Form
10-K for
LIFE SCIENCES RESEARCH INC
size=1
noshade>28-Mar-2003
Annual Report
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following should be read in conjunction with the consolidated financials
statements of LSR as presented in “Item 8, Financial Statements and Supplemental
Data”.
LSR is one of the world’s leading providers of pre-clinical and non-clinical
safety testing services to the pharmaceutical, agrochemical and industrial
chemical industries. The Company provides those services under contracts, which
may range from one day to three years. Income from these contracts is recognized
as services are rendered towards the preparation of the final report. Contracts
are generally terminable upon notice by the client with the client being
responsible for reimbursing the Company for the value of work performed to the
date of cancellation plus the value of work required to wind down a study on an
orderly basis.
The Company’s business is characterized by high fixed costs, in particular staff
and facility related costs. Such a high proportion creates favorable conditions
for the Company as excess capacity is utilized, such as has been the case during
the last two years. However, during periods of declining revenue, careful
planning is required to reduce costs without impairing revenue-generating
activities.
RESULTS OF OPERATIONS
Year ended December 31, 2002 compared with the year ended December 31, 2001
Revenues in the year ended December 31, 2002 were $115.7 million, an increase of
17% on revenues of $99.2 million for the year ended December 31, 2001. The
underlying increase, after adjusting for the impact of the movement in exchange
rates was 13%; with the UK showing a 15% increase and the US a 7% increase. The
year 2002 saw a record growth in orders, representing an increase of 25% over
last year. At December 31, 2002, backlog amounted to approximately $95 million.
Cost of sales in the year ended December 31, 2002 were $93.4 million, an
increase of 11% on cost of sales of $84.1 million for the year ended December
31, 2001. This increase was partly due to exchange rate movements, which
increased cost of sales in the year by $3.0 million. Without these movements
cost of sales would have increased by 8%. In the UK cost increases in sterling
were only 8%, which is lower than the revenue growth as capacity is filled
without the corresponding increase in fixed costs. The main increase was in
labor costs reflecting actions taken to adjust salaries to allow retention and
recruitment of key employees. Increases in costs in the US were only 3%, mainly
due to lower increases in direct materials costs compared to the UK.
Selling and administrative expenses rose by 13% to $18.1 million for the year
ended December 31, 2002 from $16.0 million in the year ended December 31, 2001.
Of this increase, $0.6 million related to exchange rate movements. This growth
was due to a continuation of the build-up of the sales activity during the year
and higher labor costs.
There were no other operating expenses in the year ended December 31, 2002,
compared with $0.75 million in the year ended December 31, 2001. In the year
ended December 31, 2001, other operating expenses comprised $0.4 million in
connection with specific legal actions taken against animal rights groups and
$0.35 million in connection with the write off of foreign exchange dealings
resulting from the bankruptcy of an exchange broker.
Interest expense declined by 5% to $6.3 million for the year ended December 31,
2002 from $6.6 million in the year ended December 31, 2001. The main reasons for
the reduction are the repayment of the former Stephens’ loan and Baker loan, the
repurchase of $2.4 million (principal amount) of the bonds, together with lower
interest rates on the non-bank debt (down from an average in 2001 of 7.13% to
5.77% in 2002).
Other income of $4.9 million for the year ended December 31, 2002 comprised $5.0
million from the non-cash foreign exchange remeasurement gain on the Capital
Bonds denominated in US dollars (the functional currency of the financing
subsidiary that holds the bonds is UK sterling); a $1.2 million gain was made on
the partial repurchase of the Capital Bonds; offset against these was a $1.3
million charge relating to the finalization of the Exchange Offer. In the year
ended December 31, 2001 there were other operating expenses of $4.5 million
which comprised of non-cash foreign exchange remeasurement loss on the Capital
Bonds of $1.4 million; $2.9 million relating to the Exchange Offer; and $0.2
million to the write off of the unamortized refinancing costs.
Taxation charge on income for the year ended December 31, 2002 was $0.3 million
representing a charge at 8% compared to a taxation benefit of $3.0 million
representing benefit at 26% for the year ended December 31, 2001. A
reconciliation between the US statutory tax rate and the effective rate of
income tax benefit on losses before income taxes for the year ended December 31,
2002 and December 31, 2001 is shown below:
% of income/(loss)
before income taxes
2002 2001
% %
US statutory rate 35 (35)
Foreign rate differential (9) 6
Non-deductible items including foreign exchange loss (31) 3
State taxes 2 -
Prior year adjustments 11 -
---------------- -------------
Effective tax rate 8 (26)
---------------- --------------
The overall net income for the year ended December 31, 2002 was $2.7 million
compared to a loss of $9.6 million in the year ended December 31, 2001. The
diluted income per share for the year ended December 31, 2002 was $0.24 compared
to a diluted loss per share of $(1.64) for the year ended December 31, 2001.
