UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period: March 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-33505
------------------------
LIFE SCIENCES RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-2340150
IRS Employer Identification No.
PO BOX 2360, METTLERS ROAD, EAST MILLSTONE, NJ 08875-2360
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732 649-9961
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes _ No X
Indicate the number of outstanding shares of each of the Registrant's classes of
common stock as of the latest practicable date.
12,523,301 Voting Common Stock of $0.01 as of May 3, 2005
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004. 3
Condensed Consolidated Balance Sheets at March 31, 2005 and
December 31, 2004. 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004. 5
Notes to Condensed Consolidated Financial Statements. 6 -9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 10-15
Item 3 Quantitative and Qualitative Disclosures about Market Risk. 16
Item 4 Controls and Procedures 16
PART II OTHER INFORMATION
Item 6 Exhibits 17
Signature 17
Certifications 18-21
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended
March 31
(Dollars in thousands, except per share data) 2005 2004
Net revenues $43,294 $37,236
Cost of revenues (31,082) (29,435)
---------------
-----------------
Gross profit 12,212 7,801
Selling, general and administrative expenses (7,012) (5,485)
----------------- ---------------
Operating income 5,200 2,316
Interest income 23 14
Interest expense (1,783) (1,576)
Other (expense)/income (732) 1,355
---------------
-----------------
Income before income taxes 2,708 2,109
Income tax expense (184) (716)
---------------
-----------------
Net income $2,524 $1,393
----------------- ---------------
----------------- ---------------
Income per common share
- - Basic $0.20 $0.12
- - Diluted $0.17 $0.11
Weighted average common shares outstanding
- - Basic (000's) 12,454 12,040
- - Diluted (000's) 14,500 12,241
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) March 31, December 31,
2005 2004
ASSETS Unaudited Audited
Current assets:
Cash and cash equivalents $29,899 $33,341
Accounts receivable, net of allowance of $289 and $259 in
2005 and 2004 respectively 26,750 27,841
Unbilled receivables 10,727 11,516
Inventories 1,981 2,024
Prepaid expenses and other current assets 4,214 2,929
---------------- ----------------
Total current assets 73,571 77,651
Property and equipment, net 109,278 109,999
Goodwill 885 901
Unamortized Capital Bonds issue costs 217 271
Deferred income taxes 10,932 11,253
---------------- ----------------
Total assets $194,883 $200,075
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $13,052 $13,547
Accrued payroll and other benefits 4,251 4,024
Accrued expenses and other liabilities 18,141 19,987
Short term debt 258 719
Fees invoiced in advance 33,208 37,574
--------------- ----------------
Total current liabilities $68,910 $75,851
Long-term debt 88,555 89,685
Pension liabilities 36,032 36,603
--------------- ----------------
Total liabilities $193,497 $202,139
--------------- ----------------
Commitments and contingencies
Stockholders' equity/(deficit)
Preferred Stock, $0.01 par value. Authorized 5,000,000
Issued and outstanding: None - -
Non-Voting Common Stock, $0.01 par value. Authorized 5,000,000
Issued and outstanding: None - -
Voting Common Stock, $0.01 par value. Authorized 50,000,000
Issued and outstanding at March 31, 2005: 12,488,639 (December
31, 2004: 12,441,281) 125 125
Paid in capital 75,744 75,671
Less: Promissory notes for the issuance of common stock (410) (697)
Accumulated comprehensive loss (34,158) (34,724)
Accumulated deficit (39,915) (42,439)
--------------- ----------------
Total stockholders' equity /(deficit) 1,386 (2,064)
--------------- ----------------
Total liabilities and stockholders' equity /(deficit) $194,883 $200,075
--------------- ----------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three months ended March 31
(Dollars in thousands) 2005 2004
Cash flows from operating activities:
Net income $2,524 $1,393
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,349 2,346
Foreign exchange loss/(gain) on Capital Bonds 732 (1,355)
Deferred income taxes 184 716
Provision for losses on accounts receivable 30 40
Amortization of warrants 86 57
Amortization of Capital Bonds issue costs 50 46
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (87) (4,784)
Inventories 12 200
Accounts payable, accrued expenses and other liabilities (1,505) (198)
Fees invoiced in advance (3,798) 3,011
---------------- ----------------
Net cash provided by operating activities $577 $1,472
---------------- ----------------
Cash flows used in investing activities:
Purchase of property and equipment (3,209) (2,309)
---------------- ----------------
Net cash used in investing activities $(3,209) $(2,309)
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from issue of Voting Common Stock 360 18
Repayments of short term borrowings (560) (484)
---------------- ----------------
Net cash used in financing activities $(200) $(466)
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (610) (545)
---------------- ----------------
Decrease in cash and cash equivalents (3,442) (1,848)
Cash and cash equivalents at beginning of period 33,341 17,271
---------------- ----------------
Cash and cash equivalents at end of period $29,899 $15,423
---------------- ----------------
Supplementary disclosures
Interest paid in the quarter $2,444 $2,307
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and 2004
Unaudited
1. THE COMPANY AND ITS OPERATIONS
Business
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the
"Company") is a global contract research organization, offering worldwide
pre-clinical and non-clinical testing for biological safety evaluation research
services to pharmaceutical, biotechnology, agrochemical and industrial chemical
companies. The Company serves the rapidly evolving regulatory and commercial
requirements to perform safety evaluations on new pharmaceutical compounds and
chemical compounds contained within the products that humans use, eat and are
otherwise exposed to. In addition, the Company tests the effect of such
compounds on the environment and also performs work on assessing the safety and
efficacy of veterinary products.
