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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to Commission File Number: 000-49765 INVERESK RESEARCH GROUP, INC.  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    43-1955097
(I.R.S. Employer Identification No.)11000 Weston Parkway, Cary, NC
(Address of Principal Executive Offices)
    
    27513
(Zip Code)
 (919) 460-9005
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ            No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ            No o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Common stock, par value $0.01 per share
    
    38,180,510
As of July 31, 2004




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TABLE OF CONTENTS PagePART I FINANCIAL INFORMATION
    
    
    1ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
    
    
    1Condensed Consolidated Statements of Operations
    
    
    1Condensed Consolidated Balance Sheets
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Condensed Consolidated Statements of Comprehensive Income and Shareholders Equity
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    32ITEM 4. CONTROLS AND PROCEDURES
    
    
    34PART II OTHER INFORMATION
    
    
    35SEVERANCE AGREEMENTCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION
  Statements contained in this Form 10-Q that are forward-looking are based on
current expectations that are subject to a number of uncertainties and risks
and actual results may differ materially. Factors that might cause such a
difference include, but are not limited to, risks associated with: the
reduction in research and development activities by pharmaceutical and
biotechnology clients, changes in government regulations, the effect of
interest rate and foreign exchange rate fluctuations, our ability to attract
and retain employees, the loss or delay of contracts due to economic
uncertainty or other factors, our ability to efficiently manage backlog, our
ability to expand our business through strategic acquisitions, competition
within the industry and the potential adverse impact of healthcare reform. - i -




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PART I FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Inveresk Research Group, Inc. 
 Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share and share data) Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Net service revenue
    
    $
    79,397
    
    
    $
    67,035
    
    
    $
    156,135
    
    
    $
    124,719Direct costs excluding depreciation
    
    
    (41,250
    )
    
    
    (34,079
    )
    
    
    (81,171
    )
    
    
    (63,357
    )38,147
    
    
    
    32,956
    
    
    
    74,964
    
    
    
    61,362Selling, general and administrative expenses:Share offering and merger expenses
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,306
    )
    
    
    (658
    )Other selling, general and administrative expenses
    
    
    (19,948
    )
    
    
    (16,926
    )
    
    
    (39,801
    )
    
    
    (33,154
    )Total selling, general and administrative expenses
    
    
    (24,948
    )
    
    
    (16,926
    )
    
    
    (45,107
    )
    
    
    (33,812
    )Depreciation
    
    
    (3,595
    )
    
    
    (3,089
    )
    
    
    (7,060
    )
    
    
    (6,038
    )Amortization of intangibles
    
    
    (348
    )
    
    
    
    
    
    
    (696
    )
    
    
    Income from operations
    
    
    9,256
    
    
    
    12,941
    
    
    
    22,101
    
    
    
    21,512Interest income (expense), net
    
    
    171
    
    
    
    (916
    )
    
    
    (627
    )
    
    
    (1,815
    )Income before income taxes
    
    
    9,427
    
    
    
    12,025
    
    
    
    21,474
    
    
    
    19,697Provision for income taxes
    
    
    (1,585
    )
    
    
    (1,866
    )
    
    
    (1,335
    )
    
    
    (2,161
    )Net income
    
    $
    7,842
    
    
    $
    10,159
    
    
    $
    20,139
    
    
    $
    17,536Earnings per share:Basic
    
    $
    0.21
    
    
    $
    0.28
    
    
    $
    0.53
    
    
    $
    0.48Diluted
    
    $
    0.20
    
    
    $
    0.27
    
    
    $
    0.51
    
    
    $
    0.47Weighted average number of common shares outstanding:Basic
    
    
    38,031,569
    
    
    
    36,352,511
    
    
    
    37,977,693
    
    
    
    36,217,809Diluted
    
    
    39,266,043
    
    
    
    37,624,192
    
    
    
    39,212,167
    
    
    
    37,489,490
 See accompanying notes to condensed consolidated financial statements.




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Inveresk Research Group, Inc. 
 Condensed Consolidated Balance Sheets
(In thousands, except share data) June 30, 2004(unaudited)
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,136
    
    
    $
    24,579Accounts receivable, net
    
    
    44,476
    
    
    
    53,391Unbilled receivables, net
    
    
    29,046
    
    
    
    24,331Income taxes receivable
    
    
    5,873
    
    
    
    4,045Inventories
    
    
    1,594
    
    
    
    1,619Deferred income taxes
    
    
    3,026
    
    
    
    144Other current assets
    
    
    9,733
    
    
    
    6,902Total current assets
    
    
    114,884
    
    
    
    115,011Property, plant and equipment, net
    
    
    151,123
    
    
    
    145,364Goodwill
    
    
    171,077
    
    
    
    184,239Intangible assets
    
    
    1,507
    
    
    
    2,203Deferred income taxes
    
    
    12,473
    
    
    
    669Deferred debt issue costs
    
    
    1,420
    
    
    
    1,593$
    452,484
    
    
    $
    449,079LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,284
    
    
    $
    20,389Advance billings
    
    
    50,423
    
    
    
    56,745Accrued expenses
    
    
    27,233
    
    
    
    29,050Income taxes payable
    
    
    1,553
    
    
    
    2,018Deferred income taxes
    
    
    
    
    
    
    334Current portion of long term debt
    
    
    7,636
    
    
    
    7,857Total current liabilities
    
    
    102,129
    
    
    
    116,393Deferred income taxes
    
    
    23,329
    
    
    
    22,994Long term debt
    
    
    47,302
    
    
    
    50,941Defined benefit pension plan obligation
    
    
    26,010
    
    
    
    24,576Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value 150,000,000 shares authorized; 38,062,089
and 37,863,498 outstanding at June 30, 2004 and December 31, 2003
    
    
    381
    
    
    
    379Additional paid-in capital
    
    
    212,556
    
    
    
    211,963Retained earnings
    
    
    24,468
    
    
    
    4,329Accumulated other comprehensive income
    
    
    16,309
    
    
    
    17,504Total shareholders equity
    
    
    253,714
    
    
    
    234,175$
    452,484
    
    
    $
    449,079
 See accompanying notes to condensed consolidated financial statements. -2-




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Inveresk Research Group, Inc. 
 Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands) Six months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    20,139
    
    
    $
    17,536Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of property, plant and equipment
    
    
    7,060
    
    
    
    6,038Amortization of intangible assets
    
    
    696
    
    
    
    Deferred pension obligations
    
    
    1,043
    
    
    
