ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
GENERAL
The following should be read in conjunction with the consolidated financial statements of LSR as presented in “Item 8, Financial Statements and Supplementary Data”.
The Company is a global provider of pre-clinical and non-clinical safety testing services to the pharmaceutical, agrochemical and industrial chemical industries. The Company provides those services under contracts, which may range from one day to three years. Income from these contracts is recognized as services are rendered towards the preparation of the final report. Contracts are generally terminable upon notice by the client with the client being responsible for reimbursing the Company for the value of work performed through the date of cancellation plus the value of work required to wind down a study on an orderly basis.
The Company's business is characterized by high fixed costs, in particular staff and facility related costs. Such a high proportion creates favorable conditions for the Company as excess capacity is utilized, such as has been the case during the last three years. However, during periods of declining revenue, careful planning is required to reduce costs without impairing revenue-generating activities.
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. Net revenue from these contracts is generally recognized over the term of the contracts as services are rendered. Contracts may contain provisions for re-negotiation in the event of cost overruns due to changes in the level of work scope. Renegotiated amounts are included in net revenue when earned and realization is assured. Provisions for losses to be incurred on contracts are recognized in full in the period in which it is determined that a loss will result from performance of the contractual arrangement. Most service contracts may be terminated for a variety of reasons by the Company's customers, either immediately or upon notice of a future date. The contracts generally require payments to the Company to recover costs incurred, including costs to wind
down the study, and payment of fees earned to date, and in some cases to provide the Company with a portion of the fees or income that would have been earned under the contract had the contract not been terminated early.
Unbilled receivables are recorded for net revenue recognized to date that is currently not billable to the customer pursuant to contractual terms. In general, amounts become billable upon the achievement of certain aspects of the contract or in accordance with predetermined payment schedules. Unbilled receivables are billable to customers within one year from the respective balance sheet date. Fees in advance are recorded for amounts billed to customers for which net 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. While such issues have not historically been significant, any such resulting reductions in margins or contract losses could be material to the Company's results of operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements and the results of operations during the reporting periods. These
26
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.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109. FIN 48 provides guidance on recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return.
Consolidation of Alconbury
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 was newly formed in June 2005 and controlled 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 paid in full on June 30, 2006, together with accrued interest of $0.6 million.
In accordance with the provisions of FASB Interpretation No. 46R (“FIN 46R”), the Company has reflected the consolidation of Alconbury from June 14, 2005 through June 29, 2006, the period in which the Company was considered the “primary beneficiary” of Alconbury’s variable interests. The Company has determined that as of June 29, 2006 it was no longer the primary beneficiary of Alconbury, and therefore was required to deconsolidate Alconbury’s assets and liabilities from the Company’s consolidated balance sheet as of that date. Please refer to Note 3 for detail of the impact of this deconsolidation.
RESULTS OF OPERATIONS
Year ended December 31, 2007 compared with year ended December 31, 2006
Net revenues in the year ended December 31, 2007 were $236.8 million, an increase of 23.2% on net revenues of $192.2 million for the year ended December 31, 2006. The underlying increase, after adjusting for the impact of the movement in exchange rates was 15.6%; with the UK showing a 14.0% increase and the US a 21.2% increase. The growth in net revenues reflects the increase in orders and, consequently, backlog over the last two years, principally from the pharmaceutical industry. Orders for the year ended December 31, 2007, of $266.7 million were 7% above the previous year at constant exchange rates. At December 31, 2007 backlog (booked-on work) amounted to
27
approximately $190 million, an increase of 9% above the level at December 31, 2006 (7% net of foreign currency effect).
Cost of sales in the year ended December 31, 2007 were $165.8 million (70.0% of net revenue), an increase of 16.2% on cost of sales of $142.7 million (74.2% of net revenue) or the year ended December 31, 2006. The underlying increase after adjusting for the impact of the movement in exchange rates was 9.0%. The decrease in cost of sales as a % of net revenue was due to improved efficiencies associated with net revenue increases and improved capacity utilization, including a reduction of 140 basis points in overhead costs as a % of net revenue and an 80 basis point reduction in labor costs as a % of net revenues. In addition a reduction of 200 basis points in direct study costs as a % of net revenue was due to a change in the mix of business.
Selling, general and administrative expenses rose by 32.9% to $39.1 million (16.5% of net revenue) for the year ended December 31, 2007 from $29.4 million (15.3% of net revenue) in the year ended December 31, 2006. The underlying increase after adjusting for the impact of the movement in exchange rates was 28.1%. The increase in costs was due to an increase in incentive accruals as a result of improved performance and non-cash FAS123 charges associated with management share options.
Other operating expenses were $0 for the year end December 31, 2007, compared with $10.5 million for the year end December 31, 2006. The 2006 expenses comprised $7.7 million for warrant costs and $1.0 million flotation expenses associated with the listing of the Company’s shares on the NYSE Arca in 2006 and $1.8 million litigation and other expenses associated with the Animal Rights campaign against the Company.
Net interest expense decreased by 14.4% to $10.8 million for the year ended December 31, 2007 from $12.6 million in the year ended December 31, 2006. This decrease of $1.8 million was due to a $1.1 million net interest saving associated with the March 2006 Financing, a $0.8 million saving caused by the deconsolidation of the variable interest entity in 2006, additional interest receivable of $0.7 million and a $0.2 million decrease in capital lease interest expense, offset by an additional $1.0 million interest expense related to the amortization of debt issue costs.
Other expense of $1.9 million for the year ended December 31, 2007 comprised finance arrangement fees of $2.8 million, offset by $0.8 million from the non-cash foreign exchange remeasurement gain on the March 2006 Financing denominated in US dollars (the functional currency of the financing subsidiary that holds the loan is UK sterling) and other exchange gains of $0.1 million. In the year ended December 31, 2006 there was other income of $1.9 million which comprised $6.2 million from the non-cash foreign exchange remeasurement gain on the March 2006 Financing and Convertible Capital Bonds denominated in US dollars (the functional currency of the financing subsidiary that held the loan and bond was UK sterling), other exchange gains of $0.7 million, offset by finance arrangement fees of $5.0 million.
Income tax expense on profits for the year ended December 31, 2007 was $33.2 million representing an expense at 173% of pre-tax profit compared to an income tax benefit of $6.9 million representing a benefit at 640% of pre-tax losses for the year ended December 31, 2006. A reconciliation between the US statutory tax rate and the effective rate of tax expense/benefit on income/losses before taxes for the year ended December 31, 2007 and December 31, 2006 is shown below:
|
|
|
|
|
|
|
% of income before
income taxes
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
%
|
|
%
|
|
US statutory rate
|
|
|
|
|
35
|
|
(35)
|
|
Foreign rate differential
|
(5)
|
|
(23)
|
|
UK R & D credit and non-deductible items
|
|
(53)
|
|
(468)
|
|
Valuation allowance
|
|
195
|
|
-
|
|
State taxes
|
|
-
|
|
(74)
|
|
Change in estimate
|
|
|
|
1
|
|
(40)
|
|
Effective tax rate
|
|
|
|
|
173
|
|
(640)
|
28
The Company derives significant benefit from the UK Research and Development Tax Credit for large companies. In 2008, this will be amended and the relief will be extended further. As a result the Company does not anticipate reporting any UK tax liability for the foreseeable future. The Company has therefore recorded a valuation allowance of $37.4 million to reflect a reversal of the previously recorded tax provision that recognized the net tax asset associated with the Company’s UK Net Operating Losses (“NOLs”) and UK defined benefit pension plan liability. This changed treatment of the NOL tax asset does not impact their availability to the Company in the future, should circumstances change.
In 2006, the main reason for the change in estimate relates to the US leaseback gain that arose from the sale of the US property as part of the Sale/Leaseback Transaction. Under FIN46R the gain was originally recognized in 2005 and charged to income taxes. This charge reversed in 2006 as the deferred gain was recognized due to the deconsolidation of the variable interest entity. The gain on the sale of the UK assets was offset against brought forward capital losses in 2005. A revision to the treatment of the losses on the UK buildings sold as part of the Sale/Leaseback Transaction in 2005 also caused a change in estimate in 2006.
Net Loss for the year ended December 31, 2007 was $14.0 million compared with $14.9 million for the year ended December 31, 2006. Net loss per common and fully diluted share was $1.10 for the year ended December 31, 2007 compared with $1.18 for the year ended December 31, 2006.
RESULTS OF OPERATIONS
Year ended December 31, 2006 compared with year ended December 31, 2005
Net revenues in the year ended December 31, 2006 were $192.2 million, an increase of 11.7% on net revenues of $172.0 million for the year ended December 31, 2005. The underlying increase, after adjusting for the impact of the movement in exchange rates was 10.6%; with the UK showing a 10.4% increase and the US a 11.3% increase. The growth in net revenues reflects the increase in orders and, consequently, backlog over the year, principally from the pharmaceutical industry. Orders for the year ended December 31, 2006, of $233.4 million at constant exchange rates were 26% above the previous year. At December 31, 2006 backlog (booked-on work) amounted to approximately $175 million, an increase of 43% above the level at December 31, 2005 (32% net of foreign currency effect).
Cost of sales in the year ended December 31, 2006 were $142.7 million (74.2% of net revenue), an increase of 14.3% on cost of sales of $124.8 million (72.6% of net revenue) for the year ended December 31, 2005. The underlying increase after adjusting for the impact of the movement in exchange rates was 13.1%. The increase in cost of sales as a % of net revenues was due to an increase in both direct study costs as a % of net revenues and overhead as a % of net revenues. These contributed 260 basis points and 30 basis points respectively to the increase in cost of sales as a % of net revenues. The increase in direct study costs was due to a change in the mix of business while the increase in overhead was due to an increase in power costs of 120 basis points offset by the improved use of capacity. Labor costs as a % of net revenues improved by 130 basis points due to improved use of capacity.
Selling, general and administrative expenses rose by 12.5% to $29.4 million for the year ended December 31, 2006 (15.3% of net revenue) from $26.2 million (15.2% of net revenue) in the year ended December 31, 2005. The underlying increase after adjusting for the impact of the movement in exchange rates was 12.3%. The increase in selling, general and administrative expenses was due to increase in labor costs, including the cost of stock issues under Executive incentive programs.
Other operating expenses of $10.5 million for the year end December 31, 2006 comprised $7.7 million for warrant costs and $1.0 million flotation expenses associated with the listing of the Company’s shares on the NYSE Arca and $1.8 million litigation and other expenses associated with the Animal Rights campaign against the Company.
Net interest expense increased by 57.2% to $12.6 million for the year ended December 31, 2006 from $8.0 million in the year ended December 31, 2005. This increase was due to the additional principal being borrowed and the higher rates of interest associated with the New Financing.
29
Other income of $1.9 million for the year ended December 31, 2006 comprised $6.2 million from the non-cash foreign exchange remeasurement gain on the New Financing and the Convertible Capital Bonds denominated in US dollars (the functional currency of the financing subsidiary that holds the bonds is UK sterling), other exchange gains of $0.7 million, offset by finance arrangement fees of $5.0 million. In the year ended December 31, 2005 there was other expense of $7.4 million comprised $5.1 million from the non-cash foreign exchange remeasurement loss on the Convertible Capital Bonds denominated in US dollars (the functional currency of the financing subsidiary that held the bond was UK sterling), finance arrangement fees of $2.8 million, offset by other exchange gains of $0.5 million.
Taxation benefit on losses for the year ended December 31, 2006 was $6.9 million representing a benefit at 640% compared to a taxation expense of $4.1 million representing an expense at 73% for the year ended December 31, 2005. A reconciliation between the US statutory tax rate and the effective rate of income tax benefit on losses before income taxes for the year ended December 31, 2006 and December 31, 2005 is shown below:
|
|
|
|
|
|
|
% of income before
income taxes
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
%
|
|
%
|
|
US statutory rate
|
|
|
|
|
(35)
|
|
35
|
|
Foreign rate differential
|
(23)
|
|
24
|
|
UK R & D credit and non-deductible items
|
|
(468)
|
|
(45)
|
|
State taxes
|
|
(74)
|
|
8
|
|
Change in estimate
|
|
|
|
(40)
|
|
51
|
|
Effective tax rate
|
|
|
|
|
(640)
|
|
73
|
|
|
|
|
|
|
|
|
|
The main reason for the change in estimate in 2006 relates to the US leaseback gain that arose from the sale of the US property as part of the Sale/Leaseback Transaction. Under FIN46R the gain was originally recognized in 2005 and charged to income taxes. This charge reversed in 2006 as the deferred gain was recognized due to the deconsolidation of the variable interest entity. The gain on the sale of the UK assets was offset against brought forward capital losses in 2005. A revision to the treatment of the losses on the UK buildings sold as part of the Sale/Leaseback Transaction in 2005 also caused a change in estimate in 2006.
The losses before tax of the British Virgin Islands represents the Alconbury balances which have been consolidated in accordance with the provisions of FASB Interpretation No. 46R.
The overall net income before loss on deconsolidation of variable interest entity, for the year ended December 31, 2006 was $5.8 million compared to a net income of $1.5 million in the year ended December 31, 2005. The diluted loss per share for the year ended December 31, 2006 was $1.18 compared to income of $0.10 for the year ended December 31, 2005.
30
SEGMENT ANALYSIS
The analysis of the Company's net revenues and operating loss between segments for the three years ended December 31, 2007 is as follows:
The performance of each segment is measured by net revenues and operating income/(loss) before other operating expenses.
|
Company
|
2007
|
|
2006
|
|
2005
|
|
|
$000
|
|
$000
|
|
$000
|
|
Net revenues
|
|
|
|
|
|
|
|
UK
|
186,935
|
|
151,079
|
|
135,054
|
|
|
US
|
49,865
|
|
41,138
|
|
36,959
|
|
|
Corporate
|
-
|
|
-
|
|
-
|
|
|
|
$236,800
|
|
$192,217
|
|
$172,013
|
|
Operating income/(loss) before other operating expenses
|
|
|
|
|
|
|
|
UK
|
34,951
|
|
21,676
|
|
22,531
|
|
|
US
|
8,309
|
|
5,268
|
|
5,239
|
|
|
Corporate
|
(11,385)
|
|
(6,875)
|
|
(6,751)
|
|
|
|
|
|
|
|
|
|
|
|
$31,875
|
|
$20,069
|
|
$21,019
|
|
Other operating expense
|
|
|
|
|
|
|
|
UK
|
-
|
|
-
|
|
-
|
|
|
US
|
-
|
|
-
|
|
-
|
|
|
Corporate
|
-
|
|
(10,497)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$-
|
|
$(10,497)
|
|
$-
|
|
Operating income/(loss)
|
|
|
|
|
|
|
|
UK
|
34,951
|
|
21,676
|
|
22,531
|
|
|
US
|
8,309
|
|
5,268
|
|
5,239
|
|
|
Corporate
|
(11,385)
|
|
(17,372)
|
|
(6,751)
|
|
|
$31,875
|
|
$9,572
|
|
$21,019
|
|
|
|
|
|
|
|
UK
2007 v 2006
Net revenues increased by 23.7% in the year ended December 31, 2007 compared with the year ended December 31, 2006. After allowing for the effect of exchange rate movements the increase was 14.0%. The growth in net revenues reflects the increase in orders and, consequently, backlog over the last two years, principally from the pharmaceutical industry. Orders for the year ended December 31, 2007 at constant exchange rates were 8.1% above the previous year.
Costs increased 17.4% in the year ended December 31, 2007 compared with the year ended December 31, 2006. After allowing for the effect of exchange rate movements, the increase was 9.1%. Costs decreased as a % of net revenue, with the exception of labor. Direct study costs and overhead costs both fell as a % of net revenue as a result of improved capacity utilization. Labor costs increased as a % of net revenue due to an increase in incentive accruals as a result of improved performance, and non-cash FAS123R charges associated with management share options.