Organization
LSR, incorporated in Maryland on July 19, 2001, was formed specifically for the
purpose of acquiring Life Sciences Research Ltd (LSR Ltd) formerly Huntingdon
Life Sciences Group plc ("Huntingdon"), which has been in business since 1952.
The Offer was declared unconditional on January 10, 2002, and LSR completed the
purchase of all outstanding ordinary shares of Huntingdon on March 26, 2002 at
which time Huntingdon became a wholly owned subsidiary of LSR (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.
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and 2004
Unaudited
2. SIGNIFICANT ACCOUNTING POLICIES
i) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The condensed consolidated financial statements are
unaudited and are subject to such year-end adjustments as may be considered
appropriate and should be read in conjunction with the historical consolidated
financial statements of LSR years ended December 31, 2004, 2003 and 2002
included in LSR's Annual Report on Form 10-K for the fiscal year ended December
31, 2004. Operating results for the three-months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
These financial statements have been prepared in accordance with US GAAP and
under the same accounting principles as the financial statements included in the
Annual Report on Form 10-K. Certain information and footnote disclosures related
thereto normally included in the financial statements prepared in accordance
with US GAAP have been omitted in accordance with Rule 10-01 of Regulation S-X.
ii) Stock-Based Compensation
The Company has stock option and stock-based compensation plans, which are
described in detail in our audited consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2004. Under the
Long Term Incentive Plan (LTIP), the Company granted 362,663 ten-year stock
options to executives on June 1, 2004. All such options were granted with an
exercise price equal to the market price of the underlying stock on the date of
the grant. These options will vest 100% on March 31, 2007 for those executives
who remain employed with the Company through that date.
Effective January 1, 2003, the Company adopted FASB Statement No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. Statement
No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide, among other things, prominent disclosure of the effects of an
entity's accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. The Company intends to continue to follow the disclosure-only
provisions of FASB Statement No. 123 and, accordingly, will continue to account
for these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB 25, when stock options are issued with an exercise price equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
ii) Stock-Based Compensation (Cont'd)
No compensation cost is recorded for options granted under the Company's plan
since all options granted are issued with an exercise price equal to the market
value of the underlying common stock on the date of grant, and employees must
pay for these stock issuances. The following table illustrates the effect on net
income and earnings per share for the three months ended March 31, 2005 and 2004
had the Company applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to all of its stock-based
employee compensation plans.
Three months ended
March 31
2005 2004
(Dollars in thousands, except per share data)
Net Income, as reported $2,524 $1,393
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects $(91) $-
----------------- --------------
Pro forma net income $2,433 $1,393
----------------- --------------
Earnings per share:
Basic - as reported $0.20 $0.12
Basic - pro forma $0.20 $0.12
Diluted - as reported $0.17 $0.11
Diluted - pro forma $0.17 $0.11
There were no stock options granted during the three months ended March 31, 2005
or 2004. The HLS 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:
3 Months ended March 31
2005 2004
Dividend yield 0% 0%
Volatility 135% 135%
Risk-free interest rate 4.63% 4.63%
Expected term of options (in years) 10 years 10 years
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States. The Company has one continuing activity,
Contract Research.
