UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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 Exchange Act)
Yes _ No X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange 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.
12,553,251 Voting Common Stock of $0.01 as of November 2, 2005
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004. 3
Condensed Consolidated Balance Sheets at September 30, 2005 and
December 31, 2004. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004. 5
Notes to Condensed Consolidated Financial Statements. 6 - 10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11 - 20
Item 3 Quantitative and Qualitative Disclosures about Market Risk. 21
Item 4 Controls and Procedures 21
PART II OTHER INFORMATION
Item 6 Exhibits 22
Signature 22
Certifications 23 - 26
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three months ended Nine months ended
September 30 September 30
(Dollars in thousands, except per share data) 2005 2004 2005 2004
Net revenues $43,758 $40,855 $131,993 $116,406
Cost of revenues (31,673) (29,674) (95,214) (87,220)
------------- ------------ ----------- -----------
Gross profit 12,085 11,181 36,779 29,186
Selling, general and administrative expenses (6,410) (6,659) (20,496) (18,345)
------------- ------------ ----------- -----------
Operating income 5,675 4,522 16,283 10,841
Interest income 21 13 66 41
Interest expense (2,138) (1,689) (5,855) (4,858)
Other (expense)/income (1,760) (105) (5,195) 625
------------- ------------ ----------- -----------
Income before income taxes 1,798 2,741 5,299 6,649
Income tax expense (649) (945) (3,288) (2,261)
------------- ------------ ----------- -----------
Net income $1,149 $1,796 $2,011 $4,388
------------- ------------ ----------- -----------
Income per common share
- - Basic $0.09 $0.15 $0.16 $0.36
- - Diluted $0.08 $0.13 $0.14 $0.33
Weighted average common shares outstanding
- - Basic (000's) 12,542 12,166 12,506 12,085
- - Diluted (000's) 14,601 13,914 14,521 13,369
<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) September 30, December 31,
2005 2004
ASSETS Unaudited Audited
Current assets:
Cash and cash equivalents $12,161 $33,341
Accounts receivable, net of allowance of $338 and $259 in
2005 and 2004 respectively 29,581 27,841
Unbilled receivables 12,531 11,516
Inventories 1,733 2,024
Prepaid expenses and other current assets 8,712 2,929
---------------- ----------------
Total current assets 64,718 77,651
Property and equipment, net 107,709 109,999
Goodwill 1,032 901
Unamortized capital bonds issue costs 117 271
Deferred income taxes 7,450 11,253
---------------- ----------------
Total assets $181,026 $200,075
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $15,855 $13,547
Accrued payroll and other benefits 3,948 4,024
Accrued expenses and other liabilities 16,928 19,987
Short-term debt 46,499 719
Fees invoiced in advance 31,850 37,574
--------------- ----------------
Total current liabilities 115,080 75,851
Long-term debt 29,643 89,685
Pension liabilities 33,760 36,603
--------------- ----------------
Total liabilities 178,483 202,139
--------------- ----------------
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 September 30, 2005: 12,548,251
(December 31, 2004: 12,441,281) 125 125
Paid in capital 75,841 75,671
Less: Promissory notes for the issuance of common stock (238) (697)
Accumulated comprehensive loss (32,757) (34,724)
Accumulated deficit (40,428) (42,439)
--------------- ----------------
Total stockholders' equity /(deficit) 2,543 (2,064)
--------------- ----------------
Total liabilities and stockholders' equity /(deficit) $181,026 $200,075
--------------- ----------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine months ended September 30
(Dollars in thousands) 2005 2004
Cash flows from operating activities:
Net income $2,011 $4,388
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 7,229 7,044
Foreign exchange loss/(gain) on Capital Bonds 3,765 (625)
Deferred income taxes 3,288 2,256
Provision for losses on accounts receivable 79 15
Amortization of warrants 260 135
Amortization of Capital Bonds issue costs 137 134
Amortization of Financing Costs 1,420 -
Changes in operating assets and liabilities:
Accounts receivable, unbilled receivables and prepaid expenses (13,880) (12,661)
Inventories 131 71
Accounts payable, accrued expenses and other liabilities 2,063 3,020
Fees invoiced in advance (2,876) 8,176
---------------- ----------------
---------------- ----------------
Net cash provided by operating activities $3,627 $11,953
---------------- ----------------
---------------- ----------------
Cash flows used in investing activities:
Purchase of property and equipment (12,084) (7,049)
---------------- ----------------
---------------- ----------------