Operating income for the year ended December 31, 2007 was $35.0 million compared with $21.7 million in the previous year.
31
2006 v 2005
Net revenues increased by 11.9% in the year ended December 31, 2006 compared with the year ended December 31, 2005. After allowing for the effect of exchange rate movements the increase was 10.4%. The growth in net revenues reflects the increase in orders and, consequently, backlog over the last year, principally from the pharmaceutical industry. Orders for the year ended December 31, 2006 at constant exchange rates were 26.1% above the previous year.
Costs increased 14.4% in the year ended December 31, 2006 compared with the year ended December 31, 2005. After allowing for the effect of exchange rate movements, the increase was 12.5%. The main increases were in labor and direct study costs, and reflected the increase in net revenues. Power costs also increased due to the increased price of oil, gas and electricity.
Operating income for the year ended December 31, 2006 was $21.7 million compared with $22.5 million in the previous year.
US
2007 v 2006
Net revenues increased by 21.2% in the year ended December 31, 2007 as compared to the year ended December 31, 2006. The growth in net revenues reflects the increase in orders and consequently, backlog over the last two years, principally from the pharmaceutical industry. Orders for the year ended December 31, 2007 were 5.5% above the previous year.
Costs increased by 15.9% in the year ended December 31, 2007 as compared with the year ended December 31, 2006. Overhead, direct material and labor costs all decreased as a % of net revenue, this was a result of improved capacity utilization during the year.
Operating income for the year ended December 31, 2007 was $8.3 million compared with an operating income of $5.3 million in the previous year.
2006 v 2005
Net revenues increased by 11.3% in the year ended December 31, 2006 as compared to the year ended December 31, 2005. The growth in net revenues reflects the increase in orders and consequently, backlog, over the last year, principally from the pharmaceutical industry. Orders for the year ended December 31, 2006 were 44.5% above the previous year.
Costs increased by 15.1% in the year ended December 31, 2006 as compared with the year ended December 31, 2005. This cost increase was mainly due to higher labor, direct study, subcontract and equipment rental costs, and reflected the increase in net revenues.
Operating income for the year ended December 31, 2006 was $5.3 million compared with an operating income of $5.2 million in the previous year.
Corporate
2007 v 2006
Corporate costs and operating loss for the year ended December 31, 2007 were $11.4 million, a decrease of 34.5% on corporate costs and operating loss for the year ended December 31, 2006 of $17.4 million. Excluding the exceptional other operating expenses in 2006 of $10.5 million, corporate costs have increased by 65.6%. The majority of the increase is a result of an increase in incentive accruals as a result of improved performance, non-cash FAS123R charges associated with management share options, and professional fees.
32
2006 v 2005
Corporate costs and operating loss for the year ended December 31, 2006 were $17.4 million, an increase of 157.3% on corporate costs and operating loss for the year ended December 31, 2005 of $6.8 million. The majority of the increase was due to the other operating expenses associated with the listing of the Company’s shares on the NYSE Arca and costs associated with the Animal Rights campaign against the Company (see Note 8 for further details).
33
LIQUIDITY AND CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On June 14, 2005, the Company entered into and consummated the Sale/Leaseback Transaction with Alconbury. Alconbury was newly formed in June 2005 and controlled 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 paid in full on June 30, 2006 together with accrued interest of $0.6 million. The Company agreed to pay the expenses incurred by Alconbury in the Sale/Leaseback Transaction of $4.6 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. Interest has been imputed on this
loan at 15% and a discount (expense) of $2.4 million was recorded by the Company on June 14, 2005. This $2.4 million is being ratably recorded as interest income over the seven year term of the loan.
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. The initial base aggregate annual rent for the facilities was $4.9 million (approximately $1.8 million in the US and approximately $3.1 million in the UK) which increases 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 was required to be paid at the time that Alconbury refinanced its financing arrangements. Additionally, because the leases are “triple net” leases, LSR also pays 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 controlling 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. In evaluating the total consideration negotiated for this transaction, the committee took into consideration an assessment and review of the levels of consideration that were proposed to be paid by independent third party bidders over
the prior several years for sale/leaseback transactions of the Company’s operating facilities in transactions that were proposed and negotiated but not ultimately consummated. The Committee also obtained appraisals of the facilities from independent real estate appraisal firms and a fairness opinion from an independent investment banking firm.
The proceeds from the Sale/Leaseback Transaction (plus additional cash on hand) were used by the Company to pay in full its £22.6 million non-bank debt (approximately $41.1 million based on exchange rates at the time).
In accordance with the provisions of FASB Interpretation No. 46R (“FIN 46R”), the Company has reflected the consolidation of Alconbury from June 14, 2005 through June 29, 2006, the period in which the Company was considered the “primary beneficiary” of Alconbury’s variable interests. The Company has determined that as of June 29, 2006 it was no longer the primary beneficiary of Alconbury, and therefore was required to deconsolidate Alconbury’s assets and liabilities from the Company’s Condensed Consolidated Balance Sheet as of that date. Please refer to Note 3 for detail of the impact of this deconsolidation.
Due to the consolidation resulting from the Company’s adoption of FIN 46R, for the period of June 14, 2005 through June 29, 2006, the Company’s financial statements reflected a loan payable to an unrelated third party in the aggregate principal amount of $30 million. This loan had a maturity date of June 14, 2006, with the right to extend the term one additional year. The loan, carried an annual interest rate of 15%, was secured by first priority lien on all the assets, including the facilities, of Alconbury, and was also personally guaranteed by the owner of Alconbury. This loan was payable in twelve monthly installments of interest only, with a balloon payment of $30 million due on June 14, 2006. Alconbury refinanced this debt on a long-term basis on June 13, 2006 with an interest rate of 12%. However, due to the June 30, 2006 deconsolidation of Alconbury (see Note 3), the Company did not
reflect this new loan on the Condensed Consolidated Balance Sheet as at June 30, 2006.
34
On March 2, 2006, the Company entered into a $70 million loan (the “March 2006 Financing”) under the terms of a Financing Agreement dated March 1, 2006 with a third party lender. The borrower under the Financing Agreement is Huntingdon Life Sciences Limited and LSR and substantially all of LSR’s other subsidiaries guarantee all of the borrower’s obligations thereunder. The loan matures on March 1, 2011 and had an interest rate of LIBOR + 825 basis points (which reduced to LIBOR + 800 basis points upon the Company meeting certain financial tests). The Financing Agreement contains standard financial and business covenants, including, without limitation, reporting requirements, limitations on the incurrence of additional indebtedness, events of default, limitations on dividends and other payment restrictions and various financial ratio requirements. The loan is secured by substantially
all of the assets of the Company and the Company has in connection therewith entered into a customary Security Agreement and a customary Pledge and Security Agreement. On August 1, 2007 the Company entered into an amendment to its $70 million March 2006 Financing in which the principal amount was reduced to $60 million and the interest rate was reduced from the reduced rate of LIBOR + 800 basis points to LIBOR + 350 basis points. A closing fee of $4.3 million was paid to the lender in connection with this amendment which has been recorded as a deferred debt premium and is being amortized to interest expense over the remaining term of the loan. For financial statement presentation purposes, the unamortized amount of the closing fee has been netted against the loan in long-term debt. On November 30, 2007, the Company entered into a Second Amendment to the Financing Agreement in which certain financial covenants were modified and consent was given by the lender to permit
the Company to complete a fold-in acquisition.
As partial consideration for the March 2006 Financing, LSR issued to the lender 10 year warrants to acquire 500,000 shares of LSR’s common stock at an exercise price of $12.00 per share (such exercise price was determined by a premium formula based on LSR’s then-recent closing market prices). These warrants were fully vested on the closing date of the loan, March 2, 2006. Accordingly, the fair value of these warrants ($4,994,000) has been recorded as a deferred debt premium and is being amortized to interest expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been netted against the loan in long-term debt. Concurrent with the August 1, 2007 amendment to the loan, the Company repurchased 250,000 of these warrants for an aggregate consideration of $2,750,000. Accordingly, the lender now owns warrants to acquire 250,000
shares of LSR common stock at an exercise price of $12.00 per share.
In addition, as partial consideration for providing financial advisory services to assist the Company in obtaining the March 2006 Financing, LSR issued to its independent third party financial advisor 10 year warrants to acquire 300,000 shares of LSR common stock at an exercise price of $10.46 per share (the closing market price on the date the Company engaged the financial advisor). These warrants became fully vested on March 2, 2006, the closing date of the loan. The fair value of these warrants ($3,113,000) has been recorded as deferred financing costs and is being amortized to other expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been classified as other assets (non-current). Certain customary registration rights were granted in connection with these warrants. The warrants are subject to customary anti-dilution provisions.
Net proceeds from the March 2006 Financing were approximately $63 million and a portion of these proceeds were used to redeem the $46.2 million outstanding principal amount of the Company’s 7.5% Convertible Capital Bonds, which were due to mature in September 2006. The balance of the proceeds was held for general corporate purposes.
Related Party Loans
On June 11, 2002 LSR issued to FHP warrants to purchase up to 410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per share. These LSR warrants are exercisable at any time and will expire on June 11, 2012. These warrants arose out of negotiations regarding the provision of the $2.9 million loan facility made available to the Company on September 25, 2000 by Mr. Baker, who controls FHP. In accordance with APB 14 the loan and warrants were recorded at their pro rata fair values in relation to the proceeds received. As a result, the value of the warrants was $250,000.
35
Cash flows
During the year ended December 31, 2007 funds used were $11.8 million, decreasing cash on hand and on short-term deposit from $44.1 million at December 31, 2006 to $32.3 million at December 31, 2007. The cash used by operating, investing and financing activities was as follows (in millions):
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expense
|
$31.9
|
|
$20.1
|
|
$21.0
|
|
|
Depreciation and loss on disposal of fixed assets
|
9.5
|
|
9.5
|
|
9.6
|
|
|
Working capital movement
|
10.2
|
|
13.4
|
|
(5.5)
|
|
|
Interest paid, net
|
(9.9)
|
|
(10.6)
|
|
(8.0)
|
|
|
Capital expenditure
|
(16.4)
|
|
(13.1)
|
|
(16.0)
|
|
|
Other operating expense
|
-
|
|
(10.5)
|
|
-
|
|
|
Loan (repayments)/receipts net of shares issued
|
(10.5)
|
|
21.2
|
|
(9.9)
|
|
|
Repurchase of Common Stock and Warrants
|
(10.7)
|
|
-
|
|
-
|
|
|
Payment for acquisition, net of cash acquired
|
(4.3)
|
|
-
|
|
-
|
|
|
Purchase of short-term investment
|
(3.9)
|
|
-
|
|
-
|
|
|
Effect of exchange rate changes on cash
|
(7.7)
|
|
(1.3)
|
|
(9.1)
|
|
|
|
$(11.8)
|
|
$28.7
|
|
$(17.9)
|
|
|
|
|
|
|
|
|
|
Operating activities generated cash of $47.0 million, of which $3.0 million was due to the reduction in DSOs. This was offset by capital expenditure of $16.4 million and $26.4 million used in financing activities, including $11.6 million debt principal repayment, $5.0 million in costs associated with the August 1, 2007 March 2006 Financing loan amendment and $10.7 million used to repurchase stock and warrants.
Net days sales outstanding (DSOs) at December 31,
2007
were
13
days, a decrease from the 21 days at December 31, 2006. DSO is calculated as a sum of accounts receivable, unbilled receivables and fees in advance over total net revenue. The impact on liquidity from a one-day change in DSO is approximately $692,000.
At December 31,
2007
, the Company had a working capital surplus of
$0.9 million
and the
Company believes that projected cash flow from operations will satisfy its other contemplated cash requirements for at least the next 12 months.
36
Commitment and Contingencies
Commitments
The Company leases certain equipment under various non-cancelable operating and capital leases. The Company is also obligated under purchase agreements, including long term power contracts. Finally Life Sciences Research Limited is obliged to make contributions to its defined benefit pension plan of £2.7 million ($5.4 million) per year, plus expenses estimated at £0.3 million ($0.6 million) a year for the next 8 years. These commitments are set out in the table below:
|
|
Year ended December 31
|
|
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013+
|
|
|
$000
|
$000
|
$000
|
$000
|
$000
|
$000
|
$000
|
|
Alconbury operating lease obligations (a)
|
$99,222
|
$2,549
|
$2,625
|
$2,704
|
$2,785
|
$2,869
|
$85,690
|
|
Operating leases
|
1,499
|
877
|
470
|
110
|
42
|
-
|
-
|
|
Alconbury capital lease obligations (a) (b)
|
137,812
|
3,151
|
3,245
|
3,343
|
3,443
|
3,546
|
121,084
|
|
Other capital lease obligations (b)
|
790
|
680
|
110
|
-
|
-
|
-
|
-
|
|
Purchase obligations
|
12,723
|
12,723
|
-
|
-
|
-
|
-
|
-
|
|
Pension plan contributions
|
47,775
|
5,972
|
5,972
|
5,972
|
5,972
|
5,972
|
17,915
|
|
Contingent acquisition
payments (c)
|
2,301
|
103
|
767
|
767
|
664
|
-
|
-
|
|
|
$302,122
|
$26,055
|
$13,189
|
$12,896
|
$12,906
|
$12,387
|
$224,689
|
(a) The Alconbury capital and operating lease contractual obligations include the fixed 3% per year rental increases on the UK leases, and an estimate of 3% for the future United States Consumer Price Index (CPI) increases required under the US lease.
(b) The Alconbury and Other capital lease contractual obligations reflected above include imputed interest.
(c) The purchase agreement, (see Note 5) contains contingent payment amounts. The amounts of the payments due under these provisions cannot be determined until the specific targets are attained.
Contingencies
The Company is party to certain legal actions arising in the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity. No form of proceedings has been brought, instigated or is known to be contemplated against the Company by any government agency.
ORDERS
Net new business signings totalled $267 million for the year ended December 31, 2007. Excluding the effects of movements in foreign exchange, this was an increase of 7% over the prior year. New business growth was slightly faster from the Pharmaceutical industry. Orders from this sector were $229 million, representing growth of 8% on the prior year excluding foreign exchange. The pharmaceutical industry therefore represented 86% of all new business in 2007, up from 85% in 2006. Orders from our non-pharmaceutical customers, primarily agrochemical companies, were $37.5 million, up 2% on the prior year.
37
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The Company operates on a worldwide basis and generally invoices its clients in the currency of the country in which the Company operates. Thus, for the most part, exposure to exchange rate fluctuations is limited as sales are denominated in the same currency as costs. Trading exposures to currency fluctuations do occur as a result of certain sales contracts, performed in the UK for US clients, which are denominated in US dollars and contribute approximately 8% of total net 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 á vis competitors who trade in currencies other than sterling or dollars.
The Company has debt denominated in US dollars, whereas the Company’s functional currency is the UK pound sterling, which results in the Company recording other income/loss associated with US dollars debt as a function of relative changes in foreign exchange rates. To manage the volatility relating to these exposures, from time to time, the Company might 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 at December 31, 2007.
Finally, the consolidated financial statements of LSR are denominated in US dollars. Changes in exchange rates between the UK pound sterling and the US dollar will affect the translation of the UK subsidiary's financial results into US dollars for the purposes of reporting the consolidated financial results. The process by which each foreign subsidiary's financial results are translated into US dollars is as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the stockholders' equity account referred to as the accumulated other comprehensive loss account. Management has decided not to hedge against the impact of exposures giving rise to these translation
adjustments as such hedges may impact upon the Company's cash flow compared to the translation adjustments which do not affect cash flow in the medium term.