Excluding other income and expense, net of income tax, the income/(loss) per
share would have been a net loss per share of $(0.20) for the year ended
December 31, 2002 and $(0.96) for the year ended December 31, 2001.
Year ended December 31, 2001 compared with year ended December 31, 2000
Revenues for the year ended December 31, 2001 at $99.2 million were just over 3%
above the revenues for the year ended December 31, 2000 of $96.0 million,
continuing the improvement shown in the prior year. The underlying increase,
after adjusting for the impact of the movement in exchange rates, was nearly 9%.
2001 saw a 9% growth in orders with the return of client confidence after the
refinancing in January 2001. The backlog at the end of the year was
approximately $73 million.
Cost of sales for the year ended December 31, 2001 of $84.1 million compared
with $80.7 million for the year ended December 31, 2000, an increase of just
over 4%. Again, after allowing for the impact of the movement in exchange rates,
the underlying increase was approximately 10%. The main reasons for the increase
in costs relate to the increase in business volume, salary increases,
particularly in the UK, to reflect market rates, and recruitment costs
reflecting the shortage of qualified staff in the market place.
Selling and administration costs for the year ended December 31, 2001 at $16.0
million were 6% up on the costs for the year ended December 31, 2000 of $15.1
million. After allowing for the impact of exchange rate movements the underlying
cost increase was 11%. The increase was mainly due to increased sales activity
with additional staff of $0.4 million ; increases in insurance costs of $0.2
million; and banking costs of $0.1 million. Excluding these items, the increase
was just over 1%.
In 2001, other operating expenses comprised a write off in connection with
foreign exchange dealings resulting from the bankruptcy of an exchange broker of
$0.35 million and specific legal and other costs incurred in connection with the
Animal Rights campaign of $0.4 million.
Net interest costs for the year ended December 31, 2001 were $6.5 million
compared with $7.2 million for the year ended December 31, 2000. The effect of
exchange rates movements reduced the charge for the year by $0.4 million; a
reduction in the facility renewal fees once the refinancing had been completed
in January 2001 reduced the charge by a further $0.6 million. These were offset
by an increase in interest costs of $0.3 million resulting from the increase in
borrowings from $85.5 million to $88.1 million.
Other expense of $4.5 million for the year ended December 31, 2001 comprised of
non-cash foreign exchange remeasurement losses on the Capital Bonds denominated
in US dollars of $1.4 million. The functional currency of the financing
subsidiary that holds the bonds is the UK pound sterling. In addition, it
includes $2.9 million relating to the Exchange Offer and $0.2 million relating
to the write off of the unamortized refinancing costs. This expense compares
with other expense of $5.4 million for the year ended December 31, 2000, which
comprised costs of $1.8 million incurred in the refinancing of the Company’s
bank debt, and $3.6 million, which was the result of non-cash foreign exchange
remeasurement losses on the Capital Bonds.
Taxation benefit on loss for the year ended December 31, 2001 was $3.0 million
representing benefit at 26% compared to $2.7 million representing benefit at 22%
in the previous year. A reconciliation between the US statutory tax rate and the
effective rate of tax benefit on losses before taxes for the year ended December
31, 2001 and December 31, 2000 is shown below.
% of loss before
income taxes
2001 2000
% %
US statutory rate 35 35
Foreign rate differential (6) (5)
Non deductible foreign exchange loss (3) (4)
Prior year adjustments - (4)
------------ -----------
26 22
------------ -----------
The resultant net loss for the year ended December 31, 2001 was $9.6 million
compared with $9.8 million the previous year. Diluted loss per share for the
year ended December 31, 2001 was $1.64 compared with $1.68 in the year ended
December 31, 2000.