Net cash used in investing activities $(12,084) $(7,049)
---------------- ----------------
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from issuance of Voting Common Stock 629 193
Repayments of long-term borrowings (11,106) -
Repayments of short-term borrowings (684) (838)
---------------- ----------------
---------------- ----------------
Net cash used in financing activities $(11,161) $(645)
---------------- ----------------
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (1,562) (729)
---------------- ----------------
---------------- ----------------
(Decrease)/increase in cash and cash equivalents (21,180) 3,530
Cash and cash equivalents at beginning of period 33,341 17,271
---------------- ----------------
---------------- ----------------
Cash and cash equivalents at end of period $12,161 $20,801
---------------- ----------------
Supplementary Disclosures
Interest paid in the period $5,392 $5,261
Taxes paid in the period
Japan 18 139
US 298 168
Supplementary Disclosure of Non-Cash Financing Activities:
Proceeds from Sale/Leaseback used to pay off non-bank loan $30,000 -
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
LIFE SCIENCES RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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.
LSR's executive office is based at the Princeton Research Center in New Jersey.
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.
On June 14, 2005, the Company entered into and consummated purchase and sale
agreements with Alconbury Estates Inc. and subsidiaries (collectively
"Alconbury") for the sale and leaseback of the Company's three operating
facilities in Huntingdon and Eye, England and East Millstone, New Jersey (the
"Sale/Leaseback Transaction"). Alconbury is a newly formed company wholly owned
by LSR's Chairman and CEO, Andrew Baker. The total consideration paid by
Alconbury for the three properties was $40 million, consisting of $30 million in
cash and a five year, $10 million variable rate subordinated promissory note,
which Alconbury has agreed to make a best effort to repay within twelve months.
The proceeds from the Sale/Leaseback Transaction (plus additional cash on hand)
were used by the Company to pay in full its (pound)22.6 million non-bank debt
(approximately $41.1 million).
In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the
Company will reflect the consolidation of Alconbury as long as it is considered
the "primary beneficiary" of Alconbury's variable interests. The Company will
not record the gain and loss associated with the sale of the properties, nor
recognize the associated changes in depreciation, interest, and rent expenses,
until FIN 46R consolidation accounting no longer applies. At that time, the
Company will record a non-cash loss of approximately $44 million for the sale of
the UK properties, and a gain of approximately $6 million, amortized over the
term of the lease, for the US property. In addition, the Company anticipates a
net reduction in its annual depreciation charge of approximately $2.7 million,
offset by a net increase of $0.5 million in interest and rent expenses. The
Company anticipates that it will no longer be the primary beneficiary of
Alconbury when the $10 million subordinated promissory note has been repaid.
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-month and nine month periods ended
September 30, 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 and nine months ended September, 30
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 September 30 Nine months ended September 30
------------------------------- ------------------------------
2005 2004 2005 2004
(Dollars in thousands, except per share data)
Net Income, as reported $1,149 $1,796 $2,011 $4,388
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects $(101) $(40) $(340) $(71)
Pro forma net income $1,048 $1,756 $1,671 $4,317
Earnings per share:
Basic - as reported $0.09 $0.15 $0.16 $0.36
Basic - pro forma $0.08 $0.14 $0.13 $0.36
Diluted - as reported $0.08 $0.13 $0.14 $0.33
Diluted - pro forma $0.07 $0.13 $0.12 $0.32
There were no grants of stock options during the three months ended September
30, 2005 (nor the three months ended September 30, 2004). The per share weighted
average fair value of stock options granted was $7.74 and $1.82 during the nine
months ended September 30, 2005 and 2004 respectively. 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:
Nine months ended
September 30
2005 2004
Dividend yield 0% 0%
Volatility 56% 40%
Risk-free interest rate 3.93% 3.72%
Expected term of options 10 years 10 years
3. SEGMENT ANALYSIS
The Company operates within two segments based on geographical markets, the
United Kingdom and the United States, and incurs corporate administrative
expenses. The Company has one continuing activity, Contract Research.