Exchange rates for translating sterling into US dollars were as follows:
|
|
At December 31
|
Average rate
(1)
|
|
2004
|
1.9199
|
1.8321
|
|
2005
|
1.7168
|
1.8195
|
|
2006
|
1.9572
|
1.8432
|
|
2007
|
1.9906
|
2.0011
|
|
(1)
|
Based on the average of the exchange rates on each day during the period.
|
On March 6, 2007 the noon buying rate for sterling was £1.00 = $2.0073.
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.
38
The following table summarizes the financial instruments denominated in currencies other than the US dollar held by LSR and its subsidiaries as of December 31, 2007:
|
|
|
Expected Maturity Date
|
|
|
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
Fair Value
|
|
(In US Dollars, amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Cash
|
Pound Sterling
|
13,197
|
-
|
-
|
-
|
-
|
-
|
13,197
|
13,197
|
|
|
Euro
|
569
|
-
|
-
|
-
|
-
|
-
|
569
|
569
|
|
|
Japanese Yen
|
3,693
|
-
|
-
|
-
|
-
|
-
|
3,693
|
3,693
|
|
Short term investments
|
Pound Sterling
|
-
|
3,919
|
-
|
-
|
-
|
-
|
3,919
|
3,919
|
|
Accounts receivable
|
Pound Sterling
|
26,628
|
-
|
-
|
-
|
-
|
-
|
26,628
|
26,628
|
|
|
Euro
|
526
|
-
|
-
|
-
|
-
|
-
|
526
|
526
|
|
|
Japanese Yen
|
2,847
|
-
|
-
|
-
|
-
|
-
|
2,847
|
2,847
|
|
Capital leases
|
Pound Sterling
|
-
|
534
|
54
|
-
|
-
|
8,341
|
8,929
|
8,929
|
INFLATION
While most of the Company's net revenues are earned under fixed price contracts, the effects of inflation do not generally have a material adverse effect on its operations or financial condition as only a minority of the contracts have a duration in excess of one year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). The consensus determined that the scope of EITF 06-3 includes any tax assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 also determined that the presentation of taxes on either a gross basis or a net basis within the scope of EITF 06-3 is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies” (APB 22). EITF 06-3 does not require a company to
reevaluate its existing policies related to taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer. EITF 06-3 is effective for interim and annual financial statements beginning after December 15, 2006, with early adoption permitted. The adoption of EITF 06-3 during the first quarter of 2007 did not have an effect on the Company’s consolidated financial statements as taxes collected from customers and remitted to governmental authorities are presented net in its consolidated results of operations or financial position.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, but it does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 could impact how fair values are determined and assigned to assets and liabilities in any future acquisition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material effect on the Company’s consolidated results of operations or financial position.
39
In December 2007, the FASB issued FAS 141(R), "Business Combinations - a replacement of FASB Statement No. 141", which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2009. The
Company is currently evaluating FAS 141(R), and has not yet determined the impact if any, FAS 141(R) will have on its consolidated results of operations or financial position.
40
FORWARD LOOKING STATEMENTS
Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in certain other parts of this Annual Report on Form 10-K (as well as information included in oral statements or other written statements made or to be made by the Company) that look forward in time, are forward looking statements made pursuant to the safe harbor provisions of the Private Litigation Reform Act of 1995. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, and assumptions and other statements which are other than statements of historical facts. Although the Company believes such forward-looking statements are reasonable, it can give no assurance that any forward-looking statements will prove to be correct. Such forward-looking statements are subject to, and are qualified
by, known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by those statements. These risks, uncertainties and other factors include, but are not limited to the Company’s ability to estimate the impact of competition and of industry consolidation and risks, uncertainties and other factors set forth in the Company’s filings with the Securities and Exchange Commission, including without limitation this Annual Report on Form 10-K.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
Managements’ Report on Consolidated Financial Statements and Internal Control
|
43
|
Report of Independent Registered Public Accounting Firm on Internal Control
|
Over Financial Reporting
|
44
|
Report of Independent Registered Public Accounting Firm on Financial Statements
–
|
December 31, 2007 and 2006
|
45
|
|
Consolidated Statements of Operations – Years ended December 31, 2007, 2006 and 2005
|
46
|
|
Consolidated Balance Sheets – December 31, 2007 and 2006
|
47
|
Consolidated Statements of Stockholders’ (Deficit)/Equity and
Comprehensive Income/(Loss) – Years ended December 31, 2007, 2006 and 2005
49
|
Consolidated Statements of Cash Flows – Years ended December 31, 2007, 2006 and 2005
|
51
|
Notes to Consolidated Financial Statements
53
43
Managements’ Report on Consolidated Financial Statements and Internal Control
The management of Life Sciences Research, Inc. (the “Company”) has prepared, and is responsible for, the Company’s consolidated financial statements and related footnotes. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting. The purpose of this system of internal accounting controls over financial reporting is to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records may be relied upon for the preparation of accurate and complete consolidated financial statements. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal audit function that evaluates and reports on the adequacy and effectiveness
of internal controls, policies and procedures.
The Company’s management concluded that its internal control over financial reporting as of December 31, 2007 was effective and adequate to accomplish the objectives described above. Management's assessment was based upon the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s consolidated financial statements and the effectiveness of control over financial reporting have been audited by an independent registered public accounting firm, Hugh Scott, P.C., as stated in their reports which are included elsewhere herein.
Chairman and Chief Executive Officer - Principal Executive Officer
Chief Financial Officer - Principal Financial and Accounting Officer
East Millstone, New Jersey
March 11, 2008
44
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Life Sciences Research, Inc.
We have audited Life Sciences Research, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Life Sciences Research, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Life Sciences Research, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Life Sciences Research, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders equity (deficit) and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 28, 2008 expressed an unqualified opinion thereon.
/s/ Hugh Scott, P.C.
Lakewood, New Jersey
February 28, 2008
45
Report of Independent Registered Public Accounting Firm on Financial Statements
The Board of Directors and Shareholders of Life Sciences Research, Inc.
We have audited the accompanying consolidated balance sheets of Life Sciences Research, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Life Sciences Research, Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2008 expressed an unqualified opinion thereon.
/s/ Hugh Scott, P.C.
Lakewood, New Jersey
February 28, 2008
46
|
Life Sciences Research Inc. and Subsidiaries
|
Consolidated Statements of Operations
Dollars in (000’s), except per share amounts
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Net revenues
|
$236,800
|
|
$192,217
|
|
$172,013
|
|
Cost of sales
|
(165,790)
|
|
(142,701)
|
|
(124,820)
|
|
Gross profit
|
71,010
|
|
49,516
|
|
47,193
|
|
Selling, general and administrative expenses
|
(39,135)
|
|
(29,447)
|
|
(26,174)
|
|
Other operating expense
|
-
|
|
(10,497)
|
|
-
|
|
Operating income
|
31,875
|
|
9,572
|
|
21,019
|
|
Interest income
|
2,171
|
|
1,511
|
|
79
|
|
Interest expense
|
(12,931)
|
|
(14,078)
|
|
(8,072)
|
|
Other (expense)/income
|
(1,895)
|
|
1,923
|
|
(7,406)
|
|
Income/(loss) before income taxes
|
19,220
|
|
(1,072)
|
|
5,620
|
|
Income tax (expense)/benefit
|
(33,194)
|
|
6,856
|
|
(4,129)
|
|
(Loss)/income before loss on deconsolidation of variable interest entity
|
(13,974)
|
|
5,784
|
|
1,491
|
|
Loss on deconsolidation of variable interest entity (net of income tax benefit of $22,218)
|
-
|
|
(20,656)
|
|
-
|
|
Net (loss)/ income
|
$(13,974)
|
|
$(14,872)
|
|
$1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/ income per share
|
|
|
|
|
|
|
(Loss)/income before loss on deconsolidation of variable interest entity
|
$(1.10)
|
|
$0.46
|
|
$0.12
|
|
Loss on deconsolidation of variable interest entity
|
-
|
|
(1.64)
|
|
-
|
|
Basic (loss)/ income per share
|
$(1.10)
|
|
$(1.18)
|
|
$0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/ income per share (Note 2)
|
|
|
|
|
|
|
(Loss)/income before loss on deconsolidation of variable interest entity
|
$(1.10)
|
|
$0.46
|
|
$0.10
|
|
Loss on deconsolidation of variable interest entity
|
-
|
|
(1.64)
|
|
-
|
|
Diluted (loss)/ income per share (Note 2)
|
$(1.10)
|
|
$(1.18)
|
|
$0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock outstanding
|
|
|
|
|
|
|
-basic
|
12,697,992
|
|
12,643,590
|
|
12,517,636
|
|
-diluted
|
12,697,992
|
|
12,643,590
|
|
14,533,377
|
The accompanying notes are an integral part of these consolidated financial statements.
47
|
Life Sciences Research Inc. & Subsidiaries
|
Consolidated Balance Sheets
Dollars in (000’s), except per share amounts
|
|
December 31,
|
|
ASSETS
|
2007
|
|
2006
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$32,304
|
|
$44,088
|
|
|
Short-term investments
|
3,919
|
|
-
|
|
|
Accounts receivable
|
30,116
|
|
38,677
|
|
|
Unbilled receivables, net
|
25,935
|
|
17,459
|
|
|
Inventories
|
2,530
|
|
1,962
|
|
|
Prepaid expenses and other current assets
|
9,270
|
|
10,339
|
|
|
Total current assets
|
$104,074
|
|
$112,525
|
|
|
Property and equipment, net
|
70,994
|
|
63,630
|
|
|
Goodwill
|
7,268
|
|
1,520
|
|
|
Other assets
|
8,382
|
|
10,341
|
|
|
Deferred income taxes
|
10,865
|
|
42,563
|
|
|
Total assets
|
$201,583
|
|
$230,579
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$15,477
|
|
$16,973
|
|
|
Accrued payroll and other benefits
|
6,644
|
|
9,743
|
|
|
Accrued expenses and other liabilities
|
33,086
|
|
17,721
|
|
|
Short-term debt
|
618
|
|
889
|
|
|
Fees invoiced in advance
|
47,347
|
|
44,435
|
|
|
Total current liabilities
|
$103,172
|
|
$89,761
|
|
|
Long-term debt, net
|
75,429
|
|
89,151
|
|
|
Deferred gain on disposal of US property
|
8,787
|
|
9,107
|
|
|
Pension liabilities
|
43,522
|
|
47,652
|
|
|
Total liabilities
|
$230,910
|
|
$235,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
48
|
Life Sciences Research Inc. & Subsidiaries
|
Consolidated Balance Sheets (Continued)
Dollars in (000’s), except per share amounts
|
|
December 31,
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT) (Continued)
|
2007
|
|
2006
|
|
|
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
December 31, 2007: 12,626,498
|
|
|
|
|
(December 31, 2006: 12,775,120)
|
126
|
|
128
|
|
Paid in capital
Less: Promissory notes for issuance of common stocks
|
87,216
-
|
|
95,762
-
|
|
Accumulated other comprehensive loss
|
(46,875)
|
|
(45,162)
|
|
Accumulated deficit
|
(69,794)
|
|
(55,820)
|
|
Total stockholders' equity/(deficit)
|
$(29,327)
|
|
$(5,092)
|
|
Total liabilities and stockholders' equity/(deficit)
|
$201,583
|
|
$230,579
|
The accompanying notes are an integral part of the consolidated financial statements.
