of March 24, 2004, certain information
regarding the beneficial ownership of the shares of LSR common stock, by (a)
each person or entity who is known by LSR to own beneficially 5% or more of its
outstanding shares of Common Stock (none other than Mr. Baker and Mr. Cass, who
are each a Director and Executive Officer of LSR); (b) each Director or
Executive Officer of LSR or principal subsidiary; and (c) all Directors and
Executive Officers as a group.
Percent of
Name Number of Shares Outstanding Shares
Mr. A. Baker 2,710,089 (1) 21.6%
Mr. G. Balthazar 20,000 (2) *
Mr. B. Cass 620,000 (3) 5.1%
Mr. J. Griffiths 110,000 (4) *
Mr. A. Junqueiras -- --
Mr. R. Michaelson 314,800 (5) 2.6%
Mr. Y. Sesay -- --
All Directors and Executive Officers 3,774,889 29.0%
as a Group
* Signifies less than 1%. All percentages calculated on the basis of
12,034,883 outstanding shares of Voting Common Stock. Shares subject to
issuance upon presently exercisable options or Warrants are included in the
number of outstanding shares for purposes of calculating that holder's
percentage interest, as well as the aggregate percentage interest of all
directors and Executive Officers as a group.
(1) Includes presently exercisable options to purchase 200,000 shares and
presently exercisable warrants to purchase 410,914 shares. 1,335,175 of
such shares are beneficially owned by First Investments LLC, a Nevada
limited liability company of which Mr. Baker owns 69% of the membership
interests, with the remaining 31% of the membership interests being owned
by Search for a Cure LLC. 684,000 of such shares are owned by Focused
Healthcare Partners Ltd, a Bahamas corporation that is controlled by Mr.
Baker. 490,914 of such shares (including the 410,914 shares subject to
presently exercisable warrants noted above) are beneficially owned by
Focused Healthcare Partners LLC, a New Jersey limited liability company
that is controlled by Mr. Baker.
(2) Includes presently exercisable options to purchase 20,000 shares.
(3) Includes presently exercisable options to purchase 200,000 shares.
(4) Includes presently exercisable options to purchase 60,000 shares, plus
50,000 shares beneficially owned by Morven LLC, a Delaware limited
liability company that is controlled by Mr. Griffiths.
(5) Includes presently exercisable options to purchase 90,000 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 24, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(1) A $2,910,800 ((pound)2,000,000) facility has been made available to the
Company on September 25, 2000 by a director, Mr. Baker. This had been drawn
down in full. The loan was repayable on demand, although it was subordinate
to the bank loan, it was unsecured and interest was 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. The remaining principal amounts were repaid in full to Mr
Baker and FHP, respectively, in 2002.
(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 at the time, and the other two banks that 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, Inc., LSR Ltd,
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 July 19, 2001
and as amended on October 5, 2001, the Stephens Group Inc. made $2,910,800
((pound)2,000,000) available to the Company, which was available for a
period of one year from July 19 2001. That loan was transferred to another
party effective February 11, 2002. This amount, which is secured and
subordinated to the bank debt, was drawn down in full. Interest was payable
monthly at a rate of 10% per annum. With the consent of the bank lender,
one half of the facility was repaid on July 1, 2002, and the remainder was
repaid on October 1, 2002.
(4) In October 2001 the Company issued to Stephen Group Inc., 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. The warrants
were subsequently transferred to an unrelated third party.
In addition at the June 11, 2002 shareholders meeting, shareholders
approved the issuance to FHP 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.
(5) Brian Cass, President and Managing Director of LSR, acquired 400,000 shares
of LSR Common Stock in the Private Placement. Mr. Cass acquired such shares
through the delivery of two promissory notes. Both such promissory notes,
each in the amount of (pound)211,679 ($377,995), are due on March 28, 2007;
bear interest at the rate of 5% per annum; and are secured by the 200,000
shares of LSR Common Stock purchased with the proceeds of each such loan.
The due date of each promissory note would be accelerated if Mr. Cass
voluntarily resigned from his employment with LSR or had his employment
terminated. Repayment of one of the promissory notes will be made by
automatic deduction of (pound)44,000 ($78,571) per year from the
(pound)66,000 ($117,856) per year pension contribution made by the Company
to a pension plan established by Mr. Cass. The other note is further
collateralized by the (pound)214,500 ($383,033) accrued in such pension
account. In addition, one-third of any yearly bonus received by Mr. Cass
will be used to reduce principal of the promissory notes. Total amount of
this loan as of December 31, 2003 is (pound)370,082 ($660,855 at year-end
foreign exchange rates).