    802Deferred income taxes
    
    
    (830
    )
    
    
    1Amortization of deferred loan issue costs
    
    
    178
    
    
    
    79Changes in operating assets and liabilities:Accounts receivable
    
    
    4,299
    
    
    
    (2,099
    )Advance billings
    
    
    (6,685
    )
    
    
    (575
    )Inventories
    
    
    (1
    )
    
    
    (242
    )Accounts payable and accrued expenses
    
    
    (2,980
    )
    
    
    223Income taxes
    
    
    (1,888
    )
    
    
    (157
    )Other assets and liabilities
    
    
    (2,826
    )
    
    
    (4,619
    )Net cash provided by operating activities
    
    
    18,205
    
    
    
    16,987CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    (17,237
    )
    
    
    (8,541
    )Net cash used in investing activities
    
    
    (17,237
    )
    
    
    (8,541
    )CASH FLOWS FROM FINANCING ACTIVITIESIssue of common stock
    
    
    595
    
    
    
    90Payment of deferred debt issue costs
    
    
    (5
    )
    
    
    (30
    )Repayments of long-term debt
    
    
    (3,846
    )
    
    
    (10,000
    )Net cash used in financing activities
    
    
    (3,256
    )
    
    
    (9,940
    )Effect of foreign currency exchange rate changes on cash
    
    
    (1,155
    )
    
    
    3,414(Decrease) increase in cash and cash equivalents
    
    
    (3,443
    )
    
    
    1,920Cash and cash equivalents at beginning of period
    
    
    24,579
    
    
    
    19,909Cash and cash equivalents at end of period
    
    $
    21,136
    
    
    $
    21,829Supplemental cash flow information:Interest paid
    
    $
    1,460
    
    
    $
    1,307Income tax paid
    
    $
    1,998
    
    
    $
    1,011
 See accompanying notes to condensed consolidated financial statements. -3-




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Inveresk Research Group, Inc. 
 Condensed Consolidated Statements of Comprehensive Income and Shareholders Equity
(unaudited)
(In thousands, except share data) Shares ofCommon
    
    
    
    
    
    Par
    
    
    
    
    
    Retained
    
    AccumulatedStock
    
    Total
    
    Value
    
    Additional
    
    Earnings
    
    Other$0.01 Par
    
    Shareholders'
    
    Paid-in
    
    Paid-in
    
    (Accumulated
    
    ComprehensiveValue
    
    Equity
    
    Capital
    
    Capital
    
    Deficit)
    
    Income (Loss)Balance at December 31, 2003
    
    
    37,863,498
    
    
    $
    234,175
    
    
    $
    379
    
    
    $
    211,963
    
    
    $
    4,329
    
    
    $
    17,504Issue of common stock
    
    
    198,591
    
    
    
    595
    
    
    
    2
    
    
    
    593
    
    
    
    
    
    
    
    Comprehensive income (loss):Foreign currency translation
adjustments
    
    
    
    
    
    
    (1,797
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,797
    )Tax benefit arising on
share options
    
    
    
    
    
    
    602
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602Net income for period to
June 30, 2004
    
    
    
    
    
    
    20,139
    
    
    
    
    
    
    
    
    
    
    
    20,139
    
    
    
    Comprehensive income
    
    
    
    
    
    
    18,944Balance at June 30, 2004
    
    
    38,062,089
    
    
    $
    253,714
    
    
    $
    381
    
    
    $
    212,556
    
    
    $
    24,468
    
    
    $
    16,309Balance at December 31, 2002
    
    
    36,004,777
    
    
    $
    152,403
    
    
    $
    360
    
    
    $
    191,618
    
    
    $
    (33,793
    )
    
    $
    (5,782
    )Issue of common stock
    
    
    420,079
    
    
    
    90
    
    
    
    4
    
    
    
    86
    
    
    
    
    
    
    
    Comprehensive income:Foreign currency translation
adjustments
    
    
    
    
    
    
    15,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,776Net income for period to
June 30, 2003
    
    
    
    
    
    
    17,536
    
    
    
    
    
    
    
    
    
    
    
    17,536
    
    
    
    Comprehensive income
    
    
    
    
    
    
    33,312Balance at June 30, 2003
    
    
    36,424,856
    
    
    $
    185,805
    
    
    $
    364
    
    
    $
    191,704
    
    
    $
    (16,257
    )
    
    $
    9,994
 See accompanying notes to condensed consolidated financial statements. -4-




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Inveresk Research Group, Inc. 
 Notes to Condensed Consolidated Financial Statements  1.
    
    Description of Business and Merger Agreement Description of Business Inveresk Research Group, Inc. and its subsidiaries (collectively the Company)
provide drug development services to companies in the pharmaceutical and
biotechnology industries. Through the Companys pre-clinical and clinical
business segments, it offers a broad range of drug development services,
including pre-clinical safety and pharmacology evaluation, laboratory sciences
services and clinical development services. The Companys client base includes
major pharmaceutical companies in North America, Europe, and Japan, as well as
many biotechnology and specialty pharmaceutical companies. Merger with Charles River Laboratories International, Inc. On June 30, 2004, the Company entered into an Agreement and Plan of Merger
with Charles River Laboratories International, Inc. (Charles River) and
Indigo Merger I Corp. and Indigo Merger II Corp., both wholly owned
subsidiaries of Charles River. The merger is subject to the satisfaction of
certain closing conditions, including the approval of the Companys
stockholders and receipt of regulatory approvals, Under the terms of the merger agreement, Indigo Merger I Corp. will merge with
and into the Company, whereupon the Company will become a wholly owned
subsidiary of Charles River. Pursuant to and as part of a single integrated
transaction the Company will then be merged with and into Indigo Merger II LLC,
whereupon the separate corporate existence of the Company will cease and Indigo
Merger II LLC will be the surviving corporation. Upon the merger of Indigo Merger I Corp. and the Company, each share of the
Companys common stock will be converted into the right to receive $15.15 in
cash and 0.48 shares of common stock in Charles River. In addition, each
outstanding option to purchase the Companys common stock will be converted
into an option to purchase Charles River stock. Each stock option resulting
from such conversion will continue to have the same terms and conditions
following the merger with Indigo Merger I Corp., except that (i) each option
will be exercisable for that number of whole shares of Charles River stock
equal to the number of shares of Inveresk stock that were issuable upon
exercise of the related Inveresk stock option multiplied by 0.8, rounded down
to the nearest whole number, and (ii) the per share exercise price for the
Charles River stock options will equal the exercise price per share of Inveresk
stock at which the related stock option was exercisable divided by 0.8, rounded
to the nearest whole cent. During the second quarter of 2004, the Company incurred approximately $5.0
million in merger costs. These are included in the share offering and merger
expenses caption in the statement of operations for the second quarter.  2.
    