49
|
Life Sciences Research Inc. and Subsidiaries
|
Consolidated Statements of Stockholders’ (Deficit)/Equity and Comprehensive Income/(Loss)
Dollars in (000’s), except per share amounts
|
|
Common
Stock
|
Common
Stock
at Par
|
Promissory Notes for Issuance of Common Stock
|
|
Additional Paid in
Capital
|
Accum-ulated Deficit
|
Accumulated Other Compre-hensive Loss
|
Total
|
|
Balance, December 31, 2004
|
12,441
|
$125
|
$(697)
|
|
$75,671
|
$(42,439)
|
$(34,724)
|
$(2,064)
|
|
Issue of shares
|
112
|
1
|
-
|
|
177
|
-
|
-
|
178
|
|
Increase in value net of repayment of Promissory notes
|
-
|
-
|
492
|
|
-
|
-
|
-
|
492
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
-
|
-
|
-
|
|
-
|
1,491
|
-
|
-
|
|
|
Minimum pension liability, net of $6,186 deferred tax – Deficiency on UK defined benefit pension plan
|
-
|
-
|
-
|
|
-
|
-
|
(14,435)
|
-
|
|
|
Translation adjustments,
net of $32 tax
|
-
|
-
|
-
|
|
-
|
-
|
(230)
|
-
|
|
|
Total comprehensive income
|
-
|
-
|
-
|
|
-
|
-
|
-
|
(13,174)
|
|
Balance, December 31, 2005
|
12,533
|
$126
|
$(205)
|
|
$75,848
|
$(40,948)
|
$(49,389)
|
$(14,568)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of shares
|
191
|
2
|
-
|
|
1,764
|
-
|
-
|
1,766
|
|
Exercise of stock options
|
31
|
-
|
-
|
|
62
|
-
|
-
|
62
|
|
Stock based compensation expense
|
-
|
-
|
-
|
|
18,088
|
-
|
-
|
18,088
|
|
Increase in value net of repayment of Promissory notes
|
-
|
-
|
205
|
|
-
|
-
|
-
|
205
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
-
|
-
|
-
|
|
-
|
(14,872)
|
-
|
-
|
|
|
Minimum pension liability, net of $2,650 deferred tax – Deficiency on UK defined benefit pension plan
|
-
|
-
|
-
|
|
-
|
-
|
6,183
|
-
|
|
|
Translation adjustments,
net of $205 tax
|
-
|
-
|
-
|
|
-
|
-
|
(1,956)
|
-
|
|
|
Total comprehensive loss
|
-
|
-
|
-
|
|
-
|
-
|
-
|
(10,645)
|
|
Balance, December 31, 2006
|
12,775
|
$128
|
$-
|
|
$95,762
|
$(55,820)
|
$(45,162)
|
$(5,092)
|
|
|
|
|
|
|
|
|
|
|
(Continued)
50
|
Life Sciences Research Inc. and Subsidiaries
|
Consolidated Statements of Stockholders’ (Deficit)/Equity and Comprehensive Income/(Loss)
Dollars in (000’s), except per share amounts
|
|
Common
Stock
|
Common
Stock
at Par
|
Promissory Notes for Issuance of Common Stock
|
|
Additional Paid in
Capital
|
Accum-ulated Deficit
|
Accumulated Other Compre-hensive Loss
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
12,775
|
$128
|
$-
|
|
$95,762
|
$(55,820)
|
$(45,162)
|
$(5,092)
|
|
Issue of shares
|
13
|
-
|
-
|
|
-
|
-
|
-
|
-
|
|
Exercise of stock options
|
88
|
-
|
-
|
|
238
|
-
|
-
|
238
|
|
Stock based compensation expense
|
-
|
-
|
-
|
|
1,908
|
-
|
-
|
1,908
|
|
Repurchase of shares
|
(250)
|
(2)
|
-
|
|
(3,998)
|
-
|
-
|
(4,000)
|
|
Repurchase of warrants
|
-
|
-
|
-
|
|
(6,694)
|
-
|
-
|
(6,694)
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
-
|
-
|
-
|
|
-
|
(13,974)
|
-
|
-
|
|
|
Minimum pension liability, net of $309 deferred tax – Deficiency on UK defined benefit pension plan
|
-
|
-
|
-
|
|
-
|
-
|
(721)
|
-
|
|
|
Translation adjustments,
net of $243 tax
|
-
|
-
|
-
|
|
-
|
-
|
(992)
|
-
|
|
|
Total comprehensive loss
|
-
|
-
|
-
|
|
-
|
-
|
-
|
(15,687)
|
|
Balance, December 31, 2007
|
12,626
|
$126
|
$-
|
|
$87,216
|
$(69,794)
|
$(46,875)
|
$(29,327)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
51
|
Life Sciences Research Inc. and Subsidiaries
|
Consolidated Statements of Cash Flows
Dollars in (000’s) except per share amounts
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net (loss)/income
|
$(13,974)
|
|
$(14,872)
|
|
$1,491
|
|
Adjustments to reconcile net (loss)/income to net cash provided by operating activities
|
|
|
|
|
|
|
Depreciation and amortization
|
9,519
|
|
9,514
|
|
9,581
|
|
Amortization of gain on disposal of US property
|
(320)
|
|
(161)
|
|
-
|
|
Non-cash compensation expense associated with employee stock compensation plans
|
1,908
|
|
2,441
|
|
-
|
|
Loss on deconsolidation of variable interest entity
|
-
|
|
42,874
|
|
-
|
|
Foreign exchange (gain)/loss on March 2006 Financing and Capital Bonds
|
(770)
|
|
(6,210)
|
|
5,145
|
|
Foreign exchange gain on intercompany balances
|
(169)
|
|
(692)
|
|
(518)
|
|
Deferred income tax expense/(benefit)
|
33,194
|
|
(29,074)
|
|
4,128
|
|
Provision for losses on accounts receivable
|
26
|
|
73
|
|
363
|
|
Amortization of Capital Bonds issue costs
|
-
|
|
70
|
|
184
|
|
Amortization of debt issue costs included in interest expense
|
1,789
|
|
861
|
|
-
|
|
Amortization of financing costs
|
2,134
|
|
3,879
|
|
2,780
|
|
Amortization of warrants
|
-
|
|
9,265
|
|
347
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, unbilled receivables and prepaid expenses
|
2,607
|
|
(3,540)
|
|
(11,475)
|
|
Inventories
|
(522)
|
|
301
|
|
(181)
|
|
Accounts payable, accrued expenses and other liabilities
|
9,775
|
|
5,692
|
|
6,072
|
|
Fees invoiced in advance
|
1,795
|
|
7,028
|
|
(859)
|
|
Net cash provided by operating activities
|
$46,992
|
|
$27,449
|
|
$17,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in)/provided by investing activities:
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
(16,439)
|
|
(13,093)
|
|
(15,973)
|
|
Sale of property, plant and equipment
|
17
|
|
6
|
|
-
|
|
Payment for acquisition, net of cash acquired
|
(4,340)
|
|
-
|
|
-
|
|
Purchase of short-term investments
|
(3,919)
|
|
-
|
|
-
|
|
Net cash used in investing activities
|
$(24,681)
|
|
$(13,087)
|
|
$(15,973)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
52
|
Life Sciences Research Inc. and Subsidiaries
|
Consolidated Statements of Cash Flows (Continued)
Dollars in (000’s) except per share amounts
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash flows (used in)/provided by financing activities:
|
|
|
|
|
|
|
Proceeds from issue of Voting Common Stock
|
238
|
|
648
|
|
670
|
|
Proceeds from long-term borrowings
|
-
|
|
70,000
|
|
30,000
|
|
Repurchase of Voting Common Stock
|
(4,000)
|
|
-
|
|
-
|
|
Repurchase of warrants
|
(6,694)
|
|
-
|
|
-
|
|
Increase in other assets
|
-
|
|
(8,145)
|
|
-
|
|
Increase in deferred finance
|
(4,300)
|
|
-
|
|
-
|
|
Repayments of long-term borrowings
|
(10,729)
|
|
(71)
|
|
(41,106)
|
|
Repayments of short-term borrowings
|
(904)
|
|
(46,871)
|
|
500
|
|
Net cash used in financing activities
|
$(26,389)
|
|
$15,561
|
|
$(9,936)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(7,706)
|
|
(1,255)
|
|
(9,070)
|
|
(Decrease)/increase in cash and cash equivalents
|
(11,784)
|
|
28,668
|
|
(17,921)
|
|
Cash and cash equivalents at beginning of year
|
44,088
|
|
15,420
|
|
33,341
|
|
Cash and cash equivalents at end of year
|
$32,304
|
|
$44,088
|
|
$15,420
|
|
Supplementary Disclosures:
|
|
|
|
|
|
|
Interest paid
|
$11,609
|
|
$10,572
|
|
$7,913
|
|
Taxes paid
|
$307
|
|
$142
|
|
$316
|
|
|
|
|
|
|
|
|
Supplementary disclosures of non-cash financing activity:
|
|
|
|
|
|
|
Increase in accrued liabilities for acquisition-related commitments
|
$1,769
|
|
$-
|
|
$-
|
|
Issuance of warrants to lender
|
$-
|
|
$5,281
|
|
$-
|
|
Issuance of warrants to financial advisor
|
$-
|
|
$3,278
|
|
$-
|
The accompanying notes are an integral part of these consolidated financial statements.
|
1.
|
THE COMPANY AND ITS OPERATIONS
|
Life Sciences Research, Inc. ("LSR") and subsidiaries (collectively, the "Company") is a global contract research organization, offering worldwide pre-clinical and non-clinical testing services for biological safety evaluation research to the pharmaceutical and biotechnology, as well as the 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.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
A summary of the significant accounting policies, is set out below:
Basis of Presentation and Principles of Consolidation
The Company’s financial statements are prepared in conformity with US generally accepted accounting principles ("GAAP").
The consolidated financial statements incorporate the accounts of LSR and each of its subsidiaries. All inter-company balances have been eliminated upon consolidation.
53
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 was newly formed in June 2005 and controlled 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 paid in full on June 30, 2006, together with accrued interest of $0.6 million.
In accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), the Company has reflected the consolidation of Alconbury from June 14, 2005 through June 29, 2006, the period in which the Company was considered the “primary beneficiary” of Alconbury’s variable interests. The Company has determined that as of June 29, 2006 it was no longer the primary beneficiary of Alconbury, and therefore was required to deconsolidate Alconbury’s assets and liabilities from the Company’s Condensed Consolidated Balance Sheet as of that date. Please refer to Note 3 for detail of the impact of this deconsolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity date of three months or less at the date of purchase. Certain cash and cash equivalents are deposited with financial institutions, and a majority of such amounts exceed insured depository limits.
54
Short-term investments in Marketable Securities
At times the Company may purchase short-term investments comprised of UK Treasury Notes with maturities greater than three months and as such are considered held-to-maturity investments. Held-to-maturity securities are those investments that the Company has the ability and intent to hold until maturity. Held-to-maturity investments are recorded at cost plus accrued income, adjusted for the amortization of premiums and discounts, which approximate market value. Interest income is accrued as earned. At December 31, 2007, held-to-maturity investments totaling $3.9 million will mature in March 2008. The company held no short-term investments at December 31, 2006.
Fair Value of Financial Instruments
The carrying amounts of the Company's significant financial instruments, which include cash equivalents, marketable securities, accounts receivable, accounts payable, and short and long-term debt approximate their fair values at December 31, 2007 and 2006.
Allowance for Uncollectible Accounts
The Company establishes an allowance for uncollectible accounts which it believes is adequate to cover anticipated losses on the collection of all outstanding trade receivable balances. The adequacy of the uncollectible account allowance is based on historical information, a review of customer accounts and related receivable balances, and management’s assessment of current economic conditions. The Company reassesses the allowance for uncollectible accounts annually.
Inventories
Inventories are valued on a FIFO (first-in, first out) method at the lower of cost, or market value. They comprise materials and supplies.
Property, Plant and Equipment
Property, plant and equipment, stated at cost, is depreciated over the estimated useful lives of the assets on a straight-line basis. Estimated useful lives are as follows:
|
Leasehold land and buildings
|
over the remaining lease term
|
|
Leasehold improvements
|
15 years – the remaining lease term
|
|
Plant and equipment
|
4 - 25 years
|
|
Vehicles
|
5 years
|
|
Computers and software
|
3 - 5 years
|
Repair and maintenance expenses on these assets arising from the normal course of business are expensed in the period incurred.
Concentration of Credit Risk
The Company maintains cash and cash equivalents, and short-term investments with various financial institutions. These financial institutions are located primarily in the US and the Company's policy is designed to limit exposure with any one institution.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables from customers in the pharmaceutical and biotechnology industries. The Company believes its exposure to credit risk to be minimal, as these industries have experienced significant growth and the customers are predominantly well established and viable. Additionally, the Company maintains allowances for potential credit losses. Credit losses incurred have not exceeded management's expectations. The Company's exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding accounts receivable and unbilled receivables less fees invoiced in advance.
55
Income Taxes
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.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109. FIN 48 provides guidance on recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return.
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. Net revenue from these contracts is generally recognized over the term of the contracts as services are rendered. Contracts may contain provisions for re-negotiation in the event of cost overruns due to changes in the level of work scope. Renegotiated amounts are included in net revenue when earned and realization is assured. Provisions for losses to be incurred on contracts are recognized in full in the period in which it is determined that a loss will result from performance of the contractual arrangement. Most service contracts may be terminated for a variety of reasons by the Company's customers either immediately or upon notice at a future date. The contracts generally require payments to the Company to recover costs incurred, including costs to wind
down the study, and payment of fees earned to date, and in some cases to provide the Company with a portion of the fees or income that would have been earned under the contract had the contract not been terminated early.
Unbilled receivables are recorded for net revenue recognized to date that is currently not billable to the customer pursuant to contractual terms. In general, amounts become billable upon the achievement of certain aspects of the contract or in accordance with predetermined payment schedules. Unbilled receivables are billable to customers within one year from the respective balance sheet date. Fees in advance are recorded for amounts billed to customers for which net revenue has not been recognized at the balance sheet date (such as upfront payments upon contract authorization, but prior to the actual commencement of the study).
Foreign Currencies
Transactions in currencies other than the functional currency of the entity are recorded at the rates of exchange at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange at the balance sheet date and the related transaction gains and losses are reported in the statements of operations. Exchange gains and losses on foreign currency transactions are recorded as other income or expense. Certain intercompany loans are determined to be of a long-term investment nature. The Company records gains and losses from re-measuring such loans as a component of other comprehensive income.
Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the US dollar are translated into US dollars at the average exchange rate, assets and liabilities are translated at year-end exchange rates, capital accounts are translated at historical exchange rates, and retained earnings are translated at the weighted average of historical rates. Translation adjustments are presented as a separate component of other accumulated comprehensive loss in the financial statements.
56
Goodwill and Other Intangible Assets
The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes financial accounting and reporting standards for acquired goodwill and other intangible assets (Note 5). In accordance with SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separate intangible assets that have finite useful lives continue to be amortized over their estimated useful lives.
The Company allocates the purchase price of acquisitions to identified tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, with any residual amounts allocated to goodwill.
SFAS No. 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment. The second step of the impairment test measures the amount of the impairment loss. The Company, after completing the first step of the process, concluded there was no impairment of goodwill at December 31, 2007 or 2006.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”. The Company evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposal are less than its carrying amount. In such instances, the carrying value of long-lived assets is reduced to the estimated fair value, as determined using an appraisal or discounted cash flows, as appropriate.
Restructuring Costs
The Company recognizes obligations associated with restructuring activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company adopted the provisions of SFAS No. 146, which generally requires a liability for costs associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. The overall purpose of the Company’s restructuring actions is to lower overall operating costs and improve profitability by reducing excess capacities. Restructuring costs are typically recorded in other operating expenses in the period in which the plan is approved by the Company’s senior management and, where material, the Company’s Board of Directors, when the liability is incurred.
Leased Assets
Assets held under the terms of capital leases are included in property and equipment and are depreciated on a straight-line basis over the lesser of the useful life of the asset or the term of the lease. Obligations for future lease payments, less attributable finance charges are shown within liabilities and are analyzed between amounts falling due within and after one year. Operating lease rentals are expensed.
Pension Costs
During the year the Company had two defined contribution plans. One of the defined contribution pension plans covers all employees in the US; the other, employees in the UK. Prior to December 31, 2002, a defined benefit pension plan provided benefits to employees in the UK based on their final pensionable salary. As of December 31, 2002, the defined benefit pension plan was curtailed. The gain on curtailment was recognized in the Statement of Operations according to SFAS No. 88, “Employees’ Accounting for Settlements and Curtailments of Deferred Benefit Pension Plan and for Termination Benefits”. The pension cost of the plan is accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions". Pension information is presented in accordance with the currently required provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits"
and FAS158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans”. The net asset at transition, prior service cost and net (loss)/gain subject to amortization, outside the corridor, are
57
being amortized on a straight-line basis over periods of 15 years, 10 years and 10 years respectively. The Company recognized all actuarial gains and losses immediately for the purposes of its minimum pension liability.
Use of estimates
The preparation of financial statements in conformity with 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.
Earnings Per Share
Earnings per share are computed in accordance with SFAS No. 128, "Earnings Per Share" (“SFAS 128”). Basic income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. The computation of diluted income per share is similar to the computation of basic income per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Diluted income per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue common stock were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the income of the Company.
The following table presents the calculation of weighted-average shares used to calculate basic and diluted net income (loss) per share (in thousands):
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average shares outstanding – basic
|
12,697,992
|
|
12,643,590
|
|
12,517,636
|
|
Plus: Effect of dilutive potential common share
|
-
|
|
-
|
|
2,015,741
|
|
|
|
|
|
|
|
|
Weighted-average shares used in calculating diluted net income (loss) per share
|
12,697,992
|
|
12,643,590
|
|
14,533,377
|
Options to purchase 1,021,432 and 971,817 common shares (weighted average) were outstanding during 2007 and 2006 respectively, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive. Warrants to purchase 1,256,680 and 901,218 common shares (weighted average) were outstanding during 2007 and 2006 respectively, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive. The 2006 diluted loss per share is presented excluding the effect of anti-dilutive securities. The result of this change increased the 2006 diluted loss per share to $1.18 from $1.02.
Segment Analysis
In accordance with the SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), the Company discloses financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Loans and Warrants
In accordance with Accounting Principles Board ("APB") Opinion No. 14 "Accounting for Convertible Debt and Debt issued with Share Purchase Warrants", loans and warrants are recorded at their pro-rata fair values in relation to the proceeds received with the portion allowable to the warrants accounted for as paid-in-capital. The costs of raising long-term financing are capitalized as an asset and are amortized, using the effective interest method, over
58
the term of the debt. "Amortization of warrants" of $861,000 presented in the 2006 cash flow statement is now reflected as "Amortization of debt issue costs included in interest expense" to conform to the current year presentation.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards (“FAS”) No. 123R, “Share-Based Payment,” (“FAS 123R”) utilizing the “modified prospective” method as described in FAS 123R. FAS 123R is a revision of FAS No. 123, “Accounting for Stock Based Compensation”.
In the “modified prospective” method, compensation cost is recognized for all stock option and stock-based arrangements granted after the effective date and for all unvested awards granted prior to the effective date. In accordance with FAS 123R, prior period amounts were not restated. FAS 123R also requires the tax benefits associated with these share-based payments to be classified as financing activities in the Consolidated Statements of Cash Flows, rather than as operating cash flows as required under previous regulations.
At December 31, 2007, the Company had two stock-based compensation plans with total unvested stock-based compensation expense of $2.4 million compared to $4.2 million for the year ended December 31, 2006, and a total weighted average remaining term of 8.92 years compared to 8.90 years in the same period in 2006. Total stock-based compensation expense, recognized in Cost of Sales and Selling, General and Administrative expenses, aggregated $1.9 million for the year ended December 31, 2007 compared to $0.7 million for the year ended December 31, 2006. The Company has not recorded any tax benefit relating to this expense as the majority of the compensation will be paid to employees that are located outside of the United States and the deduction is disallowed in that taxing jurisdiction. Accordingly, no tax benefit will be realized by the Company.