SEGMENT ANALYSIS
The analysis of the Company’s revenues and operating loss between segments for
the three years ended December 31, 2002 is as follows:
Company 2002 2001 2000
$000 $000 $000
Revenues
UK 90,851 75,705 73,035
US 24,891 23,501 22,929
----------- ------------- -------------
$115,742 $99,206 $95,964
----------- ------------- -------------
Operating income/(loss) before other
operating expenses
UK 3,963 (784) (1,615)
US 301 (109) 1,699
----------- ------------- -------------
$4,264 $(893) $84
----------- ------------- -------------
Other operating expense
UK - (750) -
US - - -
----------- ------------- -------------
$- $(750) $-
----------- ------------- -------------
Operating income/(loss)
UK 3,963 (1,534) (1,615)
US 301 (109) 1,699
----------- ------------- -------------
$4,264 $(1,643) $84
----------- ------------- -------------
The performance of each segment is measured by revenues and by operating
income/(loss) before other operating expenses.
UK
Revenues increased by 20% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. After allowing for the effect of exchange rate
movements the increase was over 15%. This was a result of continued growth in
orders.
The operating income before other operating (expenses)/income for the year ended
December 31, 2002 was $4.0 million compared to an operating loss of $0.8 million
in the year to December 31, 2001. The increase in revenues had the major impact
on the improvement in operating income, with the filling of capacity without the
corresponding increase in fixed costs. There were some additional costs,
including salary increases both to reflect market rates and additional staff
($2.6 million); and a reduction in exchange gains ($0.2 million).
Revenues increased by 4% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. After allowing for the effect of exchange rate
movements, revenues increased by 9%.
The operating loss before other operating expenses for the year ended December
31, 2001 was $0.8 million compared to $1.6 million in the year ended December
31, 2000. The increase in revenues reduced the losses, but this was partially
offset by additional costs. These included salary increases to reflect market
rates; recruitment costs reflecting the shortage of qualified staff in the
market place; increased sales activity with additional staff ($0.35 million) and
a reduction in exchange gains ($0.9 million).
US
Revenues increased by 5.9% in the year ended December 31, 2002 compared to the
year ended December 31, 2001. This increase in the rate of growth of revenues
was due to a recovery in orders after the reduction level last year. Revenues
from the US toxicology operations remained constant, but revenues derived from
the analysis of samples from clinical trials returned to their more normal
levels following the decrease last year.
Operating (loss)/income before other operating expense improved from a loss of
$0.1 million in the year ended December 31, 2001 to a income of $0.3 million in
the year ended December 31, 2002. This was as a result of the increased
revenues.
Revenues increased by 2.5% in the year ended December 31, 2001 compared to the
year ended December 31, 2000. This reduction in the rate of growth of revenues
was due to a decline in orders after two years of rapid growth. Revenues from
the US toxicology operations continued to grow, but revenues derived from the
analysis of samples from clinical trials declined with the completion of a
number of major studies.
Operating (loss)/income before other operating expense declined from a income of
$1.7 million in the year ended December 31, 2000 to a loss of $0.1 million in
the year ended December 31, 2001. Apart from inflationary cost increases,
additional security expenses of $0.5 million were incurred in the year ended
December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Bank Loan and Non-Bank Loans
On January 20, 2001, the Company’s net non-bank loan of (pound)22.4 million
($36.0 million approximately), was refinanced by Stephens’ Group Inc. and other
parties. It is now repayable on June 30, 2006 and interest is payable quarterly
at LIBOR plus 1.75%. At the same time the Company was required to take all
reasonable steps to sell off such of its real estate assets through
sale/leaseback transactions and/or obtaining mortgage financing secured by the
Company’s real estate assets to discharge this loan. The loan is held by
Huntingdon Life Sciences Group plc and is secured by the guarantees of the
wholly owned subsidiaries of the Company including, Huntingdon Life Sciences
Group plc, Huntingdon Life Sciences Ltd., and Huntingdon Life Sciences Inc., and
collateralized by all the assets of these companies. The loan was transferred
from Stephens Group Inc., to an unrelated third party effective February 11,
2002.
On October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share. The LSR warrants are exercisable at any time
and will expire on October 9, 2011. These warrants arose out of negotiations
regarding the refinancing of the bank loan by the Stephens Group Inc., in
January 2001. In accordance with APB Opinion No. 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants (“APB 14”) the warrants were
recorded at their pro rata fair values in relation to the proceeds received on
the date of issuance. As a result, the value of the warrants was $430,000. The
warrants were subsequently transferred to an unrelated third party.
Convertible Capital Bonds
The remainder of the Company’s long term financing is provided by Convertible
Capital Bonds repayable in September 2006. At the time of the issue in 1991,
these bonds were for $50 million par. They carry interest at a rate of 7.5% per
annum, payable biannually in March and September. During the year, the Company
repurchased and cancelled $2,410,000 principal amount of such bonds resulting in
a $1.2 million gain recorded in other income/expense. Subsequent to the
year-end, the Company further repurchased and cancelled $945,000 principal
amount of such bonds resulting in a gain of $0.5 million. At the current
conversion rate, the number of shares of Voting Common Stock to be issued on
conversion and exchange of each unit of $10,000 comprised in a Bond would be 49.