    Basis of Presentation The accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). In accordance with those rules and regulations, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the U. S. (GAAP) for complete financial statements. -5-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. The December 31, 2003 balance sheet was derived from audited
financial statements, but does not include all disclosures required by GAAP.
However, the Company believes that the disclosures are adequate to make the
information presented not misleading. The financial statements should be read
in conjunction with the audited consolidated financial statements at and for
the year ended December 31, 2003 filed with the SEC on Form 10-K. The results
of operations for the quarter ended and six months ended June 30, 2004 are not
necessarily indicative of the results of operations that may be expected for
the year ending December 31, 2004.  3.
    
    Summary of Significant Accounting Policies Earnings Per Share Earnings per share is computed in accordance with Statements of Financial
Accounting Standards (SFAS) 128, Earnings per Share. SFAS 128 requires
presentation of both basic earnings per share (Basic EPS) and diluted
earnings per share (Diluted EPS). Basic EPS is based on the weighted average
number of common shares outstanding during the year, while Diluted EPS also
includes the dilutive effect of share options. The number of share options not
reflected in Diluted EPS because they were anti-dilutive was 75,000 in respect
of the quarter and six months ended June 30, 2004 and 7,500 in respect of the
quarter and six months ended June 30, 2003. Stock-Based Compensation The Company accounts for stock-based awards to employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Compensation cost for
stock options granted to employees is based on the excess of the quoted market
price of the Companys stock on the measurement date over the amount an
employee must pay to acquire the stock (the intrinsic value) and is
recognized over the vesting period. No compensation cost was recognized in
respect of options where the vesting of the options was conditional upon the
listing of the Companys shares on a recognized stock exchange, prior to the
condition being met. Once the condition was met, the compensation expense was
recorded in full on the date when the condition was satisfied. -6-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements Had compensation expense been determined for the Companys option grants
consistent with the provisions of SFAS No. 123 Accounting for Stock Based
Compensation (SFAS 123), the Companys net income for the periods shown
below would have reflected the pro forma amounts set forth in the table below. Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Dollars in thousands, except per share data)Reported net income
    
    $
    7,842
    
    
    $
    10,159
    
    
    $
    20,139
    
    
    $
    17,536Compensation expense in respect of
stock options deducted in the
computation of reported net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense in respect of
stock options computed on the fair
value method
    
    
    (932
    )
    
    
    (328
    )
    
    
    (1,678
    )
    
    
    (641
    )Pro forma net income
    
    $
    6,910
    
    
    $
    9,831
    
    
    $
    18,461
    
    
    $
    16,895Reported basic earnings per share
    
    $
    0.21
    
    
    $
    0.28
    
    
    $
    0.53
    
    
    $
    0.48Pro forma basic earnings per share
    
    $
    0.18
    
    
    $
    0.27
    
    
    $
    0.49
    
    
    $
    0.47Reported diluted earnings per share.
    
    $
    0.20
    
    
    $
    0.27
    
    
    $
    0.51
    
    
    $
    0.47Pro forma diluted earnings per share
    
    $
    0.18
    
    
    $
    0.26
    
    
    $
    0.47
    
    
    $
    0.45
 The assumptions underlying the calculation of this pro forma data are described
in Note 7. New Accounting Pronouncements On June 30/July 1, 2004, the Emerging Issues Task Force (EITF) reached a
consensus that an investor should only apply the equity method of accounting
when it has investments in either common stock (as already required by APB 18)
or in-substance common stock of a corporation, provided that the investor has
the ability to exercise significant influence over the operating and financial
policies of the investee. The consensus in this Issue should be applied in the
first reporting period beginning after September 15, 2004. For instruments that
are not common stock or in-substance common stock but were accounted for under
the equity method of accounting prior to the consensus, the equity method of
accounting should be discontinued effective for reporting periods beginning
after September 15, 2004. The Company does not expect this EITF Issue will have
a material impact on its financial statements. On May 19, 2004, the Financial Accounting Standards Board (FASB) issued FSP
106-2 to provide guidance on accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act), to
employers that sponsor post-retirement health care plans, which provide
prescription drug benefits. In addition, the FSP requires those employers to
provide certain disclosures in their financial statements regarding the effect
of the Act and the related subsidy on post-retirement health obligations and
net periodic post-retirement benefit cost. This FSP is effective for the first
interim or annual period beginning after June 15, 2004. Earlier application of
the FSP is encouraged in financial statements for any period including or
following enactment of the Act (December 8, 2003) that has not been issued as
of the issuance date of the FSP. The Company does not expect this new FSP will
have a material impact on its financial statements. On March 17/18, 2004, the EITF reached a consensus on Issue 03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings per
Share (EITF 03-6). This Issue includes a definition of participating
security and clarifies some practical issues related to including
participating securities in the calculation of earnings per share. -7-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements In addition, the Task Force decided that the guidance provided in EITF Topic
D-95, Effect of Participating Convertible Securities on the Computation of
Basic Earnings per Share, should be nullified. The consensus now requires the
use of the two-class method for including participating convertible securities
in the computation of basic EPS (i.e., an issuer can no longer use the
if-converted method in basic EPS calculations). The consensus reached by the
EITF is effective for fiscal periods beginning after March 31, 2004. Prior
period earnings per share amounts presented for comparative purposes should be
restated to conform to the consensus guidance. The Company does not expect this
EITF consensus will have a material impact on its financial statements. On March 17/18, 2004, the EITF reached a consensus on Issue 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-01). EITF 03-01 is applicable to (a) debt and equity securities
within the scope of SFAS 115, (b) debt and equity securities within the scope
of SFAS 124 and that are held by an investor that reports a performance
indicator, and (c) equity securities not within the scope of Statement 115 and
not accounted for under Opinion 18s equity method (e.g., cost method
investments). EITF 03-01 provides a step model to determine whether an
investment is impaired and if an impairment is other-than-temporary. In
addition, it requires that investors provide certain disclosures for cost
method investments and, if applicable, other information related specifically
to cost method investments, such as the aggregate carrying amount of cost
method investments, the aggregate amount of cost method investments that the
investor did not evaluate for impairment because an impairment indicator was
not present, and the situations under which the fair value of a cost method
investment is not estimated. The disclosures related to cost method investments
should not be aggregated with other types of investments. The EITF 03-01
impairment model shall be applied prospectively to all current and future
investments within the scope of the Issue, effective in reporting periods
beginning after June 15, 2004. The disclosure requirements are effective for
annual periods for fiscal years ending after June 15, 2004. The Company does
not expect this EITF consensus will have a material impact on its financial
statements. New Accounting Pronouncements Adopted During the Period Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 as revised, requires a variable interest entity
(VIE) to be consolidated by a company if that company absorbs a majority of
the VIEs expected losses, receives a majority of the entitys expected
residual returns, or both, as a result of ownership, contractual or other
financial interest in the VIE. Prior to the adoption of FIN 46, VIEs were
generally consolidated by companies owning a majority voting interest in the
VIE. The consolidation requirements of FIN 46 applied immediately to VIEs
created after January 31, 2003, however, the FASB deferred the effective date
for VIEs created before February 1, 2003 to the quarter ended March 31, 2004
for calendar year companies. Adoption of the provisions of FIN 46 prior to the
deferred effective date was permitted. The Company adopted the remaining
provisions of FIN 46 in the first quarter of 2004, although the adoption of
these provisions did not have an impact on its financial statements. -8-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements  4.
    