The recognition of total stock-based compensation expense impacted Basic Net Income per Common Share and Diluted Net Income per Common Share by $0.13 and $0.13, respectively, during the year ended December 31, 2007. The recognition of total stock-based compensation expense impacted Basic Net Income per Common Share and Diluted Net Income per Common Share by $0.05 and $0.05, respectively, during the year ended December 31, 2006.
Prior to the effective date, the stock-based compensation plans were accounted for under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Pro-forma information regarding the impact of total stock-based compensation on net income and income per share for prior periods is required by FAS 123R.
Such pro-forma information, determined as if the Company had accounted for its employee stock options under the fair value method during the year ended December 31, 2005, is illustrated in the following table:
|
|
|
|
Year ended
December 31, 2005
|
|
|
|
|
$000
|
|
Net income
|
|
As reported
|
$1,491
|
|
Less: Pro forma expense as if stock options were
|
|
|
|
|
charged against net income, net of tax
|
|
|
(319)
|
|
|
|
Pro forma
|
$1,172
|
|
Basic and Diluted EPS:
|
|
As Reported
|
$0.12 and $0.10
|
|
|
|
Pro forma
|
$0.09 and $0.08
|
The per share weighted average exercise price of the stock options granted during 2007, 2006 and 2005 was $16.65, $9.90 and $11.15 respectively. The fair values of the Company’s employee stock options were estimated at the date of grant of each issuance using a Black-Scholes option-pricing model, with the following weighted average assumptions for all options expensed/proforma calculated during the years ended December 31, 2007, 2006 and 2005:
59
|
|
FAS 123R
Expense
|
FAS 123R
Expense
|
FAS No. 123
Pro Forma
|
|
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
Expected dividend yield of stock
|
0%
|
0%
|
0%
|
|
Expected volatility of stock, range
|
49.4% - 130.8%
|
49.4% - 146.4%
|
47.1% - 55.9%
|
|
Risk-free interest rate, range
|
3.52% - 4.98%
|
3.71% - 4.98%
|
3.90% - 4.71%
|
|
|
|
|
|
|
Expected term of options
|
5.5 - 10 years
|
5 - 10 years
|
10 years
|
Recently Issued Accounting Standards
In June 2006, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). The consensus determined that the scope of EITF 06-3 includes any tax assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 also determined that the presentation of taxes on either a gross basis or a net basis within the scope of EITF 06-3 is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies” (APB 22). EITF 06-3 does not require a company to
reevaluate its existing policies related to taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer. EITF 06-3 is effective for interim and annual financial statements beginning after December 15, 2006, with early adoption permitted. The adoption of EITF 06-3 during the first quarter of 2007 did not have an effect on the Company’s consolidated financial statements as taxes collected from customers and remitted to governmental authorities are presented net in its consolidated results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, but it does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 could impact how fair values are determined and assigned to assets and liabilities in any future acquisition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material effect on the Company’s consolidated results of operations or financial position.
In December 2007, the FASB issued FAS 141(R), "Business Combinations - a replacement of FASB Statement No. 141", which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2009. The Company
is currently evaluating FAS 141(R), and has not yet determined the impact if any, FAS 141(R) will have on its consolidated results of operations or financial position.
60
|
3.
|
LOSS ON DECONSOLIDATION OF VARIABLE INTEREST ENTITY
|
As described in Note 2, and in compliance with FIN 46R, the Company had included the operating results and accounts of Alconbury in its Condensed Consolidated Financial Statements since the inception of Alconbury on June 14, 2005, based on the Company being the primary beneficiary of Alconbury. On June 29, 2006 the Company determined that it was no longer the primary beneficiary of Alconbury, and therefore was required to deconsolidate Alconbury's assets and liabilities from the Company's Condensed Consolidated Balance Sheet as of that date. The effect of removing Alconbury can be summarized as follows:
The assets and liabilities of Alconbury removed from the Condensed Consolidated Balance Sheet consists of the following:
|
|
$000
|
|
Cash
|
$1,436
|
|
Deferred charges
|
713
|
|
Accrued mortgage interest payable
|
(767)
|
|
Mortgage loans payable
|
(30,000)
|
|
Net assets (liabilities) of Alconbury
|
$(28,618)
|
|
|
|
|
Since Alconbury is now deconsolidated, the Company will also no longer be eliminating certain inter-company transactions and balances relating to its dealings with Alconbury and affecting the Condensed Consolidated Balance Sheet, as follows:
|
|
|
$000
|
|
Net book value of property and equipment prior to sale-leaseback
|
$80,515
|
|
Net book value of property and equipment for property under capital leases
|
(22,750)
|
|
Accumulated depreciation on properties sold, net
|
(2,725)
|
|
Deferred gain on sale-leaseback transaction, net of amortization of $336
|
9,267
|
|
Capital lease obligations relating to sale-leaseback
|
22,750
|
|
Rents received in advance from Alconbury
|
(1,056)
|
|
Advances to Alconbury for sale-leaseback costs, net
|
(2,656)
|
|
Accrued interest receivable from Alconbury
|
(628)
|
|
Note receivable from Alconbury relating to sale-leaseback
|
(10,000)
|
|
Accumulated comprehensive loss - translation gain
|
(1,225)
|
|
Total removal of previously required "Elimination" entries
|
$71,492
|
|
|
|
|
The income tax effects relating to the removal of the assets and liabilities of Alconbury and the reinstatement of certain Company assets and liabilities previously eliminated in consolidation with Alconbury yields a deferred income tax benefit as follows:
|
|
|
$000
|
|
Deferred income tax benefit
|
$(22,218)
|
|
|
|
|
The net effect after taxes of the foregoing items has been to record a loss on deconsolidation of variable interest entity during the quarter ended June 30, 2006 as follows:
|
|
|
$000
|
|
Loss on deconsolidation of variable interest entity
|
$20,656
|
61
|
4.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment as of December 31 consisted of the following:
|
|
|
2007
|
|
2006
|
|
|
|
$000
|
|
$000
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
Building and facilities
|
|
$-
|
|
$-
|
|
Leasehold buildings and improvements
|
|
40,392
|
|
34,336
|
|
Plant, equipment, vehicles, computers and software
|
|
133,123
|
|
121,269
|
|
Assets in the course of construction
|
|
290
|
|
319
|
|
|
|
|
|
|
|
|
|
173,805
|
|
155,924
|
|
Less: Accumulated depreciation
|
|
(102,811)
|
|
(92,294)
|
|
|
|
$70,994
|
|
$63,630
|
|
|
|
|
|
|
Depreciation expense aggregated
$9,519,000
, $9,514,000 and $9,581,000 for
2007
, 2006 and 2005 respectively.
The net book value of assets held under capital leases and included above is as follows:
|
|
2007
|
|
2006
|
|
|
Cost
|
Accumulated Depreciation
|
Net book
Value
|
|
Cost
|
Accumulated Depreciation
|
Net book
Value
|
|
|
$000
|
$000
|
$000
|
|
$000
|
$000
|
$000
|
|
Alconbury capital leases
|
$23,341
|
$1,989
|
$21,352
|
|
$23,201
|
$1,204
|
$21,997
|
|
Other capital leases
|
2,752
|
1,018
|
1,734
|
|
2,684
|
505
|
2,179
|
|
|
$26,093
|
$3,007
|
$23,086
|
|
$25,885
|
$1,709
|
$24,176
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset.
The Alconbury capital leases are included in Leasehold buildings and improvements whilst Other capital leases are included in Plant, equipment, vehicles, computers and software.
Depreciation expense on these capital leases and included above, amounted to
$1,284,000
(of which
$778,000
related to Alconbury capital leases), $1,017,000 (of which $683,000 related to Alconbury capital leases), and $140,000 for the years ended December 31,
2007
, 2006 and 2005, respectively.
|
5.
|
GOODWILL AND OTHER ASSETS
|
In June 2001, the FASB issued SFAS No. 141, “Business Combinations”, which eliminates the pooling of interests method of accounting for business combinations and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, or SFAS No. 142. The Company adopted SFAS No. 142 as of January 1, 2003. SFAS No. 142 addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This statement requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis.
Huntingdon Life Sciences KK (“HLS KK”) has acted as the Company’s marketing representative in Japan since 1996. This Company was a joint venture, 50% of which was owned by Huntingdon. On July 1, 2003, the remaining 50% of the shares in HLS KK, not previously owned by Huntingdon, was purchased, resulting in HLS KK becoming a wholly owned subsidiary of Huntingdon. The purchase price was payable over a three year period, and was equal to the greater of (a) $1 million or (b) the commission which would have been paid if the purchase had not
62
happened. Payments during that three year period were made at the rate which had been in effect for commissions prior to the acquisition, and was payable semi-annually. At December 31, 2007 and 2006, goodwill on purchase was Japanese Yen 161,400,000 ($1,444,000 and $1,354,000 at year end rates respectively).
Prior to this date, the shares owned by Huntingdon in HLS KK were held as an investment, as the day to day control of HLS KK was not exercised by the Company.
During December 2007, the Company acquired all of the outstanding stock of a company providing pharmaceutical development services ("Services Company”). The purchase price, including acquisition expenses, was approximately $7,760,000, of which $6,013,000 was paid in cash at closing. A working capital adjustment is payable to the sellers in the first quarter of 2008 and estimated to be $1,747,000, which is included in the recorded purchase price at December 31, 2007. The purchase agreement also provides for annual contingent payments totaling approximately $1,991,000 if the Services Company's profits, as defined in the purchase agreement, meet certain base profit levels during each of the three years ended December 31, 2010. At the conclusion of the three year period, based upon cumulative profits of the Services Company during that period, there may be a final adjustment increasing the total amount
of these contingent payments. An additional contingent amount of approximately $310,000 is payable in three equal annual installments.
The acquisition was accounted for as a purchase and the Services Company's results of operation for the period subsequent to the acquisition have been included in the Company’s Consolidated Statements of Operations. The preliminary purchase price has been allocated to the following assets:
|
|
|
|
|
$000
|
|
Tangible assets (including cash of $1,747,000)
|
|
|
|
$2,819
|
|
Goodwill
|
|
|
|
5,720
|
|
Liabilities assumed
|
|
|
|
(779)
|
|
Fair value of assets acquired
|
|
|
|
$7,760
|
|
|
|
|
|
|
The company will finalize the purchase price allocation during 2008. The final purchase price allocation may result in different allocations for tangible and intangible assets and different depreciation and amortization expense than that reflected in the consolidated financial statements of the Company.
At December 31, 2007 other assets represent finance costs associated with the sale/leaseback transaction of $1,207,000 and finance costs associated with the March 2006 Financing of $11,231,000, net of amortization of $4,056,000. At December 31, 2006 other assets represent finance costs associated with the sale/leaseback transaction of $1,200,000 and finance costs associated with the March 2006 Financing of $11,043,000, net of amortization of $1,902,000. The movement in the asset values has occurred due to the revaluation of functional currencies during the period. Amortization is expensed over the period of the lease and the March 2006 Financing. Amortization expense for these other assets is expected to be $1,969,000 in 2008, $2,289,000 in 2009, $2,686,000 in 2010, $533,000 in 2011, and $40,000 in 2012.
The components of income / (loss) before taxes and the related benefit/(expense) for tax for the years ended December 31 are as follows:
|
Income/(loss) before taxes
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$000
|
|
$000
|
|
$000
|
|
United Kingdom
|
|
19,907
|
|
16,173
|
|
10,823
|
|
United States
|
|
(1,200)
|
|
(15,285)
|
|
207
|
|
Japan
|
|
513
|
|
(319)
|
|
96
|
|
British Virgin Islands
|
|
-
|
|
(1,641)
|
|
(5,506)
|
|
|
|
|
|
|
|
|
|
|
|
$19,220
|
|
$(1,072)
|
|
$5,620
|
|
|
|
|
|
|
|
|
63
|
The (expense)/benefit for income taxes by location of the taxing jurisdiction for the years ended December 31, consisted of the following:
|
|
2007
$000
|
|
2006
$000
|
|
2005
$000
|
|
Current Taxation:
|
|
|
|
|
|
|
- State Taxes – US
|
60
|
|
-
|
|
(452)
|
|
- Corporate Tax – US
|
-
|
|
-
|
|
(200)
|
|
- Corporate Tax – Japan
|
(126)
|
|
-
|
|
(55)
|
|
Deferred taxation:
- United Kingdom
- Corporate Tax – US
- State Tax - US
- Japan
|
|
|
(32,044)
(1,073)
-
(11)
|
|
(3,327)
9,267
793
123
|
|
(326)
(3,123)
-
27
|
|
|
|
|
$(33,194)
|
|
$6,856
|
|
$(4,129)
|
Reconciliation between the US statutory rate and the effective rate is as follows:
|
|
|
|
|
|
|
% of income/(loss) before income taxes
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
%
|
|
%
|
|
%
|
|
US statutory rate
|
|
|
|
|
35
|
|
(35)
|
|
35
|
|
Foreign rate differential
|
(5)
|
|
(23)
|
|
24
|
|
UK R & D credit and non-deductible items
|
|
(53)
|
|
(468)
|
|
(45)
|
|
Valuation allowance
|
|
195
|
|
-
|
|
-
|
|
State taxes
|
|
-
|
|
(74)
|
|
8
|
|
Change in estimate
|
|
|
|
1
|
|
(40)
|
|
51
|
|
Effective tax rate
|
|
|
|
|
173
|
|
(640)
|
|
73
|
The 2007 effective tax percentages include the valuation allowance adjustment of the UK net operating losses. The 2006 effective tax percentages are exaggerated due to the low value of the loss before income taxes.
The UK government introduced a new tax allowance, ‘Research and Development Tax Credit’ (UK R & D credit), for large companies in 2002. This UK R & D credit allows the UK companies to recover an additional 25% of their research and development expenses in addition to the 100% normally allowed. The 2007, 2006 and 2005 claims are part of the non-deductible items above.
The valuation allowance adjustment in 2007 was a result of the UK taxing authority's review of the Company's UK R & D credit in the fourth quarter of 2007 and a statutory increase in the allowable credit starting in 2008. As a result of the change in the law, the UK R & D credit will eliminate all UK taxable income of the Company and the company will not need to utilize its net operating loss carry-forwards. As long as the UK R & D credit exists in its current form, the Company will maintain a full valuation allowance against the deferred tax assets in the UK until sufficient positive evidence exists to reduce or eliminate the allowance.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. FIN 48 provides that unrecognized tax benefits should be based on the facts, circumstances and information available at each balance sheet date and that subsequent changes in judgment should be based on new facts and circumstances and any resulting change in the amount of unrecognized
64
tax benefit should be accounted for in the interim period in which the change occurs. The adoption of FIN 48 had no impact on the Company's consolidated financial statements. The Company had no unrecognized tax benefits included in liabilities as of January 1, 2007 and December 31, 2007.
Interest and penalty costs related to unrecognized tax benefits, are classified as a component of interest income and other income / (expense), net, in the accompanying consolidated statements of operations. The Company did not recognize any interest and penalty expenses related to unrecognized tax benefits for the year ended December 31, 2007.
The Company and its subsidiaries conducts business primarily in the UK, US and Japan. With a few exceptions, the Company is no longer subject to US federal, state or local income tax audits by taxing authorities for years before 2004. The most significant US jurisdictions in which the Company is required to file income tax returns include the states of New Jersey and Maryland. As of December 31, 2007, the Company is being audited by the Internal Revenue Service for the tax year ended December 31, 2005. Although the Company believes the probable outcome of these audits will not materially affect the Company's consolidated financial statements, the ultimate resolution of the audits is uncertain and, therefore, the Company cannot estimate the impact, if any, on its unrecognized tax benefits. The Company's UK tax filing through December 31, 2004 have been reviewed by the UK taxing authorities.