The analysis of the Company's net revenues and operating income by segment for
the three and nine month periods ended September 30, 2005 and September 30, 2004
is as follows:
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
(Dollars in thousands)
Net revenues
UK $33,673 $32,944 $103,763 $93,709
US
10,085 7,911 28,230 22,697
Corporate - - - -
----------- ----------- ----------- -----------
-----------
$43,758 $40,855 $131,993 $116,406
=========== =========== =========== ===========
Operating income
UK $5,183 $4,906 $16,905 $12,394
US 1,792 1,069 4,437 2,248
Corporate (1,300) (1,453) (5,059) (3,801)
----------- ----------- ----------- -----------
$5,675 $4,522 $16,283 $10,841
=========== =========== =========== ===========
=========== =========== =========== ===========
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 $459,000 was repaid to the end of
September 2005.
On June 14, 2005, the Company entered into and consummated the Sale/Leaseback
Transaction with Alconbury. Alconbury is a newly formed company wholly owned by
LSR's Chairman and CEO, Andrew Baker. The total consideration paid by Alconbury
for the three properties was $40 million, consisting of $30 million cash and a
five year, $10 million variable rate subordinated promissory note, which
Alconbury has agreed to make a best effort to repay within twelve months. The
Company has agreed to pay the expenses incurred by Alconbury in the
Sale/Leaseback Transaction of approximately $4.8 million, subject to Alconbury's
obligation to reimburse those expenses in the future. Such reimbursement shall
be made in equal installments in each year of the five-year period beginning
June 14, 2008, the third anniversary of the closing date of the Sale/Leaseback
Transaction.
Due to the consolidation resulting from the Company's adoption of FIN 46R, the
Company's financial statements reflect a loan by an unrelated third party in the
aggregate principal amount of $30 million. This loan has a term date of June 14,
2006, with the right to extend the term up to an additional one-year. Alconbury
intends to refinance this debt on a long-term basis prior to the maturity date
of June 14, 2006. However, if the long term financing is not available,
Alconbury has advised the Company that it intends to exercise the one-year
renewal option, and accordingly, has classified the loan as long-term debt. The
loan, which carries an annual interest rate of 15%, has been secured by first
priority lien on all the assets, including the facilities, of Alconbury, and is
also personally guaranteed by the owner of Alconbury. This loan is currently
payable in twelve monthly installments of interest only, with a balloon payment
of $30 million due on June 14, 2006.
As part of the Sale/Leaseback Transaction, the Company (through subsidiaries)
entered into thirty year leases with Alconbury for each facility, with two
five-year renewal options. Base aggregate annual rent for the facilities is $4.9
million (approximately $1.8 million in the US and approximately $3.1 million in
the UK) which amount will increase by 3% each year for the UK facilities and by
an amount equal to the annual US consumer price index for the US facility. Under
the terms of the leases, no security deposit was initially required, but a
three-month security deposit will be required at such time that Alconbury
refinances its current financing arrangements. Additionally, because the leases
are "triple net" leases, LSR will also pay for all of the costs associated with
the operation of the facilities, including costs such as insurance, taxes and
maintenance.
Since the Sale/Leaseback Transaction was with a related party (Mr. Baker, LSR's
Chairman and CEO and the owner of Alconbury), an Independent Committee of LSR's
Board of Directors (the "Committee") was formed to analyze and consider the
proposed Sale/Leaseback Transaction. The Committee was comprised of the three
independent directors of LSR: Gabor Balthazar, Afonso Junqueiras and Yaya Sesay.