    Business Acquisitions On July 29, 2003 the Company acquired all of the outstanding capital stock of
PharmaResearch Corporation (PharmaResearch) for $43.2 million, financed
through bank borrowings. The results of operations of PharmaResearch have been
included in the consolidated financial statements since that date.
PharmaResearch was a U.S.-based drug development services group focused on the
provision of Phase II-IV clinical trials support services, principally in the
areas of respiratory and infectious diseases. PharmaResearch was based in
Morrisville and Wilmington, North Carolina, with foreign operations based in
the U.K., France, Spain and China. Restructuring and Integration of PharmaResearch The Company established a plan at the acquisition date, July 29, 2003, to
integrate the operations of PharmaResearch with its existing operations. The
actions covered by the integration included a reduction of 58 employees (37
employees of PharmaResearch and 21 employees of the Company), the relocation of
the Morrisville, North Carolina operations of PharmaResearch to our premises in
Cary, North Carolina, integration of certain administrative functions and
operating entities between the two businesses, combination of the
PharmaResearch operations in London, Paris and Madrid with those of the Company
and the closure of certain office premises. In connection with the integration plan the Company recorded a provision of
$2.6 million that was reflected in the purchase price allocation and a
provision of $1.1 million that was reflected in the consolidated statement of
operations in restructuring and integration costs arising from business
acquisitions in 2003. The Company implemented the headcount reductions in
early September, with 37 former PharmaResearch employees and 21 former Inveresk
employees leaving the Company during September 2003. By January 2004, the
employees based at the PharmaResearch facility in Morrisville, North Carolina
were relocated to our nearby facility in Cary, North Carolina and the office in
China was closed. The following amounts have been recorded in respect of the
restructuring plan: Severance and related costs
    
    Other costsPharma
    
    
    
    
    
    Pharma
    
    
    
    
    
    Lease terminationResearch
    
    Inveresk
    
    Research
    
    Inveresk
    
    and abandonment costs(Dollars in thousands)Amount established at acquisition
    
    $
    1,190
    
    
    $
    676
    
    
    $
    348
    
    
    $
    412
    
    
    $
    1,137Utilized from July 29, 2003 to December 31, 2003
    
    
    (877
    )
    
    
    (676
    )
    
    
    (242
    )
    
    
    (344
    )
    
    
    Balance at December 31, 2003
    
    
    313
    
    
    
    
    
    
    
    106
    
    
    
    68
    
    
    
    1,137Reclassification
    
    
    
    
    
    
    
    
    
    
    331
    
    
    
    
    
    
    
    (331
    )Additional provision in the first six months of 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Utilized in the first six months of 2004
    
    
    (297
    )
    
    
    
    
    
    
    (208
    )
    
    
    (68
    )
    
    
    (304
    )Net release to reduce goodwill in the first six
months of 2004
    
    
    (6
    )
    
    
    
    
    
    
    (139
    )
    
    
    
    
    
    
    (56
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    16Balance at June 30, 2004
    
    $
    10
    
    
    $
    
    
    
    $
    90
    
    
    $
    
    
    
    $
    567
 The Company expects the remaining provisions for severance costs to be utilized
in 2004. The lease termination and abandonment costs will be utilized over the
periods of the leases of the properties concerned. The following table compares the Companys net service revenues, net income and
earnings per share data for the second quarter and first six months of 2004
with pro forma figures for the same -9-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements information for second quarter and first six months of 2003, computed to show
the effect of the PharmaResearch acquisition as if it had been acquired on
January 1, 2003. Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Dollars in thousands, except per share data)Net service revenue
    
    $
    79,379
    
    
    $
    77,719
    
    
    $
    156,135
    
    
    $
    146,088Net income
    
    $
    7,842
    
    
    $
    9,726
    
    
    $
    20,139
    
    
    $
    16,768Earnings per shareBasic
    
    $
    0.21
    
    
    $
    0.27
    
    
    $
    0.53
    
    
    $
    0.46Diluted
    
    $
    0.20
    
    
    $
    0.26
    
    
    $
    0.51
    
    
    $
    0.45Number of shares used in calculating earnings per shareBasic
    
    
    38,031,569
    
    
    
    36,352,511
    
    
    
    37,977,693
    
    
    
    36,217,809Diluted
    
    
    39,266,043
    
    
    
    37,624,192
    
    
    
    39,212,167
    
    
    
    37,489,490
 This unaudited pro forma financial information has been prepared for
comparative purposes only and does not purport to be indicative of the results
of operations which would actually have occurred had the companies operated as
one entity during the period. No effect has been included for synergies, if
any, that might have been realized through the acquisition.  5.
    