The main reason for the change in estimate in 2006 relates to the US leaseback gain that arose from the sale of the US property as part of the Sale/Leaseback Transaction. Under FIN46R the gain was originally recognized in 2005 and charged to income taxes. This charge reversed in 2006 as the deferred gain was recognized due to the deconsolidation of the variable interest entity. The gain on the sale of the UK assets was offset against brought forward capital losses in 2005. A revision to the treatment of the losses on the UK buildings sold as part of the Sale/Leaseback Transaction in 2005 also caused a change in estimate in 2006.
The losses before tax of the British Virgin Islands in 2006 represents the Alconbury balances which were consolidated in accordance with the provisions of FASB Interpretation No. 46R.
65
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31 are as follows:
|
|
2007
|
|
2006
|
|
|
$000
|
|
$000
|
|
Non-current deferred tax assets:
|
|
|
|
|
Net operating losses – US
|
$4,307
|
|
$4,817
|
|
Net operating losses – UK
|
28,476
|
|
22,346
|
|
Valuation allowance – Net operating losses – UK
|
(24,123)
|
|
-
|
|
Net operating losses – Japan
|
157
|
|
179
|
|
Deferred gain on Sale/Leaseback Transaction
|
3,515
|
|
3,643
|
|
Unexercised warrant amortization
|
3,999
|
|
4,079
|
|
Net pension plan minimum liability adjustment – UK
|
13,056
|
|
14,295
|
|
Valuation allowance – Net pension plan minimum liability
|
(13,056)
|
|
-
|
|
Capital losses – UK
|
11,849
|
|
12,317
|
|
Valuation allowance – UK
|
(11,849)
|
|
(12,317)
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
$16,331
|
|
$49,359
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
Property and equipment - US
|
$1,113
|
|
$966
|
|
- UK
|
4,353
|
|
5,830
|
|
Total
|
$5,466
|
|
$6,796
|
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
$10,865
|
|
$42,563
|
In accordance with SFAS No. 109, the Company nets all current and non-current assets and liabilities by tax jurisdiction.
The gross amount of net operating losses in the US is $8,796,000, of which $755,000 expires in 2018, $523,000 expires in 2019, $1,087,000 expires in 2021, $414,000 expires in 2022, $1,783,000 expires in 2024, $3,840,000 expires in 2026 and $394,000 expires in 2027. The gross amount of net operating losses in the UK of $86,575,000 has no expiration date. The Company has provided a valuation allowance on the net operating loss carry forwards because it believes that it is more likely than not that those amounts will not be realized through taxable income in the foreseeable future. A full valuation allowance has been recorded for the total benefit of capital losses incurred in prior years, as the Company does not anticipate that the benefit will be realized in the foreseeable future through the recognition of capital gains.
The Company’s historical policy has been to leave its unremitted foreign earnings invested indefinitely outside the United States. The Company intends to continue to leave its unremitted foreign earnings invested indefinitely outside the United States. As a result, United States income taxes have not been provided on any accumulated foreign unremitted earnings as of December 31, 2007.
|
7.
|
LONG-TERM DEBT AND RELATED PARTY LOANS
|
|
|
2007
|
|
2006
|
|
|
$000
|
|
$000
|
|
New Financing
|
$59,200
|
|
$69,936
|
|
Warrants and Financing costs
|
(7,209)
|
|
(4,693)
|
|
Capital leases, net of current portion
|
97
|
|
707
|
|
Alconbury leases
|
23,341
|
|
23,201
|
|
|
$75,429
|
|
$89,151
|
66
|
Repayment Schedule
|
Total
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|
|
$000
|
$000
|
$000
|
$000
|
$000
|
$000
|
|
New Financing
|
59,200
|
-
|
-
|
59,200
|
-
|
-
|
|
Capital leases
|
97
|
97
|
-
|
-
|
-
|
-
|
|
Alconbury leases
|
23,341
|
-
|
-
|
-
|
-
|
23,341
|
|
|
$82,638
|
$97
|
$-
|
$59,200
|
$-
|
$23,431
|
|
|
|
|
|
|
|
|
Bank Loans and Non-Bank Loans
On January 20, 2001, the Company's non-bank loan of £22.6 million ($43.4 million approximately based on exchange rates at the time), 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 + 175 basis points. At the same time the Company was required to take all reasonable steps to sell off such of its real estate assets through sale/leaseback transactions and/or obtaining mortgage financing secured by the Company's real estate assets to discharge this loan. The loan was held by LSR Ltd. and was secured by the guarantees of the wholly owned subsidiaries of the Company including LSR Ltd., Huntingdon Life Sciences Ltd. and Huntingdon Life Sciences Inc., and collateralized by all the assets of these companies. On
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 up to 704,425 shares of LSR Voting Common Stock at a purchase price of $1.50 per share. These warrants were subsequently transferred to an unrelated third party. The LSR warrants are exercisable at any time and will expire on October 9, 2011. These warrants arose out of negotiations regarding the refinancing of the bank loan by the Stephens Group Inc., in January 2001. In accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants ("APB 14") the warrants were recorded at their pro rata fair values in relation to the proceeds received on the date of issuance and treated as a debt discount. The value of the warrants was $430,000. 154,425 of such warrants were exercised in 2004. No additional exercises were made to date.
On June 14, 2005, the Company entered into and consummated the Sale/Leaseback Transaction with Alconbury. Alconbury was newly formed in June 2005 and controlled 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 paid in full on June 30, 2006, together with accrued interest of $0.6 million. The Company agreed to pay the expenses incurred by Alconbury in the Sale/Leaseback Transaction of $4.6 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. Interest has been imputed on this
loan at 15% and a discount (expense) of $2.4 million was recorded by the Company on June 14, 2005. This $2.4 million is being ratably recorded as interest income over the seven year term of the loan.
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. The initial base aggregate annual rent for the facilities was $4.9 million (approximately $1.8 million in the US and approximately $3.1 million in the UK) which increases 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 was required to be paid at the time that Alconbury refinanced its financing arrangements. Additionally, because the leases are “triple net” leases, LSR also pays 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 controlling 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.
67
In evaluating the total consideration negotiated for this transaction, the committee took into consideration an assessment and review of the levels of consideration that were proposed to be paid by independent third party bidders over the prior several years for sale/leaseback transactions of the Company’s operating facilities in transactions that were proposed and negotiated but not ultimately consummated. The Committee also obtained appraisals of the facilities from independent real estate appraisal firms and a fairness opinion from an independent investment banking firm.
The proceeds from the Sale/Leaseback Transaction (plus additional cash on hand) were used by the Company to pay in full its £22.6 million non-bank debt (approximately $41.1 million based on exchange rates at the time).
In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the Company has reflected the consolidation of Alconbury from June 14, 2005 through June 29, 2006, the period in which the Company was considered the “primary beneficiary” of Alconbury’s variable interests. The Company has determined that as of June 29, 2006 it was no longer the primary beneficiary of Alconbury, and therefore was required to deconsolidate Alconbury’s assets and liabilities from the Company’s Condensed Consolidated Balance Sheet as of that date. Please refer to Note 3 for detail of the impact of this deconsolidation.
Due to the consolidation resulting from the Company’s adoption of FIN 46R, for the period of June 14, 2005 through June 29, 2006, the Company’s financial statements reflected a loan payable to an unrelated third party in the aggregate principal amount of $30 million. This loan had a maturity date of June 14, 2006, with the right to extend the term one additional year. The loan, carried an annual interest rate of 15%, was secured by first priority lien on all the assets, including the facilities, of Alconbury, and was also personally guaranteed by the owner of Alconbury. This loan was payable in twelve monthly installments of interest only, with a balloon payment of $30 million due on June 14, 2006. Alconbury refinanced this debt on a long-term basis on June 13, 2006 with an interest rate of 12%. However, due to the June 30, 2006 deconsolidation of Alconbury (see Note 3), the Company did not
reflect this new loan on the Condensed Consolidated Balance Sheet as at June 30, 2006.
On March 2, 2006, the Company entered into a $70 million loan (the “March 2006 Financing”) under the terms of a Financing Agreement dated March 1, 2006 with a third party lender. The borrower under the Financing Agreement is Huntingdon Life Sciences Limited and LSR and substantially all of LSR’s other subsidiaries guarantee all of the borrower’s obligations thereunder. The loan matures on March 1, 2011 and had an interest rate of LIBOR + 825 basis points (which reduced to LIBOR + 800 basis points upon the Company meeting certain financial tests). The Financing Agreement contains standard financial and business covenants, including, without limitation, reporting requirements, limitations on the incurrence of additional indebtedness, events of default, limitations on dividends and other payment restrictions and various financial ratio requirements. The loan is secured by substantially
all of the assets of the Company and the Company has in connection therewith entered into a customary Security Agreement and a customary Pledge and Security Agreement. On August 1, 2007 the Company entered into an amendment to its $70 million March 2006 Financing in which the principal amount was reduced to $60 million and the interest rate was reduced from the reduced rate of LIBOR + 800 basis points to LIBOR + 350 basis points. A closing fee of $4.3 million was paid to the lender in connection with this amendment which has been recorded as a deferred debt premium and is being amortized to interest expense over the remaining term of the loan. For financial statement presentation purposes, the unamortized amount of the closing fee has been netted against the loan in long-term debt. On November 30, 2007, the Company entered into a Second Amendment to the Financing Agreement in which certain financial covenants were modified and consent was given by the lender to permit
the Company to complete a fold-in acquisition.
As partial consideration for the March 2006 Financing, LSR issued to the lender 10 year warrants to acquire 500,000 shares of LSR’s common stock at an exercise price of $12.00 per share (such exercise price was determined by a premium formula based on LSR’s then-recent closing market prices). These warrants were fully vested on the closing date of the loan, March 2, 2006. Accordingly, the fair value of these warrants ($4,994,000) has been recorded as a deferred debt premium and is being amortized to interest expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been netted against the loan in long-term debt. Concurrent with the August 1, 2007 amendment to the loan, the Company repurchased 250,000 of these warrants for an aggregate consideration of $2,750,000. Accordingly, the lender now owns warrants to acquire 250,000
shares of LSR common stock at an exercise price of $12.00 per share.
68
In addition, as partial consideration for providing financial advisory services to assist the Company in obtaining the March 2006 Financing, LSR issued to its independent third party financial advisor 10 year warrants to acquire 300,000 shares of LSR common stock at an exercise price of $10.46 per share (the closing market price on the date the Company engaged the financial advisor). These warrants became fully vested on March 2, 2006, the closing date of the loan. The fair value of these warrants ($3,113,000) has been recorded as deferred financing costs and is being amortized to other expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been classified as other assets (non-current). Certain customary registration rights were granted in connection with these warrants. The warrants are subject to customary anti-dilution provisions.
Net proceeds from the March 2006 Financing were approximately $63 million and a portion of these proceeds were used to redeem the $46.2 million outstanding principal amount of the Company’s 7.5% Convertible Capital Bonds, which were due to mature in September 2006. The balance of the proceeds was held for general corporate purposes.
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 entered into and consummated the Sale/Leaseback Transaction with Alconbury. Alconbury was newly formed in June 2005 and controlled 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 paid in full on June 30, 2006, together with accrued interest of $0.6 million. The Company agreed to pay the expenses incurred by Alconbury in the Sale/Leaseback Transaction of $4.6 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. Interest has been imputed on this
loan at 15% and a discount (expense) of $2.4 million was recorded by the Company on June 14, 2005. This $2.4 million is being ratably recorded as interest income over the seven year term of the loan.
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. The initial base aggregate annual rent for the facilities was $4.9 million (approximately $1.8 million in the US and approximately $3.1 million in the UK) which increases 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 was required to be paid at the time that Alconbury refinanced its financing arrangements. Additionally, because the leases are “triple net” leases, LSR also pays 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 controlling 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. In evaluating the total consideration negotiated for this transaction, the committee took into consideration an assessment and review of the levels of consideration that were proposed to be paid by independent third party bidders over
the prior several years for sale/leaseback transactions of the Company’s operating facilities in transactions that were proposed and negotiated but not ultimately consummated. The Committee also obtained appraisals of the facilities from independent real estate appraisal firms and a fairness opinion from an independent investment banking firm.
69
|
8.
|
OTHER OPERATING EXPENSE
|
|
|
2007
$000
|
|
2006
$000
|
|
2005
$000
|
|
Litigation and other expenses associated with obtaining first time legal protections against Animal Rights Extremists
|
$-
|
|
$1,790
|
|
$-
|
|
Other exchange gains – intercompany balances
|
-
|
|
1,046
|
|
-
|
|
Amortization of financing costs
|
-
|
|
7,661
|
|
-
|
|
|
|
|
|
|
|
|
|
$-
|
|
$10,497
|
|
$-
|
|
|
|
|
|
|
|
|
9.
|
OTHER (EXPENSE)/INCOME
|
|
|
2007
$000
|
|
2006
$000
|
|
2005
$000
|
|
Exchange gain/(loss) on March 2006 Financing and Capital Bonds
|
$770
|
|
$6,210
|
|
$(5,144)
|
|
Other exchange gains – intercompany balances
|
169
|
|
692
|
|
518
|
|
Amortization of financing costs
|
(2,834)
|
|
(4,979)
|
|
(2,780)
|
|
|
|
|
|
|
|
|
|
$(1,895)
|
|
$1,923
|
|
$(7,406)
|
|
|
|
|
|
|
|
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Commitments
The Company leases certain equipment under various non-cancelable operating and capital leases. The Company is also obligated under purchase agreements, including long term power contracts. Finally Life Sciences Research Limited is obliged to make contributions to its defined benefit pension plan of £2.7 million ($5.4 million) per year, plus expenses estimated at £0.3 million ($0.6 million) a year for the next 8 years. These commitments are set out in the table below:
|
|
Year ended December 31
|
|
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013+
|
|
|
$000
|
$000
|
$000
|
$000
|
$000
|
$000
|
$000
|
|
Alconbury operating lease obligations (a)
|
$99,222
|
$2,549
|
$2,625
|
$2,704
|
$2,785
|
$2,869
|
$85,690
|
|
Operating leases
|
1,499
|
877
|
470
|
110
|
42
|
-
|
-
|
|
Alconbury capital lease obligations (a) (b)
|
137,812
|
3,151
|
3,245
|
3,343
|
3,443
|
3,546
|
121,084
|
|
Other capital lease obligations (b)
|
790
|
680
|
110
|
-
|
-
|
-
|
-
|
|
Purchase obligations
|
12,723
|
12,723
|
-
|
-
|
-
|
-
|
-
|
|
Pension plan contributions
|
47,775
|
5,972
|
5,972
|
5,972
|
5,972
|
5,972
|
17,915
|
|
Contingent acquisition
payments (c)
|
2,301
|
103
|
767
|
767
|
664
|
-
|
-
|
|
|
$302,122
|
$26,055
|
$13,189
|
$12,896
|
$12,906
|
$12,387
|
$224,689
|
|
|
|
|
|
|
|
|
|
(a) The Alconbury capital and operating lease contractual obligations include the fixed 3% per year rental increases on the UK leases, and an estimate of 3% for the future United States Consumer Price Index (CPI) increases required under the US lease.
(b) The Alconbury and Other capital lease contractual obligations reflected above include imputed interest.
70
(c) The purchase agreement, (see Note 5) contains contingent payment amounts. The amounts of the payments due under these provisions cannot be determined until the specific targets are attained.