The conversion rate is subject to adjustment in certain circumstances.
Related Party Loans
Other financing has been provided by a $2.952 million loan facility made
available on September 25, 2000 by a director, Mr. Baker. In connection with
this financing, the company authorized, subject to shareholder approval, the
issuance of warrants to purchase 410,914 shares of LSR Voting Common Stock at
purchase price of $1.50 per share to FHP, a company controlled by Mr. Baker.
Such shareholder approval was granted on June 12, 2002. Additionally, other
financing also includes a $2.8 million facility from the Stephens Group Inc.
made available on July 19, 2001. Effective February 11, 2002 the Stephens Group
Inc. debt was transferred to an unrelated third party. Both facilities have been
fully drawn down. $550,000 of the loan from Mr. Baker was transferred to and
assumed by FHP in March 2001. These loans from Mr. Baker and FHP are repayable
on demand although they are subordinated to the bank debt, they are unsecured
and interest is payable monthly at a rate of 10% per annum. On March 28, 2002,
$2.1 million of Mr. Baker’s loan was converted into 1,400,000 shares of LSR
Voting Common Stock and $300,000 of FHP’s loan was converted into 200,000 shares
of LSR Voting Common Stock; in each case as part of LSR’s private placement of
approximately 5.1 million shares of Voting Common Stock. As a result of such
conversions, $302,000 remains payable to Mr. Baker and $250,000 remains payable
to FHP. Net of warrants, as discussed below, the corresponding amount payable on
the FHP loan is $56,000. The former Stephens Group Inc. secured facility is
subordinated to the bank loan. Interest was payable monthly at a rate of 10% per
annum. With the consent of the bank lender, one half of the facility was repaid
on July 1, 2002, and the remainder was repaid on October 1, 2002.
As noted above, on June 11, 2002 LSR issued to FHP warrants to purchase up to
410,914 shares of LSR Voting Common Stock at a purchase price of $1.50 per
share. The LSR warrants are exercisable at any time and will expire on June 11,
2012. These warrants arose out of negotiations regarding the provision of the
$2.9 million loan facility made available to the Company on September 25, 2000
by Mr. Baker, who controls FHP. In accordance with APB 14 the loan and warrants
were recorded at their pro rata fair values in relation to the proceeds
received. As a result, the value of the warrants was $250,000.
Common Shares
On January 10, 2002, LSR issued 99,900 shares of Voting Common Stock and 900,000
shares of Non-Voting Common Stock at a price of $1.50 per share (or an aggregate
of $1.5 million). Effective July 25, 2002, all of the 900,000 shares of the
Non-Voting Common Stock were converted into 900,000 shares of Voting Common
Stock.
On March 28, 2002, LSR closed the sale in a private placement of an aggregate of
5,085,334 shares of Voting Common Stock at a price of $1.50 per share. Of the
aggregate proceeds of approximately $7.6 million, $4.4 million was in cash, $2.4
million represented conversion into equity of debt owed to Mr. Baker ($2.1
million) and FHP ($0.3 million) and $825,000 was paid with promissory notes.
$222,000 of such promissory notes were repaid during 2002.
Cash flows
During the year ended December 31, 2002 funds generated were $12.4 million,
increasing cash in hand and on short-term deposit from $2.2 million at December
31, 2001 to $14.6 million at December 31, 2002. The cash generated from
operating, investing and financing activities were generated as follows (in
millions):
2002 2001 2000
Operating income/(loss) before
other operating (expense)/income $4.3 $(0.9) $(0.1)
Depreciation 8.1 8.3 9.1
Working capital movement 9.0 0.2 (2.7)
Interest (6.1) (6.5) (7.2)
Capital expenditure (4.2) (3.3) (3.6)
Other (expense)/income (1.2) (3.1) (1.8)
Shares issued net of loan repayments 1.7 5.0 1.8
Effect of exchange rate changes on cash 0.8 (0.7) (0.7)
-------------- ------------- --------------
$12.4 $(1.0) $(5.2)
-------------- ------------- --------------
Net days sales outstanding (DSOs) at December 31, 2002 were 9 days, down from 46
days at December 31, 2001. DSO is calculated as a sum of accounts receivable,
unbilled receivables and fees in advance over total revenue. The improvement is
in part due to a dedicated initiative at the Company throughout this past year
to improve the processes that affect this. The impact on liquidity from a
one-day change in DSO is approximately $350,000.