    Credit Facilities and Debt At June 30, 2004 the Companys bank credit facilities totaled $129.5 million,
comprised of $54.5 million of term loans in U.S. dollars and up to $75 million
of loans available in multiple currencies under a revolving credit arrangement. At June 30, 2004, the borrowings under the facility comprised $54.5 million
drawn down as a five year term loan with repayments due quarterly until
December 31, 2007. Such borrowings bear interest at rates between LIBOR plus
1.25% and LIBOR plus 2.00% depending on the ratio of Earnings before Interest,
Taxes, Depreciation and Amortization (EBITDA) to borrowings. Based on the
financial position of the Company at March 31, 2004, the borrowings currently
bear interest at LIBOR plus 1.25%. The exposure to interest rate fluctuations
on the loans drawn under this facility has been limited by retaining, with
minor amendments, the interest rate swaps entered into in connection with the
previous bank credit facility. The bank credit facility subjects the Company to
significant affirmative, negative and financial covenants, is guaranteed by the
Company and its significant subsidiaries and is secured by liens on
substantially all of the assets and pledges of the shares of the subsidiaries.
The covenants include, but are not limited to, a maximum leverage ratio, a
minimum net worth amount and a minimum amount for the ratio of consolidated
EBITDA to consolidated financial charges. The Company was in compliance with
these covenants at June 30, 2004. -10-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements Derivative Instruments The Company uses forward foreign exchange currency contracts to manage the risk
of foreign exchange rate fluctuations. At June 30, 2004 the Company had one
forward currency contract outstanding. This was to sell $11.6 million and buy
CDN$15.6 million (in Canadian dollars) on September 30, 2004. This contract
was entered into for no initial cost on June 30, 2004 and at June 30, 2004 the
fair value of the contract was insignificant. This contract has not been
designated as a hedge and changes in the fair value of this contract are
included in selling, general and administrative expenses in the statement of
operations. In addition, in the second quarter of 2004, the Company purchased for a cost of
$0.3 million, a series of options to sell U.S. $20 million and purchase
Canadian dollars (U.S. $2.5 million on a specified date each month from May
2004 through December 2004) at a rate of U.S.$1: CDN$1.3630. The Company
designated these options as cash flow hedges of the forecasted U.S. dollar
denominated sales invoices arising in its Canadian operations. At June 30, 2004
the fair value of the options was $0.4 million. The Company assesses the
effectiveness of the hedging arrangements at each quarter end. To the extent
that the Company concludes the hedging is effective, changes in the fair value
of the options are included in other comprehensive income prior to the date of
exercise of each individual option and then the net gain or loss on each
individual option is recognized in revenues over the collection period of the
invoices being hedged. The Company expects that the total gain or losses on
all the options will be recognized in revenues prior to the end of the first
quarter of 2005. To the extent that the hedging is ineffective, the Company
recognizes any change in the fair value of the options in selling, general and
administrative expenses immediately. At June 30, 2004, the amount of existing
gains and losses which have not yet been recognized in the statement of
operations is insignificant. The Company also enters into interest rate swap arrangements related to its
bank borrowings to manage its exposure to variability in cash flows associated
with floating interest rates. These swaps have not been designated as hedges.
The details of these are described in the Companys Form 10-K for the year
ended December 31, 2003 and have not changed since that form was filed.  6.
    
    Income Taxes Significant components of the Companys deferred tax assets and liabilities are
as follows: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Deferred tax assets:Defined benefit pension obligations
    
    $
    7,794
    
    
    $
    7,364Federal and state net operating losses
    
    
    12,779
    
    
    
    13,652Foreign net operating losses
    
    
    
    
    
    
    425Interest rate swaps
    
    
    94
    
    
    
    296U.K. share option deductions
    
    
    482
    
    
    
    555Other deferred tax assets
    
    
    3,344
    
    
    
    3,583Total deferred tax assets
    
    
    24,493
    
    
    
    25,875Valuation allowance for deferred tax assets
    
    
    (100
    )
    
    
    (15,789
    )Net deferred tax assets
    
    $
    24,393
    
    
    $
    10,086Deferred tax liabilitiesProperty, plant and equipment
    
    
    (31,642
    )
    
    
    (31,569
    )
 -11-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements Intangible assets
    
    
    (581
    )
    
    
    (532
    )Other deferred tax liabilities
    
    
    
    
    
    
    (500
    )Net deferred tax liabilities
    
    $
    (7,830
    )
    
    $
    (22,515
    )
 Following the completion of the integration of PharmaResearch Corporation into
the clinical operations in the U.S., in the first quarter of 2004, the Company
reassessed the valuation allowance previously established to reduce the value
of the deferred tax assets (mainly arising on net operating losses) in the
U.S. As a consequence, the valuation allowance was reduced by $15.4 million
during the first quarter of 2004. A portion of the tax benefit, $13.7 million,
was recorded as a reduction of goodwill as these deferred tax assets were
acquired in 2001, and at that time a valuation allowance was established. The
remaining $1.7 million was recognized as a tax benefit in the statement of
operations in the first quarter of 2004. The balance sheet classification of net deferred tax liabilities is as follows: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Net current deferred tax assets
    
    $
    3,026
    
    
    $
    144Net non-current deferred tax assets
    
    
    12,473
    
    
    
    669Net current deferred tax liabilities
    
    
    
    
    
    
    (334
    )Net non current deferred tax liabilities
    
    
    (23,329
    )
    
    
    (22,994
    )Net deferred tax liabilities
    
    $
    (7,830
    )
    
    $
    (22,515
    )
 The provision for income taxes is affected by various factors. The Company
receives research and development tax credits in Canada and the U.K. The level
of such credits is dependent upon the amount of qualifying costs in these
jurisdictions and therefore the tax credits are not a constant percentage of
income before income taxes. As a consequence of these factors, the Companys provision for income taxes
expressed as a percentage of income before income taxes may fluctuate from
period to period. The Companys consolidated effective tax rate differed from the federal
statutory rate as set forth below: Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Dollars in thousands)U.S. Federal statutory rate
    
    $
    3,205
    
    
    $
    4,208
    
    
    $
    7,301
    
    
    $
    6,894U.K. and Canadian Research and Development tax credits
    
    
    (1,954
    )
    
    
    (1,754
    )
    
    
    (3,862
    )
    
    
    (3,515
    )Difference between foreign income taxed at U.S. Federal
Statutory rates and foreign income tax expense
    
    
    (398
    )
    
    
    (397
    )
    
    
    (792
    )
    
    
    (673
    )Impact of non deductible share offering and merger expenses
    
    
    1,700
    
    
    
    
    
    
    
    1,804
    
    
    
    Increase (reduction) in federal valuation allowance
    
    
    (382
    )
    
    
    (59
    )
    
    
    (2,096
    )
    
    
    137Reduction in valuation allowance against losses of foreign
subsidiaries
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    (170
    )Share option deductions
    
    
    (208
    )
    
    
    (312
    )
    
    
    (363
    )
    
    
    (866
    )Other
    
    
    (378
    )
    
    
    297
    
    
    
    (657
    )
    
    
    354$
    1,585
    
    
    $
    1,866
    
    
    $
    1,335
    
    
    $
    2,161
 -12-




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##### Table of Contents



Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements We operate in numerous countries but the tax regulations in the U.S., Canada
and the U.K. have the most significant effect on our income tax and deferred
tax assets and liabilities and our income tax expense. The tax regulations are
highly complex and, while we aim to ensure the estimates of tax assets and
liabilities that we record are accurate, there may be instances where the
process of agreeing our tax liabilities with the tax authorities may possibly
require significant adjustments, which cannot presently be quantified. to be
made to estimates previously recorded. Our provision for income taxes is
affected by various factors.  7.
    