Leases
In 2005, the Company entered into a sale-leaseback arrangement for its two UK and one US properties with a related party, Andrew Baker, the Company’s Chairman and CEO, as more fully described in Note 2 to the financial statements. The UK buildings and the US land and buildings were determined to be capital leases, while the land portion of the UK properties were determined to be operating leases under FASB No. 13. The gain of approximately $9.6 million on the sale of the US property has been deferred and is being amortized over the 30-year term of the lease. The leases on these properties are for 30 year terms and expire in 2035. The leases also have two 5-year renewal options under the same terms and conditions in effect under the leases immediately prior to the renewal periods. The annual rental payments on the US leases currently approximate $2.0 million and call for annual CPI increases. The
annual rental payments on the UK leases currently approximate $3.5 million and have fixed annual increases of 3% per year during the term of the lease. All of the Alconbury leases are "triple net" leases and the Company is required to pay for all of the costs associated with the operation of the facilities, including insurance, taxes and maintenance. The implicit interest rate on the Alconbury capital leases approximate 12.25%, representing the rate required to discount the future stream of rental payments to equal the appraised value of the properties at the date of the sale-leaseback transaction.
71
The following is a schedule by year of future minimum lease payments under capital leases, together with the present value of net minimum lease payments as of December 31, 2007:
|
|
Alconbury capital leases
|
|
Other capital leases
|
|
Total capital leases
|
|
|
$000
|
|
$000
|
|
$000
|
|
Total payments due
|
$137,812
|
|
$790
|
|
$138,602
|
|
Less amounts representing interest
|
(114,471)
|
|
(73)
|
|
(114,544)
|
|
Present value of net minimum lease payments
|
23,341
|
|
717
|
|
24,058
|
|
Less current portion of capital lease obligations
|
-
|
|
(618)
|
|
(618)
|
|
Non-current portion of capital lease obligations
|
$23,341
|
|
$99
|
|
$23,440
|
Depreciation expense on these capital leases amounted to
$1,284,000
, (of which
$778,000
related to the Alconbury capitalized leased assets) for the year ended December 31,
2007.
Operating lease expenses were as follows:
|
|
2007
|
2006
|
2005
|
|
|
$000
|
$000
|
$000
|
|
Alconbury operating leases
|
2,487
|
1,104
|
-
|
|
Plant and equipment
|
1,306
|
1,403
|
441
|
|
Other operating leases
|
220
|
209
|
418
|
Contingencies
The Company is party to certain legal actions arising out of the normal course of its business. In management's opinion, none of these actions will have a material effect on the Company's operations, financial condition or liquidity. No form of proceedings has been brought, instigated or is known to be contemplated against the Company by any government agency.
Common Stock
As of December 31,
2007
and 2006 LSR had outstanding
12,626,498
and 12,775,120 shares of Voting Common Stock of par value of $0.01 each respectively.
Stock based option plans
LSR 2001 Equity Incentive Plan (the "LSR 2001 Equity Incentive Plan")
The LSR Board has adopted the LSR 2001 Equity Incentive Plan. Adoption of the LSR 2001 Equity Incentive Plan enables LSR to use stock options (and other stock-based awards) as a means to attract, retain and motivate key personnel. This stock option plan was approved by the shareholders of LSR, prior to the acquisition of Huntingdon.
Awards under the LSR 2001 Equity Incentive Plan (which has designated the Compensation Committee for such purpose) may be granted by a committee designated by the LSR Board pursuant to the terms of the LSR 2001 Equity Incentive Plan and may include: (i) options to purchase shares of LSR Voting Common Stock, including incentive stock options ("ISOs"), non-qualified stock options or both; (ii) stock appreciation rights ("SARs"), whether in conjunction with the grant of stock options or independent of such grant, or stock appreciation rights that are only exercisable in the event of a change in control or upon other events; (iii) restricted stock consisting of shares that are subject to forfeiture based on the failure to satisfy employment-related restrictions; (iv) deferred stock, representing the right to receive shares of stock in the future; (v) bonus stock and awards in lieu of cash compensation; (vi)
dividend equivalents, consisting of a right to receive cash, other awards, or other property equal in value to dividends paid with
72
respect to a specified number of shares of LSR Voting Common Stock or other periodic payments; or (vii) other awards not otherwise provided for, the value of which are based in whole or in part upon the value of the LSR Voting Common Stock. Awards granted under the LSR 2001 Equity Incentive Plan are generally not assignable or transferable except pursuant to a will and by operation of law.
The flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among other things, permit the Compensation Committee to impose performance conditions with respect to any award, thereby requiring forfeiture of all or part of any award if performance objectives are not met or linking the time of exercisability or settlement of an award to the attainment of performance conditions. For awards intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the United States Internal Revenue Code such performance objectives shall be based solely on (i) annual return on capital; (ii) annual earnings or earnings per share; (iii) annual cash flow provided by operations; (iv) changes in annual revenues; (v) stock price; and/or (vi) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business
expansion goals, cost targets, and goals relating to acquisitions or divestitures.
LSR's Compensation Committee, which administers the 2001 LSR Equity Incentive Plan, has the authority, among other things, to: (i) select the directors, officers and other employees and independent contractors entitled to receive awards under the 2001 LSR Equity Incentive Plan; (ii) determine the form of awards, or combinations of awards, and whether such awards are to operate on a tandem basis or in conjunction with other awards; (iii) determine the number of shares of LSR Voting Common Stock or units or rights covered by an award; and (iv) determine the terms and conditions of any awards granted under the 2001 LSR Equity Incentive Plan, including any restrictions or limitations on transfer, any vesting schedules or the acceleration of vesting schedules, any forfeiture provision or waiver of the same and including any terms and conditions necessary or desirable to ensure the optimal tax result for
participating personnel and the Company including by way of example to ensure that there is no tax on the grant of the rights and that such tax only arises on the exercise of rights or otherwise when the LSR Voting Common Stock unconditionally vests and is at the disposal of such participating personnel. The exercise price at which shares of LSR Voting Common Stock may be purchased pursuant to the grant of stock options under the 2001 LSR Equity Incentive Plan is to be determined by the option committee at the time of grant in its discretion, which discretion includes the ability to set an exercise price that is below the fair market value of the shares of LSR Voting Common Stock covered by such grant at the time of grant.
The number of shares of LSR Voting Common Stock that may be subject to outstanding awards granted under the 2001 LSR Equity Incentive Plan (determined immediately after the grant of any award) may not exceed 20 percent of the aggregate number of shares of LSR Voting Common Stock then outstanding.
The 2001 LSR Equity Incentive Plan may be amended, altered, suspended, discontinued, or terminated by the LSR Board without LSR Voting Common Stockholder approval unless such approval is required by law or regulation or under the rules of any stock exchange or automated quotation system on which LSR Voting Common Stock is then listed or quoted. Thus, LSR Voting Common Stockholder approval will not necessarily be required for amendments, which might increase the cost of the plan or broaden eligibility. LSR Voting Common Stockholder approval will not be deemed to be required under laws or regulations that condition favorable tax treatment on such approval, although the LSR Board may, in its discretion, seek LSR Voting Common Stockholder approval in any circumstances in which it deems such approval advisable.
The LSR Board has designated the Compensation Committee of the Board to serve as the stock option committee. LSR made grants under the LSR 2001 Equity Incentive Plan on March 1, 2002 to certain directors and key employees at the time.
|
Grants to Directors
|
|
Name
|
Number Granted
|
|
Gabor
Balthazar
|
20,000
|
|
John Caldwell
|
20,000
|
|
Kirby Cramer
|
40,000
|
73
|
Grants to Named Executive Officers
|
|
Name
|
Number Granted
|
|
Andrew Baker
|
200,000
|
|
Mark Bibi
|
50,000
|
|
Brian Cass
|
200,000
|
|
Julian Griffiths
|
60,000
|
|
Richard Michaelson
|
90,000
|
All such options have ten-year terms; 50% of the shares subject to grant are immediately exercisable with the remaining 50% exercisable one year after the grant date (meaning all such options fully vested as of March 1, 2003); and all have an exercise price of $1.50 per share, the price at which the Company sold shares of Common Stock in the Private Placement. Options to purchase an aggregate of 1,188,000 shares of LSR Common Stock (including those specified above) were granted during the two years 2002 and 2003 to employees and directors, on the terms set forth above, are listed below.
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
March 1, 2002
|
1,142,000
|
$1.50
|
|
September 3, 2002
|
20,000
|
$2.40
|
|
October 21, 2002
|
15,000
|
$2.03
|
|
February 14, 2003
|
11,000
|
$1.80
|
|
|
|
|
|
In 2004, in addition to the options granted under the 2004 LTIP referred to below, options to purchase an aggregate of 67,100 shares of LSR Common Stock were issued, all at exercise prices equal to the market price at the date of grant, on the terms set forth in the previous paragraph, are listed below.
|
|
|
|
|
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
April 12, 2004
|
37,100
|
$1.85
|
|
October 28, 2004
|
17,400
|
$7.70
|
|
December 15, 2004
|
12,600
|
$9.52
|
74
In 2005, options to purchase an aggregate of 23,600 shares of LSR Common Stock were issued, all at exercise prices equal to the market price at the date of grant, on the terms set forth above, are listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
May 23, 2005
|
3,600
|
$12.00
|
|
June 27, 2005
|
20,000
|
$11.00
|
In May 2006, options to purchase an aggregate of 48,900 shares LSR Common Stock were issued, all at exercise prices equal to the market price at the date of grant, with ten-year terms; 50% of the shares exercisable one year after grant date and with the remaining 50% exercisable two years after the grant date (meaning all such options fully vested as of May 16, 2008), listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
May 16, 2006
|
48,900
|
$9.25
|
In June 2006, options to purchase an aggregate of 7,500 shares of LSR Common Stock were issued, all at exercise prices equal to the market price at the date of grant, on the terms set forth above, which are listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
June 8, 2006
|
7,500
|
$10.75
|
In addition in June 2006, a total of 7,500 shares of the Company’s common stock were issued to non-management directors of the Company.
In December 2006, options to purchase an aggregate of 480,000 shares LSR Common Stock were issued, all at exercise prices equal to the average daily high for the five trading days leading up to the date of grant, with ten-year terms; 50% of the shares exercisable on December 31, 2008 and with the remaining 50% exercisable on December 31, 2009, listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
December 6, 2006
|
480,000
|
$9.95
|
In addition in December 2006, a total of 100,000 shares of the Company’s common stock were awarded to two of the executive officers of the Company (50,000 each to Richard Michaelson and Mark Bibi).
In January 2007, options to purchase an aggregate of 5,000 shares LSR Common Stock were issued, all at exercise prices equal to the average daily high for the five trading days leading up to the date of grant, with ten-year terms; 50% of the shares exercisable on December 31, 2008 and with the remaining 50% exercisable on December 31, 2009, listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
January 9, 2007
|
5,000
|
$13.79
|
In December 2007, options to purchase an aggregate of 5,000 shares LSR Common Stock were issued, all at exercise prices equal to the market price at the date of grant, with ten-year terms; 50% of the shares exercisable on December 31, 2008 and with the remaining 50% exercisable on December 31, 2009, listed below:
|
Date of Grant
|
Numbers Granted
|
Exercise Price
|
|
December 19, 2007
|
5,000
|
$19.50
|
75
2004 Long Term Incentive Plan
Effective June 1, 2004 the Company adopted the 2004 Long Term Incentive Plan (“2004 LTIP”), pursuant to the terms of the 2001 Equity Incentive Plan. The 2004 LTIP had two components: a grant of stock options, with a vesting date of March 31, 2007, and a cash bonus to be awarded in 2007 based on 2006 Company financial performance. Based upon the 2006 performance no cash bonus was awarded.
Options to purchase an aggregate of 362,663 shares of common stock were granted to 32 key employees of the Company as of June 1, 2004 under the 2004 LTIP; 55,500 of such options were granted to Andrew Baker, the Company’s Chairman and CEO, 55,500 of such options were granted to Brian Cass, the Company’s Managing Director and President, 30,303 of such options were granted to Richard Michaelson, the Company’s CFO, 27,750 of such options were granted to Julian Griffiths, the Company’s Vice President of Operations and 20,455 were granted to Mark Bibi, the Company’s General Counsel and Secretary. The exercise price of all such options is $3.30, the market price of LSR common stock on June 1, 2004. All such options have ten-year terms and are exercisable in full on March 31, 2007. At December 31, 2007, 318,123 shares under the 2004 LTIP option plan were outstanding and were exercisable.
|
The following table summarizes stock option activity under the Company’s option plans.
|
|
|
Shares
(000)
|
|
Wtd Avg. Ex Price
|
|
Number of securities remaining available for future issuance
|
|
Outstanding - December 31, 2006
|
1,789
|
|
$4.62
|
|
|
|
Granted
|
10
|
|
$16.65
|
|
|
|
Lapsed
|
(2)
|
|
$7.70
|
|
|
|
Exercised
|
(88)
|
|
$2.70
|
|
|
|
Outstanding - December 31, 2007
|
1,709
|
|
$4.78
|
|
490,000
|
|
Exercisable at end of year
|
1,194
|
|
|
|
|
|
Weighted average fair value per option granted in 2007 was
|
$14.75
|
|
|
|
|
Warrants
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc. warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a purchase price of $1.50 per share. Stephens Group Inc. subsequently sold the warrants to independent third parties. The LSR warrants are exercisable at any time and will expire on October 9, 2011. These warrants arose out of negotiations regarding the refinancing of the bank loan by the Stephens Group Inc., (“Stephens’ Loan”) in January 2001. In accordance with APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants ("APB 14") the warrants were recorded at their pro rata fair values in relation to the proceeds received on the date of issuance. As a result the value of the warrants was $430,000. 154,425 of such warrants were exercised in 2004. No additional exercises have been made to date.
On June 11, 2002 LSR issued to FHP warrants to purchase up to 410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per share. The LSR warrants are exercisable at any time and will expire on June 11, 2012. These warrants arose out of negotiations regarding the provision of the $2.9 million loan facility made available to the Company on September 25, 2000 by Mr. Baker, who controls FHP. In accordance with APB 14 the loan and warrants were recorded at their pro rata fair values in relation to the proceeds received. As a result, the value of the warrants was $250,000. None of these warrants have been exercised as of December 31, 2007.
On October 24, 2003, 100,000 warrants were issued to an independent consultant at the market price on the day of $2.05. 50,000 of these were exercisable on the first business day following the date of grant and 50,000 became exercisable on June 15, 2005, the business day following the closing date on which the Company’s non-bank debt became refinanced. None of these warrants have been exercised as of December 31, 2007.
76
On January 4, 2005 100,000 warrants were issued at the market price on the day of $10.70. 50,000 were exercisable from January 4, 2007 but later accelerated to August 8, 2005, and 50,000 from January 4, 2008. In all cases, these warrants were issued to independent consultants in connection with financial and strategic advice.
On November 9, 2005 625,000 warrants were issued to a third party advisory/lobbying firm at the closing market price on the day of $10.46. These warrants fully vested on December 26, 2006 following the successful completion of the specific goal outlined in the engagement letter with such firm, namely the listing of the Company’s common stock on the NYSE. Accordingly, the fair value of these warrants ($7,661,000) has been recorded in other operating expense. On August 30, 2007 the Company repurchased 312,500 of these warrants for an aggregate consideration of $3,593,750. Accordingly, the third party advisory/lobbying firm now owns warrants to acquire 312,500 shares of LSR common stock at an exercise price of $10.46 per share.