The Committee retained independent legal and financial advisors to assist it in
its analysis. The Committee and LSR's senior management (other than Mr. Baker)
negotiated the key terms and provisions of the Sale/Leaseback Transaction with
Alconbury. The Committee also obtained appraisals of the facilities from
independent real estate appraisal firms.
The proceeds from the Sale/Leaseback Transaction (plus additional cash on hand)
were used by the Company to pay in full its (pound)22.6 million non-bank debt
(approximately $41.1 million).
In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the
Company will reflect the consolidation of Alconbury as long as it is considered
the "primary beneficiary" of Alconbury's variable interests. The Company will
not record the gain and loss associated with the sale of the properties, nor
recognize the associated changes in depreciation, interest, and rent expenses,
until FIN 46R consolidation accounting no longer applies. At that time, the
Company will record a non-cash loss of approximately $44 million for the sale of
the UK properties, and a gain of approximately $6 million, amortized over the
term of the lease, for the US property. In addition, the Company anticipates a
net reduction in its annual depreciation charge of approximately $2.7million,
offset by a net increase of $0.5 million in interest and rent expenses. The
Company anticipates that it will no longer be the primary beneficiary of
Alconbury when the $10 million subordinated promissory note has been repaid.
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 September 30, 2005 compared with three months ended
September 30, 2004.
Net revenues for the three months ended September 30 2005 were $43.8 million, an
increase of 7.1% on net revenues of $40.9 million for the three months ended
September 30, 2004. Excluding the effect of exchange rate movements, the
increase was 8.6%. UK net revenues increased by 2.4%; at constant exchange rates
the increase was 4.3%. US net revenues increased by 26.6%. The growth in
revenues in both the UK and the US reflects the increase in orders from the
pharmaceutical industry.
Cost of revenues for the three months ended September 30, 2005 were $31.7
million, an increase of 6.7% on cost of revenues of $29.7 million for the three
months ended September 30, 2004. Excluding the effects of exchange rate
movements, the increase was 8.2%. UK cost of revenues increased by 2.7%; at
constant exchange rates there was a increase of 4.5%. US cost of revenues
increased by 23.6%. The increase in the cost of revenues in both the UK and the
US reflects the growth in revenues.
Selling, general and administrative expenses (SG&A) decreased by 3.8% to $6.4
million for the three months ended September 30, 2005 from $6.7 million in the
corresponding period in 2004. Excluding the effects of exchange rate movements,
the decrease was 8.1%. The decrease was mainly due to lower incentive plan costs
and exchange gains, offset in part by higher salary and insurance costs.
Net interest expense for the three months ended September 30, 2005 was $2.1
million, which was $0.4 million higher than the net interest expense for the
three months ended September 30, 2004. Excluding the effects of exchange rate
movements, the increase was mainly due to an increase in costs associated with
the unrelated third party loan of Alconbury, which is included in these
consolidated financial statements due to the Company's adoption of FIN 46R, when
compared to the interest associated with the non bank loan that was repaid on
June 14, 2005.
Other expense in the three months ended September 30, 2005 was $1.8 million
reflecting a non-cash foreign exchange re-measurement loss of $0.6 million which
arose on the Convertible Capital Bonds denominated in US dollars (the functional
currency of the financial subsidiary that holds the bonds is UK sterling), with
the strengthening of the dollar against sterling, and finance arrangement fees
of $1.2 million. The finance arrangement fees represent the amortization of
costs incurred by Alconbury as part of the sale and leaseback transaction. In
the three months ended September 30, 2004, other expense of $0.1 million related
to the non-cash foreign exchange re-measurement loss that arose on the
Convertible Capital Bonds, with the strengthening of the dollar against
sterling.
The income tax expense for the three months ended September 30, 2005 was $0.6
million. The income tax expense for the three months ended September 30, 2004,
was $0.9 million. Net operating losses are $61.2 million at September 30, 2005;
with net operating losses in the US of $6.4 million and with net operating
losses in the UK of $54.8 million.