    Stock Options and Other Equity-Based Compensation Plans The Company has issued options to employees
pursuant to the Inveresk Research
Group, Inc. 2002 Stock Option and Incentive Compensation Plan
as Amended and Restated as of May 4, 2004 and to non-executive directors pursuant to
the Inveresk Research Group, Inc. 2002 Non-Employee Directors Stock Option Plan.
The objectives of these plans include attracting and retaining personnel and
promoting the success of the Company by providing employees and non-executive
directors with the opportunity to acquire shares. All options issued prior to June 27, 2002 were issued by Inveresk Research
Group Limited. Those options subsequently were exchanged for stock options
issued by Inveresk Research Group, Inc. (the replacement options) under its
2002 Stock Option Plan on June 28, 2002. The replacement options had exercise
prices, exercise periods and other terms substantially the same as those that
were replaced. The replacement options became fully vested (immediately exercisable in full)
upon completion of the Companys initial public offering and such options will
expire 10 years after the original date of grant. At June 30, 2004, the number
of replacement options remaining outstanding was 469,791. The Company has also
issued options that vest in equal annual installments over the three years
following the date of grant. At June 30, 2004, the number of shares issuable
on exercise of these options outstanding was 1,776,466. During the second
quarter of 2004, the Company entered into arrangements with certain members of
management which, amongst other items, provide for the acceleration of the
vesting of the unvested options held by the individuals concerned in the event
of their employment being terminated by the Company following a change in
control of the Company. The following table summarizes the movements on the options outstanding in the
six months ended June 30, 2004: Shares of CommonStock Issuable Upon
    
    
    
    
    
    Weighted AverageExercise
    
    Exercise Price
    
    Exercise PriceOutstanding at December 31, 2003
    
    
    1,819,948
    
    
    $
    0.03 - $20.14
    
    
    $
    8.72Granted
    
    
    682,200
    
    
    $
    23.64 - $31.93
    
    
    $
    24.65Forfeited
    
    
    (57,300
    )
    
    $
    10.60 - $23.64
    
    
    $
    14.73Exercised
    
    
    (198,591
    )
    
    $
    0.03 - $17.75
    
    
    $
    3.15Outstanding at June 30, 2004
    
    
    2,246,257
    
    
    $
    0.03 - $31.93
    
    
    $
    13.90
 -13-




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##### Table of Contents



Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements The following table summarizes the exercise prices of the options outstanding
at June 30, 2004: Shares of Common StockIssuable Upon Exercise
    
    Exercise Price153,210
    
    
    $0.03 per share11,736
    
    
    $0.05 per share16,312
    
    
    $0.19 per share288,533
    
    
    $0.40 per share674,115
    
    
    $10.60 per share28,334
    
    
    $13.00 per share40,000
    
    
    $14.68 per share20,000
    
    
    $15.00 per share3,500
    
    
    $16.35 per share20,000
    
    
    $17.17 per share301,817
    
    
    $17.75 per share7,500
    
    
    $20.14 per share586,200
    
    
    $23.64 per share20,000
    
    
    $30.00 per share30,000
    
    
    $30.84 per share30,000
    
    
    $31.01 per share15,000
    
    
    $31.93 per share2,246,257
 The weighted average exercise price of the Companys outstanding stock options
was $13.90 per share at June 30, 2004 and $8.72 at December 31, 2003. Pro forma information regarding net income is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method of that statement. This
information is shown in Note 3. For purposes of this disclosure, the fair values of the fixed option grants
were estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used for option grants: Risk-free interest rate
    
    
    3.0
    %Volatility factor
    
    
    60.0
    %Weighted average expected life of options in months
    
    
    21.8
 The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective valuation assumptions including the expected stock price
volatility. Because the Companys stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimates, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Companys stock options. -14-




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##### Table of Contents



Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements  8.
    
    Employee Benefits The net periodic pension costs for the Companys defined benefit pension plan
include the following components: Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Dollars in thousands)Service cost
    
    $
    1,035
    
    
    $
    800
    
    
    $
    2,088
    
    
    $
    1,590Interest cost
    
    
    1,258
    
    
    
    888
    
    
    
    2,539
    
    
    
    1,768Return on plan assets (expected)
    
    
    (1,079
    )
    
    
    (774
    )
    
    
    (2,177
    )
    
    
    (1,538
    )Amortization of actuarial loss
    
    
    312
    
    
    
    199
    
    
    
    630
    
    
    
    398Net periodic pension cost
    
    $
    1,526
    
    
    $
    1,113
    
    
    $
    3,080
    
    
    $
    2,218
 The total employers contributions paid to the plan in the second quarter and
first six months of 2004 amounted to $0.9 and $2.0 million respectively, and
the total contributions expected to be paid in 2004 amount to $3.7 million.  9.
    