At December 31, 2002, the Company had a working capital deficiency of $844,000.
The Company believes that projected cash flow from operations will satisfy its
contemplated cash requirements for at least the next 12 months.
Commitment and Contingencies
Operating leases
Operating lease expenses were as follows:
2002 2001 2000
$000 $000 $000
Hire of plant and equipment 904 924 1184
Other operating leases 392 127 69
The Company has commitments payable under operating leases as follows:
Year ended December 31 $000
2003 956
2004 417
2005 95
2006 51
2007 1
-----------------
$1,520
-----------------
Capital Leases
$000
2003 225
2004 100
------------------
$325
------------------
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.
ORDERS
The year 2002 saw order growth of over 25% over the prior year. The increase in
orders was driven by the Company’s pharmaceutical business, which was 35% up on
2001. Non-pharmaceutical orders also grew in 2002 (5% ahead of 2001 orders), but
declined as a percent of total company sales to 30%.
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The Company operates on a worldwide basis and generally invoices its clients in
the currency of the country in which the Company operates. Thus, for the most
part, exposure to exchange rate fluctuations is limited as sales are denominated
in the same currency as costs. Trading exposures to currency fluctuations do
occur as a result of certain sales contracts, performed in the UK for US
clients, which are denominated in US dollars and contribute approximately 11% of
total revenues. Management has decided not to hedge against this exposure.
Also, exchange rate fluctuations may have an impact on the relative price
competitiveness of the Company vis a vis competitors who trade in currencies
other than sterling or dollars. Such fluctuations also have an impact on the
translation of the 7.5% convertible capital bonds payable in September 2006.
Finally, the consolidated financial statements of LSR are denominated in US
dollars. Changes in exchange rates between the UK pound sterling and the US
dollar will affect the translation of the UK subsidiary’s financial results into
US dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary’s financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and equity accounts are translated
at historical exchange rates. Translation of the balance sheet in this manner
affects the stockholders’ equity account referred to as the accumulated other
comprehensive loss account. Management has decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company’s cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
Exchange rates for translating US dollars into sterling were as follows:
At December 31 Average rate (1)
2000 0.6760 0.6520
2001 0.6800 0.6950
2002 0.6212 0.6664
(1) Based on the average of the exchange rates on the last day of each month
during the period.
On March 18, 2003 the noon buying rate for sterling was $1.00 = (pound)0.64.
The Company has not experienced difficulty in transferring funds to and
receiving funds remitted from those countries outside the US or UK in which it
operates and management expects this situation to continue.
While the UK has not at this time entered the European Monetary Union, the
Company has ascertained that its financial systems are capable of dealing with
Euro denominated transactions.
The following table summarizes the financial instruments denominated in
currencies other than the US dollar held by LSR and its subsidiaries as of
December 31, 2002:
Expected Maturity Date
2002 2003 2004 2005 2006 Thereafter Total Fair Value
(In US Dollars, amounts in thousands)
Cash - Pound Sterling 8,051 8,051 8,051
- Euro 731 731 731
Accounts
receivable - Pound Sterling 14,103 14,103 14,103
- Euro 629 629 629
Debt - Pound Sterling (36,385) (36,385) (36,385)
COMPETITION
Competition in both the pharmaceutical and non-pharmaceutical market segments
ranges from in-house research and development divisions of large pharmaceutical,
agrochemical and industrial chemical companies, who perform their own safety
assessments to contract research organizations like the Company, who provide a
full range of services to the industries and niche suppliers focusing on
specific services or industries.
This competition could have a material adverse effect on LSR’s net revenues and
net income, either through in-house research and development divisions doing
more work internally to utilize capacity or through the loss of studies to other
competitors. As the Company operates on an international basis, movements in
exchange rates, particularly against sterling, can have a significant impact on
its price competitiveness.
CONSOLIDATION WITHIN PHARMACEUTICAL INDUSTRY
The process of consolidation within the pharmaceutical industry continues to
accelerate the move towards outsourcing work to contract research organizations
in the longer term as resources are increasingly invested in in-house facilities
for discovery and lead optimization, rather than development and regulatory
safety evaluation. However, in the short-term, there is a negative impact with
development pipelines being rationalized and a focus on integration rather than
development. This can have a material adverse impact on the Company’s net
revenues and net income.