(6) Julian Griffiths, a former director of LSR and current Finance Director of
Huntingdon, acquired 50,000 shares of LSR Common Stock in the Private
Placement. Mr. Griffiths acquired such shares through the delivery of a
promissory note in the principal amount of (pound)52,817 ($94,315), which
is due on March 28, 2007; bears interest at the rate of 5% per annum; and
is secured by the 50,000 shares of LSR Common Stock purchased with the
proceeds of the loan. This loan was fully repaid during 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed for professional services rendered by Hugh Scott PC
for the audit of the Company's annual financial statements for the year ended
December 31, 2003 and for review of financial statements included in Form 10-Q
Filings for 2003 were $107,147.
The aggregate fees billed for professional services rendered by Deloitte &
Touche for the audit of the Company's annual financial statements for the year
ended December 31, 2002 were $295,000.
Audit Related Fees
There were no fees billed for assurance and related services by the Company's
principal accountant in either 2003 or 2002.
Tax Fees
Fees billed for tax compliance, tax advice and tax planning by the Company's
principal accountant in 2003 and 2002 was $10,155 and $0, respectively.
All Other Fees
There were no fees billed for services other than those reported above by the
Company's principal accountant in 2003.
The aggregate fees billed for services other than those reported above by
Deloitte & Touche in 2002 were $92,000. Such services included $72,000 in
services provided in connection with the Company's registration statement on
Forms S-4 regarding LSR's acquisition of Huntingdon. The remainder of non-audit
fees primarily related to foreign payroll consultation.
The Audit Committee has established a pre-approval process to review and
pre-approve all non-audit fees and services of the principal accountants that
are not `de minimis' (defined as amounts greater than 5% of the principal
accountant's audit fees). There were no such fees to be approved in 2003.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
1. List of documents filed as part of this report
2. Index to Financial Statements
Life Sciences Research, Inc.
Independent Auditors' Report
Consolidated Statements of Operations- Years ended
December 31, 2003, 2002, and 2001
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Changes in Shareholders' (Deficit)/Equity
and Comprehensive Loss - Years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows - Years ended December 31, 2003,
2002, and 2001
Notes to Consolidated Financial Statements
3. 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.
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 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.
4.2 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.
4.3 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.
4.4 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.
4.5 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 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12Rules 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.
10.13 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.
10.14 Registrant's 2001 Equity Incentive Plan. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER
333-71408.
10.15 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.
10.16 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.
10.17 Amendment No. 2 to Loan Facility Letter, dated as of March 20, 2001, by
and among Andrew Baker, HLS and Focused Healthcare Partners. INCORPORATED
BY REFERENCE TO REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2002.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Form of Director's Irrevocable Undertaking. INCORPORATED BY REFERENCE TO
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT
NUMBER 333-71408.
10.24 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.
10.25 Warrant, dated June 11, 2002, issued by the Registrant. INCORPORATED BY
REFERENCE TO REGISTRANT'S PROXY STATEMENT ON SCHEDULE 14A, DATED MAY 10,
2002.
10.26 Service Agreement, dated as of April 1, 2000, between Huntingdon Life
Sciences, Inc. and Richard Michaelson. INCORPORATED BY REFERENCE TO
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 2002.
10.27 Amendment No. 1 to Service Agreement between Huntingdon Life Sciences,
Inc. and Richard Michaelson, dated as of April 15, 2002. INCORPORATED BY
REFERENCE TO REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002.
10.28 Amendment No. 1 to Service Agreement between Huntingdon Life Sciences
Limited and Brian Cass, dated as of April 15, 2002. INCORPORATED BY
REFERENCE TO REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002.
10.29 Amendment No. 1 to Service Agreement between Huntingdon life Sciences
Limited and Julian Griffiths, dated as of April 15, 2002. INCORPORATED BY
REFERENCE TO REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002.
10.30 Amendment No. 2 to Management Services Agreement between Huntingdon Life
Sciences Group plc and Focused Healthcare Partners, dated as of April 15,
2002. INCORPORATED BY REFERENCE TO REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
21.1 Subsidiaries - FILED HEREWITH
31.1 Certification of Chief Executive Officer pursuant to SEC Rule 13(a) -
14(a). FILED HEREWITH
31.2 Certification of Chief Financial Officer pursuant to SEC Rule 13(a) -
14(a). FILED HEREWITH
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.Section 1350.
FILED HEREWITH
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.Section 1350.
FILED HEREWITH
99.1 Press Release, dated March 19, 2004, announcing fourth quarter and full
year 2003 results. FILED HEREWITH.
99.2 Code of Ethics - FILED HEREWITH
(b) Reports on Form 8-K
None in the fourth quarter.
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/ Richard Michaelson
Name: Richard Michaelson
Title: CFO & Secretary
Date: April 14, 2004