The analysis of the Company's net revenues and operating income by segment for
the three month periods ended March 31, 2005 and March 31, 2004 is as follows:
Three months ended
March 31
2005 2004
(Dollars in thousands)
Net revenues
UK $34,594 $30,175
US
8,700 7,061
Corporate - -
--------------- ----------------
$43,294 $37,236
=============== ================
Operating income
UK $5,905 $3,057
US
1,078 398
Corporate (1,783) (1,139)
--------------- ----------------
$5,200 $2,316
=============== ================
4. REFINANCING
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and Focused Healthcare Partners ("FHP") ($0.3 million) and $825,000 was
paid with promissory notes. A net $128,000 of such promissory notes was repaid
to the end of 2004, and a further net $287,000 was repaid to the end of March
2005.
5. COMMITMENTS AND CONTINGENCIES
(i) 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.
(ii) The Compensation Committee approved as of June 1, 2004 a performance based
cash bonus award for executives. This award, issued under the Long Term
Incentive Plan (LTIP), will award cash compensation to select individuals
if certain performance goals relating to operations are reached by December
31, 2006. The amount of the award varies based upon the level of
performance, with a complete default of the award if minimum operating
levels are not achieved.
Management is ratably accruing, as compensation expense, an amount equal to
the currently estimated cash bonus over the performance period. Management
will re-evaluate this estimate periodically throughout the performance
period and, if applicable, will adjust the estimate accordingly.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. RESULTS OF OPERATIONS
a) Three months ended March 31, 2005 compared with three months ended March
31, 2004.
Net revenues for the three months ended March 31 2005 were $43.3 million, an
increase of 16.3% on net revenues of $37.2 million for the three months ended
March 31, 2004. Excluding the effect of exchange rate movements, the increase
was 13.6%. UK net revenues increased by 14.6%; at constant exchange rates the
increase was 11.4%. In the US, net revenues increased by 23.2%. This growth in
revenues reflects the increase in orders and, consequently, backlog over the
last year. This growth has been particularly strong from the pharmaceutical
industry, but has been partly offset by a decline in non-pharmaceutical
business.
Cost of revenues for the three months ended March 31, 2005 were $31.1 million,
an increase of 5.6% on cost of revenues of $29.4 million for the three months
ended March 31, 2004. Excluding the effects of exchange rate movements, the
increase was 3.2%. UK cost of revenues increased by 3.4%; at constant exchange
rates there was a increase of 0.5%. This low increase in costs compared to the
increase in revenues reflects the consolidation of duplicate facilities in
response to changes in the market announced in the fourth quarter of 2003 and
implemented at the end of the first quarter of 2004. US cost of revenues
increased by 14.5% reflecting the growth in revenues.
Selling, general and administrative expenses (SG&A) rose by 27.8% to $7.0
million for the three months ended March 31, 2005 from $5.5 million in the
corresponding period in 2004. Excluding the effects of exchange rate movements,
the increase was 25.5%. The increase was mainly due to increased costs for
headquarters salary and bonuses, higher insurance costs, some increased
administrative expenses, and certain expenses which are now classified into
SG&A.
Net interest expense for the three months ended March 31, 2005 was $1.8 million,
which was $0.2 million higher than the net interest expense for the three months
ended March 31, 2004. Excluding the effects of exchange rate movements, the
increase was mainly due to an increase in LIBOR and costs associated with
foreign currency hedging.
Other expense in the three months ended March 31, 2005 was $0.7 million which
relates to the non-cash foreign exchange re-measurement loss which arose on the
Convertible Capital Bonds denominated in US dollars (the functional currency of
the financial subsidiary that holds the bonds in UK sterling), with the
strengthening of the dollar against sterling. In the three months ended March
31, 2004, other income of $1.4 million related to the non-cash foreign exchange
re-measurement gain that arose on the Convertible Capital Bonds, with the
weakening of the dollar against sterling.
The income tax expense on income for the three months ended March 31, 2005 was
$0.2 million, which was primarily a non-cash charge due to the company's
operating loss carry forwards. The income tax expense for the three months ended
March 31, 2004 was $0.7 million. The expense for the three months ended March
31, 2005 has been reduced by $1.1 million in respect of research and development
tax credits in the UK. The gross net operating losses in the US are $12.8
million at March 31, 2005; with gross net operating losses in the UK of $63.9
million.