The net income for the three months ended September 30, 2005 was $1.1 million
compared to $1.8 million for the three months ended September 30, 2004. The
decrease in the net income of $0.7 million is due to an increase in operating
income of $1.2 million; offset by an increase in non-cash foreign exchange
re-measurement loss of $0.6 million, finance arrangement fees of $1.2 million,
an increase in interest expenses of $0.4 million and a decrease in the income
tax expense of $0.3 million.
Basic income per common share for the three months ended September 30, 2005 was
9 cents, compared to 15 cents income in the same period last year, on the
weighted average common shares outstanding of 12,541,912 (2004: 12,165,643).
Diluted income per diluted share for the three months ended September 30, 2005
was 8 cents, compared to 13 cents income in the same period last year.
Excluding the Other Expense items described above related to the finance
arrangement fees, the non-cash foreign exchange losses, and related tax effect,
non-GAAP net income for the three months ended September 30, 2005 was $3.2
million, or $0.22 per fully diluted share (non-GAAP), compared with $1.9 million
or $0.13 per fully diluted share for the same period in the prior year.
Earnings before interest, taxes, depreciation and amortization, and other
income/(expense) ("EBITDA") was $8.1 million for the three months ended
September 30, 2005, or 18.5% of revenues, compared with $7.0 million, or 17.0%
of revenues for the same period in the prior year.
This Quarterly Report on Form 10-Q contains non-GAAP financial measures,
including EBITDA and non-GAAP earnings per share which exclude, among other
items, gains or losses associated with the non-cash foreign exchange
remeasurement loss pertaining to the Company's Convertible Capital Bonds and one
time charges. We exclude these items in the non-GAAP financial measures because
they are outside our normal operations. We believe that the inclusion of
non-GAAP financial measures in this Quarterly Report on Form 10-Q helps
investors to gain a meaningful understanding of our core operating results and
future prospects, and is consistent with how management measures and forecasts
the Company's performance and debt service capabilities, especially when
comparing such results to prior periods or forecasts. Non-GAAP results also
allow investors to compare the Company's operations against the financial
results of other companies in the industry who similarly provide non-GAAP
results. The non-GAAP financial measures included in this Quarterly Report on
Form 10-Q are not meant to be considered superior to or a substitute for results
of operations prepared in accordance with GAAP. Reconciliations of the non-GAAP
financial measures used in this Quarterly Report on Form 10-Q to the most
directly comparable GAAP financial measures are set forth in the text of this
Quarterly Report on Form 10-Q and other public filings, and can also be found on
the Company's website at www.lsrinc.net.
b) Nine months ended September 30 2005 compared with nine months ended
September 30, 2004
Net revenues for the nine months ended September 30, 2005 were $132.0 million,
an increase of 13.4% on net revenues of $116.4 million for the nine months ended
September 30, 2004. Excluding the effect of exchange rate movements, the
increase was 12.3%. UK net revenues increased by 10.8%; at constant exchange
rates the increase was 9.4%. This growth in revenues reflects the increase in
orders and, consequently, backlog over the last year, principally from the
pharmaceutical industry. Also reflected in the nine months were revenues
associated with the post life phase of an unusually large number of long-term
studies, much of which was subcontracted due to capacity constraints. This
increased revenues for the nine months by approximately $1.8 million. In the US,
net revenues increased by 24.0%. The growth in revenues in the US reflects the
increase in orders from the pharmaceutical industry.
Cost of revenues for the nine months ended September 30, 2005 were $95.2
million, an increase of 9.2 % on cost of revenue of $87.2 million for the nine
months ended September 30, 2004. Excluding the effects of exchange rate
movements, the increase was 8.1%. UK cost of revenues increased by 6.8%; at
constant exchange rates the increase was 5.5%. Reflected in the nine months were
costs of $0.8 million associated with subcontracting the post life phase of an
abnormal number of long-term studies. US cost of revenues increased by 18.7%
reflecting the growth in revenues.