ANIMAL RIGHTS ACTIVISM
Refer to the detailed discussion under Item 1, on pages 9 to 10.
INFLATION
While most of the Company’s net revenues are earned under fixed price contracts,
the effects of inflation do not generally have a material adverse effect on its
operations or financial condition as only a minority of the contracts have
duration in excess of one year.
SIGNIFICANT ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company’s consolidated financial statements, which have
been prepared in accordance with US GAAP. The Company considers the following
accounting policies to be significant accounting policies.
Revenue recognition
The majority of the Company’s net revenues have been earned under contracts,
which generally range in duration from a few months to three years. Revenue from
these contracts is generally recognized over the term of the contracts as
services are rendered. Contracts may contain provisions for renegotiation in the
event of cost overruns due to changes in the level of work scope. Renegotiated
amounts are included in net revenue when earned and realization is assured.
Provisions for losses to be incurred on contracts are recognized in full in the
period in which it is determined that a loss will result from performance of the
contractual arrangement. Most service contracts may be terminated for a variety
of reasons by the Company’s customers, either immediately or upon notice of a
future date. The contracts generally require payments to the Company to recover
costs incurred, including costs to wind down the study, and payment of fees
earned to date, and in some cases to provide the Company with a portion of the
fees or income that would have been earned under the contract had the contract
not been terminated early.
Unbilled receivables are recorded for revenue recognized to date that is
currently not billable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment schedules. Unbilled
receivables are billable to customers within one year from the respective
balance sheet date. Fees in advance are recorded for amounts billed to customers
for which, revenue has not been recognized at the balance sheet date (such as
upfront payments upon contract authorization, but prior to the actual
commencement of the study).
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to the Company’s results of
operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the financial statements and the results of operations during the
reporting periods. These also include management estimates in the calculation of
pension liabilities covering discount rates, return on plan assets and other
actuarial assumptions. Although these estimates are based upon management’s best
knowledge of current events and actions, actual results could differ from those
estimates.
Taxation
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting For Income Taxes”
(“SFAS 109”). SFAS 109 requires recognition of deferred tax assets and
liabilities for the estimated future tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment date changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 “Business Combinations.” (“SFAS 141”). SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 had no
impact on LSR’s results of operations, financial position or cash flows.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible
Assets”. This statement applies to intangibles and goodwill acquired after
September 30, 2001, as well as goodwill and intangibles previously acquired.
Under this statement, goodwill as well as other intangibles determined to have
an infinite life will no longer be amortized; however these assets will be
reviewed for impairment on a periodic basis. This statement was effective for
LSR for the first quarter of the fiscal year ended December 31, 2002. The
adoption of this statement had no impact on LSR’s results of operations,
financial position or cash flows.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations” (“SFAS 143”). This statement is effective for financial statements
issued for fiscal years beginning on or after June 15, 2002. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When a liability is initially
recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
LSR does not believe that the adoption of this statement will have a material
impact on LSR’s results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived” Assets. This statement is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
These new rules on asset impairment supersede SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and
portions of APB Opinion 30, “Reporting the Results of Operations”. This
statement provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value or carrying amount. This statement also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The adoption of this statement had no
impact on LSR’s results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”
(“SFAS 145”). This statement is effective fiscal years beginning after May 15,
2002. SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from
Extinguishment of Debt” (SFAS 4), which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. SFAS 145 also
amends Statement 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. The Company early adopted the
provisions of this statement, resulting in the inclusion of a $1.2 million gain
in other income/(expense) in 2002.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities” (SFAS 146). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 eliminates the definition and requirement for
recognition of exit costs in Emerging Issues Task Force (EITF) Issue No. 94-3
where a liability for an exit costs was recognized at the date of an entity’s
commitment to an exit plan. This statement is effective for exit or disposal
activities initiated after December 31, 2002. LSR does not believe that the
adoption of this statement will have a material impact on its results of
operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based
Compensation – Transition and Disclosure, an amendment of FASB Statement No.
123” (“SFAS 148”). This statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
amendments to Statement 123 of this statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of this
statement had no impact on LSR’s results of operations, financial position or
cash flows.
In November 2002, the FASB issued FASB interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others”. In the normal course of business, the
Company does not issue guarantees to third parties; accordingly, this
interpretation has no effect on the Company’s financial statements. In January
2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities”. The Company has no arrangements that would be subject to
this interpretation.
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.