The overall net income for the three months ended March 31, 2005 was $2.5
million compared to $1.4 million for the three months ended March 31, 2004. The
increase in the net income of $1.1 million is due to an increase in operating
income of $2.9 million; offset by an increase in non-cash foreign exchange
re-measurement loss of $2.1 million, an increase in interest expenses of $0.2
million and an decrease in the income tax expense of $0.5 million.
Basic income per common share was 20 cents, compared to 12 cents in the same
period last year, on the weighted average common shares outstanding of
12,453,633 (2004: 12,039,874). Diluted income per diluted share was 17 cents,
compared to 11 cents in the same period last year.
Earnings before interest, taxes, depreciation and amortization, and other
income/(expense) ("EBITDA") was $7.5 million for the first quarter of 2005, or
17.4% of revenues, compared with $4.7 million, or 12.5% of revenues for the same
period in the prior year.
The Company believes that EBITDA information, which for this Company excludes
other income/(expense), enhances an investor's understanding of our financial
performance and our ability to satisfy principal and interest obligations with
respect to our indebtedness. However, EBITDA should not be considered in
isolation or viewed as a substitute for net income, cash flow from operations or
other measures of performance as defined by generally accepted accounting
principles in the United States. We understand that while securities analysts,
lenders and others in their evaluation of companies frequently use EBITDA,
EBITDA as used herein is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method of
calculation. Management uses EBITDA to assess financial performance and debt
service capabilities. In assessing financial performance, our management reviews
EBITDA as a general indicator of economic performance compared to prior periods.
Because EBITDA excludes interest, income tax, depreciation and amortization, and
other income/(expense), EBITDA provides an indicator of general economic
performance that is not affected by changes in debt levels, fluctuations in
interest rates or effective tax rates, levels of depreciation and amortization,
or exchange rate movements on the Capital Bonds. Management believes this type
of measurement is useful for comparing general operating performance from period
to period and making certain management decisions. Nevertheless, management
recognizes that there are material limitations associated with the use of EBITDA
as compared to net income, which reflects overall financial performance,
including the effects of interest, taxes, depreciation, amortization and other
income/(expense).
2. LIQUIDITY & CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company's non-bank loan of (pound)22.6 million ($42.7
million approximately), was refinanced by Stephens' Group Inc. and other
parties. The loan was transferred from Stephens Group Inc., to an unrelated
third party effective February 11, 2002. It is now repayable on June 30, 2006
and interest is payable quarterly at LIBOR plus 1.75%. At the same time the
Company was required to take all reasonable steps to sell off some of its real
estate assets through sale/leaseback transactions and/or obtaining mortgage
financing secured by the Company's real estate assets to discharge this loan.
The loan is held by Life Sciences Research Ltd (LSR Ltd.), and is secured by the
guarantees of the Company's wholly owned subsidiaries, including LSR Ltd,
Huntingdon Life Sciences Ltd, and Huntingdon Life Sciences Inc., and
collateralized by all the assets of these companies.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. The warrants were subsequently transferred to
an unrelated third party. The LSR warrants are exercisable at any time and will
expire on October 9, 2011. These warrants arose out of negotiations regarding
the refinancing of the bank loan by the Stephens Group Inc. in January 2001. In
accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants ("APB 14"), the warrants were recorded at
their pro rata fair values in relation to the proceeds received on the date of
issuance. As a result, the value of the warrants was $430,000. 154,425 of such
warrants were exercised in 2004.
Convertible Capital Bonds
The remainder of the Company's long term financing is provided by Convertible
Capital Bonds repayable on September 25, 2006. At the time of the issue in 1991,
these bonds were for $50 million par and at March 31, 2005, $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 Transactions
On June 11, 2002 LSR issued to Focused Healthcare Partners ("FHP"), an entity
controlled by Andrew Baker, the Company's Chairman and CEO, warrants to purchase
up to 410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share. The LSR warrants are exercisable at any time and will expire on June 11,
2012. These warrants arose out of negotiations regarding the provision of a $2.9
million loan facility made available to the Company on September 25, 2000 by Mr.
Baker. This loan was paid in full in 2002. In accordance with APB 14 the loan
and warrants were recorded at their pro rata fair values in relation to the
proceeds received. As a result, the value of the warrants was $250,000.
Common Shares
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and FHP ($0.3 million) and $825,000 was paid with promissory notes. A
net $128,000 of such promissory notes was repaid to the end of 2004, and a
further net $287,000 was repaid to the end of March 2005.