Selling, general and administrative expenses (SG&A) rose by 11.7% to $20.5
million for the nine months ended September 30, 2005 from $18.3 million in the
corresponding period in 2004. Excluding the effects of exchange rate movements,
the increase was 9.8%. This increase was mainly due to increased salary and
insurance costs.
Net interest expense for the nine months ended September 30, 2005 was $5.8
million, which was $1.0 million higher than the net interest expense for the
nine months ended September 30, 2004. Excluding the effects of exchange rate
movements, the increase was mainly due to an increase in LIBOR, the costs
associated with foreign currency hedging, and the increased cost of financing
since the repayment of the non-bank loan.
Other expense in the nine months ended September 30, 2005 was $5.2 million
reflecting a non-cash foreign exchange remeasurement loss of $3.8 million which
arose on the Convertible Capital Bonds denominated in US dollars (the functional
currency of the financial subsidiary that holds the bonds is UK sterling), with
the strengthening of the dollar against sterling, and finance arrangement fees
of $1.4 million. The finance arrangement fees represent the amortization of
costs incurred by Alconbury as part of the sale and leaseback transaction. In
the nine months ended September 30, 2004, other income of $0.6 million related
to the non-cash foreign exchange remeasurement gain that arose on the
Convertible Capital Bonds with the weakening of the dollar against sterling.
The income tax expense for the nine months ended September 30, 2005 was $3.3
million. This expense includes $2.4 million in respect of the tax liability on
the sale of the Company's US facility. The income tax expense for the nine
months ended September 30, 2004 was $2.3 million.
The net income for the nine months ended September 30, 2005 was $2.0 million
compared to $4.4 million for the nine months ended September 30, 2004. The
decrease in the net income of $2.4 million is due to an increase in the
operating income of $5.4 million; offset by a decrease in non-cash foreign
exchange remeasurement loss of $4.4 million, finance arrangement fees of $1.4
million, an increase in interest expense of $1.0 million, and an increase in the
income tax expense of $1.0 million.
Basic income per common share for the nine months ended September 30, 2005 was
16 cents, compared to 36 cents income in the same period last year, on the
weighted average common shares outstanding of 12,505,798 (2004: 12,085,311).
Diluted income per diluted share for the nine months ended September 30, 2005
was 14 cents, compared to 33 cents income for the same period in the prior year.
Excluding the Other Expense items described above related to the finance
arrangement fees, the non-cash foreign exchange losses, and related tax effect,
and the transaction related tax charges, non-GAAP net income for the nine months
ended September 30, 2005 was $9.4 million or $0.65 per fully diluted share
(non-GAAP), compared with $3.9 million or $0.29 per fully diluted share for the
same period in the prior year.
Earnings before interest, taxes, depreciation and amortization and other
income/(expense) ("EBITDA") was $23.5 million for the nine months ended
September 30, 2005 or 17.8% of revenues, compared with $17.9 million or 15.4% of
revenues for the same period in the prior year.
2. LIQUIDITY & CAPITAL RESOURCES
Non-Bank Loans
On January 20, 2001, the Company's non-bank loan of (pound)22.6 million
($41.1million 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 was repayable on June 30, 2006 and
interest was 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 was
held by Life Sciences Research Ltd (LSR Ltd.), and was 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 June 14, 2005 this non-bank loan was fully repaid
using the proceeds from the Sale/Leaseback Transaction and cash on hand.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase 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.
On June 14, 2005, the Company entered into and consummated the Sale/Leaseback
Transaction with Alconbury. Alconbury is a newly formed company wholly owned by
LSR's Chairman and CEO, Andrew Baker. The total consideration paid by Alconbury
for the three properties was $40 million, consisting of $30 million cash and a
five year, $10 million variable rate subordinated promissory note, which
Alconbury has agreed to make a best effort to repay within twelve months. The
Company has agreed to pay the expenses incurred by Alconbury in the
Sale/Leaseback Transaction of approximately $4.8 million, subject to Alconbury's
obligation to reimburse those expenses in the future. Such reimbursement shall
be made in equal installments in each year of the five-year period beginning on
June 14, 2008, the third anniversary of the closing date of the Sale/Leaseback
Transaction.