On November 9, 2005 300,000 warrants were issued to an independent third party financial advisor as partial consideration for providing financial advisory services to the Company in obtaining financing. These were issued at an exercise price of $10.46 per share, the closing market price on the date the Company engaged the financial advisor. These warrants became fully vested on March 2, 2006, the closing date of the loan. The fair value of these warrants ($3,113,000) has been recorded as deferred financing costs and is being amortized to other expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been classified as other assets (non-current). Certain customary registration rights were granted in connection with these warrants. The warrants are subject to customary anti-dilution provisions.
As partial consideration for the March 2006 Financing, LSR issued to the lender 10 year warrants to acquire 500,000 shares of LSR’s common stock at an exercise price of $12.00 per share (such exercise price was determined by a premium formula based on LSR’s then-recent closing market prices). These warrants were fully vested on the closing date of the loan, March 2, 2006. Accordingly, the fair value of these warrants ($4,994,000) has been recorded as a deferred debt premium and is being amortized to interest expense over the term of the loan. For financial statement presentation purposes, the unamortized amount of these warrants has been netted against the loan in long-term debt. Concurrent with the August 1, 2007 amendment to the loan, the Company repurchased 250,000 of these warrants for an aggregate consideration of $2,750,000. Accordingly, the lender now owns warrants to acquire 250,000
shares of LSR common stock at an exercise price of $12.00 per share.
A summary of warrants outstanding at December 31, 2007 is as follows:
|
Date of Issue
|
Warrants
|
Exercise Price
|
Expiration Date
|
|
October 9, 2001
|
550,000
|
$1.50
|
October 9, 2011
|
|
June 11, 2002
|
410,914
|
$1.50
|
June 11, 2012
|
|
October 24, 2003
|
100,000
|
$2.05
|
October 24, 2013
|
|
November 9, 2005
|
312,500
|
$10.46
|
November 9, 2010
|
|
November 9, 2005
|
300,000
|
$10.46
|
November 9, 2015
|
|
March 1, 2006
|
250,000
|
$12.00
|
March 2, 2016
|
77
The Company operated the Huntingdon Life Sciences Pension and Life Assurance Scheme, subsequently renamed “LSR Pension and Life Assurance Scheme” (the “Plan”) through to December 31, 2002. The Plan had been closed to new entrants from April 5, 1997 and as of December 31, 2002, the accumulation of plan benefits of employees in the scheme was permanently suspended, and therefore, the Plan was curtailed.
The components of the net periodic cost of the Plan for the years ended December 31, are as follows:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
$000
|
|
$000
|
|
$000
|
|
Interest cost on projected benefit obligation
|
$9,934
|
|
$8,565
|
|
$7,960
|
|
Expected return on plan assets
|
(12,209)
|
|
(10,042)
|
|
(8,836)
|
|
Amortization of transition asset
Amortization of actuarial loss
|
|
|
-
2,525
|
|
-
2,899
|
|
-
1,627
854
|
|
Net periodic cost
|
|
$250
|
|
$1,422
|
|
$751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The major assumptions used in calculating the pension expense were:
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
|
|
5.0%
|
|
5.0%
|
|
5.5%
|
|
Rate of increase of future compensation
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Long-term rate of return on plan assets
|
|
8.0%
|
|
8.0%
|
|
8.0%
|
The overall expected return on the Plan assets for 2007 was the average of 4.75% per annum expected for debt securities and 9.0% per annum for equity securities and other assets held. The expected returns were based on market yields at the measurement date. Expected returns on the equity and ‘other’ assets allowed for expected economic growth.
78
A reconciliation of the projected benefit obligation for the Plan to the accrued pension expense recorded as of December 31 is as follows:
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
$000
|
|
$000
|
|
$000
|
|
Projected benefit obligation
|
|
$(201,464)
|
|
$(196,402)
|
|
$(169,640)
|
|
Plan assets at market value
|
|
|
157,942
|
|
148,750
|
|
116,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$(43,522)
|
|
$(47,652)
|
|
$(53,335)
|
|
Unrecognized net actuarial loss
|
58,681
|
|
56,684
|
|
57,472
|
|
Adjustment for minimum liability - pretax
|
|
|
(58,681)
|
|
(56,684)
|
|
(57,472)
|
|
Unrecognized net asset at transition
|
-
|
|
-
|
|
-
|
|
Accrued pension expense
|
$(43,522)
|
|
$(47,652)
|
|
$(53,335)
|
|
Change in plan assets
|
|
|
Fair value of assets, beginning of year
|
|
$148,750
|
|
$116,305
|
|
$118,054
|
|
Foreign currency changes
|
|
2,539
|
|
16,286
|
|
(12,489)
|
|
Actual gain on plan assets
|
|
5,886
|
|
15,552
|
|
15,039
|
|
Employer contributions
|
|
6,221
|
|
5,827
|
|
687
|
|
Benefit payments
|
|
(5,454)
|
|
(5,220)
|
|
(4,986)
|
|
Fair value of assets, end of year
|
|
$157,942
|
|
$148,750
|
|
$116,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in projected benefit obligations
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
|
$196,402
|
|
$169,640
|
|
$154,613
|
|
Foreign currency changes
|
|
3,352
|
|
23,754
|
|
(16,356)
|
|
Interest cost
|
|
9,881
|
|
9,095
|
|
7,511
|
|
Actuarial (gains)/losses
|
|
(2,717)
|
|
(867)
|
|
28,858
|
|
Benefit payments
|
|
(5,454)
|
|
(5,220)
|
|
(4,986)
|
|
Projected benefit obligation, end of year
|
|
$201,464
|
|
$196,402
|
|
$169,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Plan assets and projected benefit obligations have been converted from pounds sterling to US dollar using year end exchange rates.
The major assumptions used in calculating the pension obligations were:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
5.75%
|
|
5%
|
|
4.75%
|
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
The accumulated benefit obligation is the same as the projected benefit obligation as the Plan has been curtailed.
The Trustee of the Plan aims to invest with a broad split of 60/40 between its two fund managers. The first manager invests in unit funds that hold portfolios of shares (64%), hedge funds (20%) and property funds (16%). The second manager invests in funds holding predominantly index-linked bonds, gilts and investment grade and sub investment grade corporate bonds (47% in total) and in a fund of UK equities designed to track the FTSE All-Share Index (53%). These percentages are approximate and kept under review.
79
The Plan target split of investment types is as follows:
|
Equity Securities
|
59%
|
|
Debt Securities
|
27%
|
|
Real Estate
|
5%
|
|
Other
|
9%
|
|
Total
|
100%
|
The asset allocation is weighted towards equity investment while the liability profile contains a greater proportion of monetary liabilities. The investment stance has been undertaken in expectation of higher long-term returns, but is kept under review by the Trustee. Over the year the Trustee has continued to reduce its exposure to equities investing in commercial property and ‘absolute return’ products, so as to increase the range of investments used by the Plan. In principle, this wider range of assets should help maintain the overall portfolio return, whilst reducing variability (and hence reduce the risk to the Plan).
The Plan weighted average asset allocations at December 31,
2007
and 2006, by asset category are as follows:
|
|
2007
|
|
2006
|
|
Equity Securities
|
57%
|
|
58%
|
|
Debt Securities
|
28%
|
|
26%
|
|
Real Estate
|
6%
|
|
8%
|
|
Other
|
9%
|
|
8%
|
|
Total
|
100%
|
|
100%
|
The Company expects to contribute $5,375,000 (£2,700,000) plus expenses to the Plan in 2008. The following benefit payments are expected to be paid in each of the next five years, and in aggregate for the following five years thereafter.
|
|
Pension Benefits
$000s
|
|
2008
|
4,517
|
|
2009
|
4,738
|
|
2010
|
4,899
|
|
2011
|
5,142
|
|
2012
|
5,444
|
|
2013 - 2017
|
34,091
|
On April 6, 1997 the Company established a defined contribution plan, the Group Personal Pension Plan, for Company employees in the UK. Additionally, a defined contribution plan (401-K plan) is also available for employees in the US. The retirement benefit expense for these plans for the year ended December 31,
2007
, 2006 and 2005 were
$3.6 million
, $2.7 million and $3.3 million respectively.
|
13.
|
GEOGRAPHICAL ANALYSIS
|
During each of the years ended December 31,
2007
, 2006 and 2005, the Company operated from within two segments based on geographical markets, the United Kingdom and the United States. The Company had one continuing activity, Contract Research, throughout these periods.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Transactions between segments, which are immaterial, are carried out on an arms-length basis. Interest income, interest expense and income taxes are also not reported on an operating segment basis because they are not considered in the performance evaluation by the Company's chief operating decision-maker.
80
Geographical segment information is as follows:
|
|
|
US
$000
|
UK
$000
|
Corporate
$000
|
Total
$000
|
|
2007
|
Net revenues
|
$49,865
|
$186,935
|
$-
|
$236,800
|
|
|
Operating income before other operating income/(expense)
|
8,309
|
34,951
|
(11,385)
|
31,875
|
|
|
Operating income
|
8,309
|
34,951
|
(11,385)
|
31,875
|
|
|
Long-lived assets (A)
|
43,017
|
119,349
|
2,994
|
165,360
|
|
|
Property and equipment, net
|
23,159
|
47,791
|
44
|
70,994
|
|
|
Depreciation and amortization
|
1,756
|
7,747
|
16
|
9,519
|
|
|
Capital expenditure
|
3,834
|
12,560
|
45
|
16,439
|
|
|
Total assets
|
43,921
|
154,640
|
3,022
|
201,583
|
|
|
|
|
|
|
|
|
2006
|
Net revenues
|
$41,138
|
$151,079
|
$-
|
$192,217
|
|
|
Operating income before other operating income/(expense)
|
5,268
|
21,676
|
(6,875)
|
20,069
|
|
|
Operating income
|
5,268
|
21,676
|
(17,372)
|
9,572
|
|
|
Long-lived assets (A)
|
37,827
|
141,216
|
7,448
|
186,491
|
|
|
Property and equipment, net
|
21,082
|
42,535
|
13
|
63,630
|
|
|
Depreciation and amortization
|
1,700
|
7,798
|
16
|
9,514
|
|
|
Capital expenditure
|
2,025
|
11,068
|
-
|
13,093
|
|
|
Total assets
|
39,781
|
183,312
|
7,486
|
230,579
|
|
|
|
|
|
|
|
|
2005
|
Net revenues
|
$36,959
|
$135,054
|
$-
|
$172,013
|
|
|
Operating income before other operating expense
|
5,239
|
22,531
|
(6,751)
|
21,019
|
|
|
Operating income
|
5,239
|
22,531
|
(6,751)
|
21,019
|
|
|
Long-lived assets (A)
|
21,569
|
134,436
|
12,874
|
168,879
|
|
|
Property and equipment, net
|
11,139
|
94,448
|
18
|
105,605
|
|
|
Depreciation & amortization
|
1,598
|
7,971
|
12
|
9,581
|
|
|
Capital expenditure
|
2,795
|
13,178
|
-
|
15,973
|
|
|
Total assets
|
25,771
|
143,881
|
14,717
|
184,369
|
|
(A) Long-lived assets exclude cash and cash equivalents and unamortized costs of raising long-term debt.
|
81
Net revenues from customers (based on location of customers)
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
$000
|
|
$000
|
|
$000
|
|
United States
|
|
|
$69,517
|
|
$53,215
|
|
$46,758
|
|
Europe
|
|
118,258
|
|
109,668
|
|
87,520
|
|
Rest of World
|
49,025
|
|
29,334
|
|
37,735
|
|
|
|
|
|
$236,800
|
|
$192,217
|
|
$172,013
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
Balance
at beginning of period
|
Effects of Foreign Exchange
|
Additions/ Charged to Expense
|
Deductions
|
Balance
at end of period
|
|
|
$000
|
$000
|
$000
|
$000
|
$000
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
Accounts receivable allowances (1)
|
691
|
6
|
340
|
538
|
1,575
|
|
Valuation allowance for deferred tax asset
|
12,317
|
(749)
|
37,460
|
-
|
49,028
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Accounts receivable allowances (1)
|
618
|
78
|
133
|
(138)
|
691
|
|
Valuation allowance for deferred tax asset
|
10,739
|
1,509
|
69
|
-
|
12,317
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Accounts receivable allowances (1)
|
255
|
(18)
|
125
|
256
|
618
|
|
Valuation allowance for deferred tax asset
|
16,373
|
(1,470)
|
(4,164)
|
-
|
10,739
|
(1) – Allowances are for doubtful accounts and chargebacks
|
15.
|
UNAUDITED QUARTERLY FINANCIAL INFORMATION
|
The following is a summary of unaudited quarterly financial information for the 12 months ended December 31,
2007
and December 31, 2006.
|
|
|
Year ended December 31, 2007
|
Quarter Ended
|
|
|
March 31
|
June 30
|
September 30
|
December 31
|
|
|
$000
|
$000
|
$000
|
$000
|
|
|
|
|
|
|
|
Net revenues
|
$54,297
|
$58,191
|
$60,874
|
$63,438
|
|
Cost of sales
|
(40,283)
|
(40,411)
|
(42,525)
|
(42,571)
|
|
Gross profit
|
14,014
|
17,780
|
18,349
|
20,867
|
|
Selling and administrative expense
|
(7,795)
|
(10,254)
|
(9,777)
|
(11,309)
|
|
Other operating (expense)/income
|
-
|
-
|
-
|
-
|
|
Operating income
|
6,219
|
7,526
|
8,572
|
9,558
|
|
Interest income
|
382
|
803
|
506
|
480
|
|
Interest expense
|
(3,460)
|
(3,482)
|
(3,039)
|
(2,950)
|
|
Other (expense)/income
|
(439)
|
708
|
15
|
(2,179)
|
|
|
|
|
|
|
|
Income before taxes
|
2,702
|
5,555
|
6,054
|
4,909
|
82
|
Income tax benefit/(expense)
|
752
|
(46)
|
(185)
|
(33,715)
|
|
|
|
|
|
|
|
Net income/(loss)
|
$3,454
|
$5,509
|
$5,869
|
$(28,806)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share
|
$0.27
|
$0.43
|
$0.47
|
$(2.28)
|
|
|
|
Year ended December 31, 2006
|
Quarter Ended
|
|
|
March 31
|
June 30
|
September 30
|
December 31
|
|
|
$000
|
$000
|
$000
|
$000
|
|
|
|
|
|
|
|
Net revenues
|
$42,455
|
$47,851
|
$49,460
|
$52,451
|
|
Cost of sales
|
(31,758)
|
(35,125)
|
(36,388)
|
(39,430)
|
|
Gross profit
|
10,697
|
12,726
|
13,072
|
13,021
|
|
Selling and administrative expense
|
(6,671)
|
(7,881)
|
(7,334)
|
(7,561)
|
|
Other operating (expense)/income
|
-
|
-
|
-
|
(10,497)
|
|
Operating income/(loss)
|
4,026
|
4,845
|
5,738
|
(5,037)
|
|
Interest income
|
258
|
273
|
437
|
543
|
|
Interest expense
|
(2,963)
|
(3,932)
|
(3,162)
|
(4,021)
|
|
Other (expense)/income
|
(971)
|
2,234
|
(913)
|
1,573
|
|
|
|
|
|
|
|
Income/(loss) before taxes
|
350
|
3,420
|
2,100
|
(6,942)
|
|
Income tax benefit/(expense)
|
120
|
(2,283)
|
579
|
8,440
|
|
|
|
|
|
|
|
Income before loss on deconsolidation of variable interest entity
|
470
|
1,137
|
2,679
|
1,498
|
|
Loss on deconsolidation of variable interest entity (net of income tax benefit of $22,218)
|
-
|
(20,656)
|
-
|
-
|
|
|
|
|
|
|
|
Net income/(loss)
|
$470
|
$(19,519)
|
$2,679
|
$1,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share
|
$0.04
|
$(1.54)
|
$0.21
|
$0.12
|
None.
83