Cash flows
During the three months ended March 31, 2005, funds used were $3.4 million,
reducing cash and cash equivalents from $33.3 million at December 31, 2004 to
$29.9 million at March 31, 2005.
Net days sales outstanding ("DSOs") at March 31, 2005 were 9 days, an increase
from the 4 days at December 31, 2004 (14 days at March 31, 2004). DSO is
calculated as a sum of accounts receivables, unbilled receivables and fees in
advance over total revenue. Since January 1999, DSOs at the quarter end have
varied from 1 day to 47 days so they are currently at a relatively low level.
The impact on liquidity from a one-day change in DSO is approximately $484,000.
3. CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with US GAAP. The Company considers the following
accounting policies to be critical accounting policies.
Revenue recognition
The majority of the Company's net revenues have been earned under contracts,
which generally range in duration from a few months to three years. Revenue from
these contracts is generally recognized over the term of the contracts as
services are rendered. Contracts may contain provisions for renegotiations in
the event of changes in the level of work scope. Renegotiated amounts are
included in net revenue when earned and realization is assured. Provisions for
losses to be incurred on contracts are recognized in full in the period in which
it is determined that a loss will result from performance of the contractual
arrangement. The Company's customers may terminate most service contracts for a
variety of reasons, either immediately or upon notice of a future date. The
contracts generally require payments to the Company to recover costs incurred,
including costs to wind down the study, and payment of fees earned to date, and
in some cases to provide the Company with a portion of the fees or income that
would have been earned under the contract had the contract not been terminated
early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment schedules. Unbilled
receivables are billable to customers within one year from the respective
balance sheet date. Fees in advance are recorded for amounts billed to customers
for whom 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, though it is unlikely, be material to the
Company's results of operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the financial statements and the results of operations during the
reporting periods. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. Although these estimates are based upon management's best
knowledge of current events and actions, actual results could differ from those
estimates.
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment rate changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
Exchange rate fluctuations and exchange controls
The Company operates on a worldwide basis and generally invoices its clients in
the currency of the country in which it operates. Thus, for the most part,
exposure to exchange rate fluctuations is limited as sales are denominated in
the same currency as costs. Trading exposures to currency fluctuations do occur
as a result of certain sales contracts, performed in the UK for US clients,
which are denominated in US dollars and contribute approximately 7% 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.
The Company has debt denominated in both USD and GBP, each of which have
repayment dates in 2006. Whereas the Company's functional currency is the UK
pound sterling, which results in the Company recording other income/loss
associated with USD debt as a function of relative changes in foreign exchange
rates, no decision has been made as to which currency might be chosen as the
basis for replacement financing. The Company recognizes that there has recently
been volatility in exchange rates which could have an impact on such
refinancing. To manage the volatility relating to these exposures, from time to
time, the Company may enter into certain derivative transactions. The Company
holds and issues derivative financial instruments for economic hedging purposes
only. In February 2005 the Company purchased a currency hedge against the UK
pound sterling. The call amount of the hedge was (pound)15.0 million and the put
amount was $30.0 million.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pounds sterling and the US
dollar will affect the translation of the UK subsidiary's financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and capital accounts are translated
at historical exchange rates and retained earnings are translated at weighted
average of historical rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated
comprehensive loss. Management has decided not to hedge against the impact of
exposures giving rise to these translation adjustments as such hedges may impact
upon the Company's cash flow compared to the translation adjustments which do
not affect cash flow in the medium term.
Exchange rates for translating sterling into US dollars were as follows:
At December 31 At March 31 3 months to March 31
Average rate (1)
2003 1.7857 1.5807 1.6031
2004 1.9199 1.8378 1.8365
2005 - 1.8896 1.8909
(1) Based on the average of the exchange rates on each day of each month during
the period.
On May 3, 2005 the noon buying rate for sterling was (pound)1.00 = $1.891.
The Company has not experienced difficulty in transferring funds to and
receiving funds remitted from those countries outside the US or UK in which it
operates and Management expects this situation to continue.
While the UK has not at this time entered the European Monetary Union, the
Company has ascertained that its financial systems are capable of dealing with
Euro denominated transactions.