As part of the Sale/Leaseback Transaction, the Company (through subsidiaries)
entered into thirty-year leases with Alconbury for each facility, with two
five-year renewal options. Base aggregate annual rent for the facilities is $4.9
million (approximately $1.8 million in the US and approximately $3.1 million in
the UK) which amount will increase by 3% each year for the UK facilities and by
an amount equal to the annual US consumer price index for the US facility. Under
the terms of the leases, no security deposit was initially required, but a
three-month security deposit will be required at such time that Alconbury
refinances its current financing arrangements. Additionally, because the leases
are "triple net" leases, LSR will also pay for all of the costs associated with
the operation of the facilities, including costs such as insurance, taxes and
maintenance.
Since the Sale/Leaseback Transaction was with a related party (Mr. Baker, LSR's
Chairman and CEO and the owner of Alconbury), an Independent Committee of LSR's
Board of Directors (the "Committee") was formed to analyze and consider the
proposed Sale/Leaseback Transaction. The Committee was comprised of the three
independent directors of LSR: Gabor Balthazar, Afonso Junqueiras and Yaya Sesay.
The Committee retained independent legal and financial advisors to assist in its
analysis. The Committee and LSR's senior management (other than Mr. Baker)
negotiated the key terms and provisions of the Sale/Leaseback Transaction with
Alconbury. The Committee also obtained appraisals of the facilities from
independent real estate appraisal firms.
The proceeds from the Sale/Leaseback Transaction (plus additional cash on hand)
were used by the Company to pay in full its (pound)22.6 million non-bank debt
(approximately $41.1 million).
In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the
Company will reflect the consolidation of Alconbury as long as it is considered
the "primary beneficiary" of Alconbury's variable interests. The Company will
not record the gain and loss associated with the sale of the properties, nor
recognize the associated changes in depreciation, interest, and rent expenses,
until FIN 46R consolidation accounting no longer applies. At that time, the
Company will record a non-cash loss of approximately $44 million for the sale of
the UK properties, and a gain of approximately $6 million, amortized over the
term of the lease, for the US property. In addition, the Company anticipates a
net reduction in its annual depreciation charge of approximately $2.7 million,
offset by a net increase of $0.5 million in interest and rent expenses. The
Company anticipates that it will no longer be the primary beneficiary of
Alconbury when the $10 million subordinated promissory note has been repaid.
Due to the consolidation resulting from the Company's adoption of FIN 46R, the
Company's financial statements reflect a loan by an unrelated third party in the
aggregate principal amount of $30 million. This loan has a maturity date of June
14, 2006, with the right to extend the term one additional year. Alconbury
intends to refinance this debt on a long-term basis prior to the maturity date
of June 14, 2006. However, if the long term financing is not available,
Alconbury has advised the Company that it intends to exercise the one-year
renewal option, and accordingly, has classified the loan as long-term debt. The
loan, which carries an annual interest rate of 15%, has been secured by first
priority lien on all the assets, including the facilities, of Alconbury, and is
also personally guaranteed by the owner of Alconbury. This loan is currently
payable in twelve monthly installments of interest only, with a balloon payment
of $30 million due on June 14, 2006.
Convertible Capital Bonds
The remainder of the Company's 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 September 30, 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 $1,395,000 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.
On June 14, 2005, the Company completed the Sale/Leaseback Transaction with
Alconbury, a company formed by Mr Baker, LSR's Chairman and CEO. The Company has
agreed to pay the expenses incurred by Alconbury in the Sale/Leaseback
Transaction of approximately $4.8 million, subject to Alconbury's obligation to
reimburse those expenses in the future. Such reimbursement shall be made in
equal instalments in each year of the five-year period beginning on June 14,
2008, the third anniversary of the closing date of the Sale/Leaseback
Transaction.
Alconbury has received an interest free loan of $250,000, which has been
included in accrued expenses and other liabilities, from Andrew Baker, LSR's
Chairman and CEO.