    Segment Reporting The Company is a full-service drug development services group serving the
pharmaceutical, biotechnology and medical device industries. The Companys
drug development services comprise two operating segments  pre-clinical and
clinical. Pre-clinical services include pre-clinical safety and pharmacology
evaluation as well as laboratory sciences services. Pre-clinical services are
performed in Edinburgh, Scotland and Montreal, Canada. Clinical services
consist of designing, monitoring, and managing trials of new pharmaceutical and
biotechnology products on humans, and providing clinical data management,
biostatistical, product registration, and pharmacovigilance services. Clinical
service activities and revenues are performed and earned primarily in the U.S.
and Europe. The Companys European clinical operations are performed in
Maidenhead, England and Edinburgh, Scotland, with its primary satellite offices
in Brussels, Belgium and Glasgow, Scotland. The operating results of the
Company in the individual European countries apart from the U.K. are not
material. -15-




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##### Table of Contents



Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements Financial data by segment are as follows: Pre-clinical
    
    Clinical
    
    TotalQuarter Ended June 30, 2004
    
    (Dollars in thousands)Net service revenue from external customers
    
    $
    47,289
    
    
    $
    32,108
    
    
    $
    79,397Depreciation and amortization
    
    
    2,850
    
    
    
    1,092
    
    
    
    3,942Segment income
    
    
    12,171
    
    
    
    4,534
    
    
    
    16,705Expenditures for long-lived assets in the quarter ended June 30, 2004
    
    
    7,716
    
    
    
    335
    
    
    
    8,051Quarter Ended June 30, 2003Net service revenue from external customers
    
    $
    42,231
    
    
    $
    24,804
    
    
    $
    67,035Depreciation
    
    
    2,526
    
    
    
    563
    
    
    
    3,089Segment income
    
    
    12,206
    
    
    
    2,797
    
    
    
    15,003Expenditures for long-lived assets in the quarter ended June 30, 2003
    
    
    3,803
    
    
    
    436
    
    
    
    4,239
 Pre-clinical
    
    Clinical
    
    TotalSix Months Ended June 30, 2004
    
    (Dollars in thousands)Net service revenue from external customers
    
    $
    91,666
    
    
    $
    64,469
    
    
    $
    156,135Depreciation and amortization
    
    
    5,698
    
    
    
    2,056
    
    
    
    7,754Segment income
    
    
    23,915
    
    
    
    8,707
    
    
    
    32,622Segment assets at June 30, 2004
    
    
    388,043
    
    
    
    262,598
    
    
    
    650,641Intangible assets at June 30, 2004
    
    
    64,712
    
    
    
    107,872
    
    
    
    172,584Long-lived assets at June 30, 2004
    
    
    200,783
    
    
    
    134,977
    
    
    
    335,760Expenditures for long-lived assets in the six months ended June 30, 2004
    
    
    12,655
    
    
    
    1,178
    
    
    
    13,833Six Months Ended June 30, 2003Net service revenue from external customers
    
    $
    78,560
    
    
    $
    46,159
    
    
    $
    124,719Depreciation
    
    
    4,907
    
    
    
    1,131
    
    
    
    6,038Segment income
    
    
    20,988
    
    
    
    5,060
    
    
    
    26,048Segment assets at December 31, 2003
    
    
    375,384
    
    
    
    266,117
    
    
    
    641,501Intangible assets at December 31, 2003
    
    
    65,064
    
    
    
    121,378
    
    
    
    186,442Long-lived assets at December 31, 2003
    
    
    195,275
    
    
    
    137,143
    
    
    
    332,418Expenditures for long-lived assets in the six months ended June 30, 2003
    
    
    7,702
    
    
    
    839
    
    
    
    8,541
 -16-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements The following table summarizes net service revenues and long-lived assets by
geographic area. USA
    
    Canada
    
    Europe
    
    TotalQuarter Ended June 30, 2004
    (Dollars in thousands)Net service revenue from external customers
    
    $
    17,588
    
    
    $
    25,865
    
    
    $
    35,944
    
    
    $
    79,397Quarter Ended June 30, 2003Net service revenue from external customers
    
    $
    9,935
    
    
    $
    25,302
    
    
    $
    31,798
    
    
    $
    67,035
 USA
    
    Canada
    
    Europe
    
    TotalSix Months Ended June 30, 2004
    (Dollars in thousands)Net service revenue from external customers
    
    $
    35,419
    
    
    $
    50,463
    
    
    $
    70,253
    
    
    $
    156,135Long-lived assets at June 30, 2004
    
    
    74,981
    
    
    
    100,605
    
    
    
    160,174
    
    
    
    335,760Six Months Ended June 30, 2003Net service revenue from external customers
    
    $
    19,297
    
    
    $
    45,679
    
    
    $
    59,743
    
    
    $
    124,719Long-lived assets at December 31, 2003
    
    
    77,510
    
    
    
    97,251
    
    
    
    157,657
    
    
    
    332,418
 The Companys operations in Europe comprise operations in a number of countries
that are coordinated from the U.K. No European country is significant in terms
of revenues generated or assets held, other than the U.K. The following table
reconciles the above totals for net service revenues, expenditure for
long-lived assets, segment income (loss), segment assets and long-lived assets
to the appropriate figures in the financial statements. Quarter
    
    Quarter
    
    Six months ended
    
    Six months endedended June 30, 2004
    
    ended June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Dollars in thousands)Segment income per above segment analysis
    
    $
    16,705
    
    
    $
    15,003
    
    
    $
    32,622
    
    
    $
    26,048Corporate overhead, including share offering and merger
expenses
    
    
    (7,449
    )
    
    
    (2,062
    )
    
    
    (10,521
    )
    
    
    (4,536
    )Income from operations per financial statements
    
    $
    9,256
    
    
    $
    12,941
    
    
    $
    22,101
    
    
    $
    21,512Expenditures for long-lived assets per above segment analysis
    
    $
    8,051
    
    
    $
    4,239
    
    
    $
    13,833
    
    
    $
    8,541Expenditures for long-lived assets not allocated to segments
    
    
    7
    
    
    
    
    
    
    
    28
    
    
    
    Expenditures for long-lived assets per financial statements
    
    $
    8,058
    
    
    $
    4,239
    
    
    $
    13,861
    
    
    $
    8,541
 June 30,
    
    December 31,2004
    
    2003Segment assets per above segment analysis
    
    $
    650,641
    
    
    $
    641,501Long lived assets not allocated to segments
    
    
    420
    
    
    
    57Deferred debt issue costs not allocated to segments
    
    
    1,420
    
    
    
    1,593Elimination of inter segment balances
    
    
    (199,997
    )
    
    
    (194,072
    )Assets per financial statements
    
    $
    452,484
    
    
    $
    449,079Long lived assets per above segment analysis
    
    $
    335,760
    
    
    $
    332,418Long lived assets not allocated to segments
    
    
    420
    
    
    
    57Deferred debt issue costs not allocated to segments
    
    
    1,420
    
    
    
    1,593Long lived assets per financial statements
    
    $
    337,600
    
    
    $
    334,068
 No client accounted for more than 10% of the Companys consolidated net revenue
for any of the periods covered by these financial statements. -17-




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Inveresk Research Group, Inc. Notes to Condensed Consolidated Financial Statements  10.
    