The following table summarizes the financial instruments denominated in
currencies other than the US dollar held by LSR and its subsidiaries as of March
31, 2005:
Expected Maturity Date
2005 2006 2007 2008 2009 Thereafter Total Fair
Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 14,091 - - - - - 14,091 14,091
- Euro 2,743 - - - - - 2,743 2,743
- Japanese Yen 1,876 - - - - - 1,876 1,876
Accounts
receivable - Pound Sterling 20,156 - - - - - 20,156 20,156
- Euro 606 - - - - - 606 606
- Japanese Yen 1,767 - - - - 1,767 1,767
Debt - Pound Sterling - 42,679 - - - - 42,679 42,679
- Japanese Yen 57 - - - - - 57 57
4. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising out of the normal course
of its business. In management's opinion, none of these actions will have a
material effect on the Company's operations, financial condition or liquidity.
No form of proceedings has been brought, instigated or is known to be
contemplated against the Company by any governmental agency.
5. FORWARD LOOKING STATEMENTS
Statements in this management's discussion and analysis of financial condition
and results of operations, as well as in certain other parts of this Quarterly
Report on Form 10-Q (as well as information included in oral statements or other
written statements made or to be made by the Company) that look forward in time,
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, expectations, predictions, and assumptions and other
statements which are other than statements of historical facts. Although the
Company believes such forward-looking statements are reasonable, it can give no
assurance that any forward-looking statements will prove to be correct. Such
forward-looking statements are subject to, and are qualified by, known and
unknown risks, uncertainties and other factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by those statements. These risks, uncertainties and other factors include, but
are not limited to the Company's ability to estimate the impact of competition
and of industry consolidation and risks, uncertainties and other factors more
fully described in the Company's filings with the SEC, including its
Registration Statement on Form S-1, dated July 12, 2002, and Annual Report on
Form 10-K for the year ended December 31, 2004, each as filed with the
Securities and Exchange Commission.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's (pound)22.6 million (approximately $42.7 million) credit facility
is sterling denominated and does not contribute to transaction gains and losses
on the income statement. Interest on all outstanding borrowings under this
credit facility is based upon LIBOR plus a margin and approximated 6.639% per
annum for the three months ended March 31, 2005. At March 31, 2005 this credit
facility was fully drawn down.
In the three months ended March 31, 2005, a 1% change in LIBOR would have
resulted in a fluctuation in interest expense of $107,000.
The Company has debt denominated in both USD and GBP, each of which have
repayment dates in 2006. Whereas the Company's functional currency is the UK
pound sterling, which results in the Company recording other income/loss
associated with USD debt as a function of relative changes in foreign exchange
rates, no decision has been made as to which currency might be chosen as the
basis for replacement financing. The Company recognizes that there has recently
been volatility in exchange rates which could have an impact on such
refinancing. To manage the volatility relating to these exposures, from time to
time, the Company may enter into certain derivative transactions. The Company
holds and issues derivative financial instruments for economic hedging purposes
only. In February 2005 the Company purchased a currency hedge against the UK
pound sterling. The call amount of the hedge was (pound)15.0 million and the put
amount was $30.0 million.
For the three months ended March 31, 2005, approximately 73% of the Company's
net revenues were from outside the United States.
On March 31, 2005, the Company's $46.2 million principal amount of Convertible
Capital Bonds is US dollar denominated, but is held by a non-US subsidiary of
the Company. As a result, with respect to these bonds, the Company experiences
exchange related gains and losses which only has a non-cash impact on the
financial statements, based on the movement of exchange rates. Hence, the
Company does not take any actions to hedge against such risks. The Company is
unable to predict whether it will experience future gains or future losses from
such exchange-related risks on the bonds.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2005 an evaluation was carried out, under the supervision and
with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the quarter ended March 31, 2005 in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in our periodic SEC filings. During the quarter ended
March 31, 2005 there were no significant changes in internal controls or in
other factors that has materially affected, or are reasonably likely to
materially affect, internal controls over financial reporting.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS
Exhibit 31.1 Certification of the Chief Executive Officer
Exhibit 31.2 Certification of the Chief Financial Officer
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Chief
Executive Officer
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 of the Chief
Financial Officer
Exhibit 99.1 Press Release, dated May 4, 2005, announcing the
first quarter earnings results for 2005.
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this Quarterly Report on Form 10-Q has been signed below by the
following person on behalf of the Registrant and in the capacities and on the
dates indicated.
Life Sciences Research Inc.
(Registrant)
By: /s/ Richard Michaelson
Name: Richard Michaelson
Title: CFO & Secretary
Date: May 4, 2005