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 $459,000 was repaid to the end of September 2005.
Cash flows
During the three months ended September 30, 2005, funds used were $3.2 million,
reducing cash and cash equivalents from $15.4 million at June 30, 2005 to $12.2
million at September 30, 2005.
In the nine months to September 30, 2005 funds used were $21.1 million, reducing
cash and cash equivalents from $33.3 million in December 31, 2004 to $12.2
million at September 30, 2005.
Net days sales outstanding ("DSOs") at September 30, 2005 were 21 days, an
increase from the 13 days at June 30, 2005, and 4 days at December 31, 2004 (20
days at September 30, 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 4 days to 47 days so they are currently
at a mid range level. The impact on liquidity from a one-day change in DSO is
approximately $485,000.
New York Stock Exchange Listing Application
On August 22, 2005 the Company announced that its listing application had been
accepted by the New York Stock Exchange ("NYSE") and that trading of the
Company's common stock on the NYSE was expected to begin on September 7. On
September 7, 2005 the Company announced that the NYSE had "postponed" such
listing. The Company has received no further information from the NYSE since
September 7 about when or whether such postponement will be resolved.
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.
Consolidation of Alconbury
In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the
Company will reflect the consolidation of Alconbury as long as it is considered
the "primary beneficiary" of Alconbury's variable interests. The Company will
not record the gain and loss associated with the sale of the properties, nor
recognize the associated changes in depreciation, interest, and rent expenses,
until FIN 46R consolidation accounting no longer applies. At that time, the
Company will record a non-cash loss of approximately $44 million for the sale of
the UK properties, and a gain of approximately $6 million, amortized over the
term of the lease, for the US property. In addition, the Company anticipates a
net reduction in its annual depreciation charge of approximately $2.7million,
offset by a net increase of $0.5 million in interest and rent expenses. The
Company anticipates that it will no longer be the primary beneficiary of
Alconbury when the $10 million subordinated promissory note has been repaid.
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 6% 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 USD, 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. There were no derivative financial instruments in place on
September 30, 2005.
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 September 30 3 months to September 30 9 months to September 30
Average rate (1) Average rate (1)
2003 1.7857 1.6614 1.6111 1.6111
2004 1.9199 1.8096 1.8192 1.8209
2005 - 1.7691 1.7854 1.8437
<FN>
(1) Based on the average of the exchange rates on each day of each month during the period.
</FN>
On November 2, 2005 the noon buying rate for sterling was (pound)1.00 = $1.7755
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
September 30, 2005:
Expected Maturity Date
2005 2006 2007 2008 2009 Thereafter Total Fair
Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 3,512 - - - - - 3,512 3,512
- Euro 605 - - - - - 605 605
- Japanese Yen 2,325 - - - - - 2,325 2,325
Accounts
receivable - Pound Sterling 20,834 - - - - - 20,834 20,834
- Euro 2,033 - - - - - 2,033 2,033
- Japanese Yen 2,080 - - - - 2,080 2,080
Debt - Pound Sterling - - - - - - - -
- Japanese Yen 87 - - - - - 87 87
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 $41.1million on June 14, 2005)
non-bank loan was sterling denominated and did not contribute to transaction
gains and losses on the income statement. Interest on this non-bank loan was
based upon LIBOR plus a margin and approximated 6.66% per annum for the period
ended June 14, 2005. On June 14, 2005 this non-bank loan was fully repaid using
the proceeds from the Sale/Leaseback transaction and cash on hand.
The Company has debt denominated in USD, 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. There were no derivative financial instruments in place on
September 30, 2005.
For the three and nine months ended September 30, 2005, approximately 73% and
74% respectively, of the Company's net revenues were from outside the United
States.
On September 30, 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. Unlike the
Company's position to hedge against the debt mentioned above, the Company does
not take any action to hedge against the risk of currency fluctuation with
regard to the Capital Bonds.. 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 September 30, 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 September 30, 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 September 30, 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 November 3, 2005, announcing the third
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
Date: November 4, 2005