    Contingencies From time to time the Company is subject to claims, suits and administrative
proceedings arising in the ordinary course of business. The Company does not
expect that any of the claims suits or proceedings of which it has been
notified will have a material adverse effect upon its operations or financial
condition. -18-




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the corresponding
section of our Form 10-K for the year ended December 31, 2003 filed with the
Securities and Exchange Commission on February 24, 2004. The information set forth and discussed below for the quarters and six month
periods ended June 30, 2004 and June 30, 2003 is derived from the Condensed
Consolidated Financial Statements included under Item 1 above. The financial
information set forth and discussed below is unaudited but includes all
adjustments (consisting of normal recurring adjustments) which the Companys
management considers necessary for a fair presentation of the financial
position and the operating results and cash flows for those periods. The
Companys results of operations for a particular quarter may not be indicative
of the results that may be expected for other quarters or the entire year. Overview The following discussion and analysis of our financial position is intended to
give investors an understanding of our financial condition, liquidity and
capital resources and changes in financial conditions as well as our results of
operations. We are required to include much of the detail in the discussion
which follows by various regulatory requirements that we are subject to. This
introductory overview is intended to assist investors in identifying the areas
that are the main focus of management. We undertake pre-clinical and clinical development services on behalf of our
clients. The scope of our services for each project is agreed with the client
and documented in a contract prior to commencement of the work. Most of the
contracts with our clients are fixed price contracts, ranging in length from up
to a few weeks to several years. As we perform the agreed services under each
of the contracts with our clients, we record revenues based on a percentage of
completion for each contract. Because we have large numbers of contracts
underway at any particular time, all of which are individually priced, we do
not analyze the results of operations based on study type or based on the
profitability of individual studies. In evaluating the underlying health of our business and its prospects, it is
important to ensure that we replace the revenues we have generated with new
signed business (i.e. future revenues), so as to maintain the growth of our
underlying businesses. Therefore, in addition to the results of our
operations, which are discussed separately below, we monitor closely new
business signings for each of our operating units on a cumulative latest twelve
months basis (to address seasonal factors). We compare this with revenues
recorded over the same period and, based upon past experience, this data
provide an indication of the future prospects of the Company. Approximate new business signings for the twelve months ended June 30, 2004
compared with reported net service revenues are as follows: Latest 12
    
    Latest 12Months as at
    
    Months as atJune 30,
    
    June 30,2004
    
    2003(Dollars in thousands)New business signings (net)
    
    $
    367,000
    
    
    $
    281,000Net service revenue
    
    
    303,198
    
    
    
    238,469
 Each of our businesses operate principally under a fee for service model. We
have historically generated cash flows from operations in excess of our
requirements to fund internal growth. Because we have large numbers of
individually small contracts, no single contract has a significant effect on
our cash flow, although historically our cash flow from operations has been
stronger in the second -19-




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##### Table of Contents



half of the year than in the first. In addition, at June 30, 2004 we had
unutilized bank credit facilities totaling $75 million. We place significant emphasis on the process of contract management and how we
recognize revenue. This is a significant area of focus for our management.
Our operational and our financial management are closely involved in the review
of progress and the analysis of expected outcomes of our studies on a regular
basis. We have no history of significant issues arising in this area. Our net
investment in accounts receivable, unbilled receivables less advance payments,
has historically approximated 30 days of net revenue and at June 30, 2004 stood
at 27 days. The main area of market risk that affects our business is foreign exchange rate
fluctuations. In the first six months of 2004, approximately 77% of our
revenues were generated outside of the U.S., principally in the U.K. and
Canada. We experienced considerable volatility in U.S. dollar exchange rates
in 2003, particularly against pounds sterling and against the Canadian dollar.
Whilst the depreciation of the U.S. dollar against pounds sterling positively
impacted our financial results in 2003, its depreciation against the Canadian
dollar has had an adverse impact on our profitability. This is because the
costs of our Canadian operations arise predominantly in Canadian dollars, but a
significant proportion of the income of this business arises in U.S. dollars.
The impact of exchange rates on our financial results is discussed in more
detail in Item 3 below. Results of Operation We operate in two segments for financial reporting purposes: pre-clinical and
clinical. The following table shows a summary of our financial performance for
the quarter and the six months ended June 30, 2004, compared with the quarter
and six months ended June 30, 2003. -20-




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##### Table of Contents



Quarter
    
    Quarter
    
    Six months
    
    Six monthsended June 30,
    
    ended June 30,
    
    ended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Net service revenue:
    
    (Dollars in thousands)Pre-clinical
    
    $
    47,289
    
    
    $
    42,231
    
    
    $
    91,666
    
    
    $
    78,560Clinical
    
    
    32,108
    
    
    
    24,804
    
    
    
    64,469
    
    
    
    46,15979,397
    
    
    
    67,035
    
    
    
    156,135
    
    
    
    124,719Direct costs excluding depreciation:Pre-clinical
    
    
    (23,238
    )
    
    
    (19,276
    )
    
    
    (44,402
    )
    
    
    (36,100
    )Clinical
    
    
    (18,012
    )
    
    
    (14,803
    )
    
    
    (36,769
    )
    
    
    (27,257
    )(41,250
    )
    
    
    (34,079
    )
    
    
    (81,171
    )
    
    
    (63,357
    )Selling, general and administrative expenses:Pre-clinical
    
    
    (9,030
    )
    
    
    (8,223
    )
    
    
    (17,651
    )
    
    
    (16,565
    )Clinical
    
    
    (8,470
    )
    
    
    (6,641
    )
    
    
    (16,937
    )
    
    
    (12,711
    )Corporate overhead:Share offering and merger expenses
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,306
    )
    
    
    (658
    )Restructuring and integration costs arising from
business acquisition
    
    
    (24
    )
    
    
    
    
    
    
    (105
    )
    
    
    Other selling, general and administrative expenses
    
    
    (2,424
    )
    
    
    (2,062
    )
    
    
    (5,108
    )
    
    
    (3,878
    )(24,948
    )
    
    
    (16,926
    )
    
    
    (45,107
    )
    
    
    (33,812
    )Depreciation:Pre-clinical
    
    
    (2,850
    )
    
    
    (2,526
    )
    
    
    (5,698
    )
    
    
    (4,907
    )Clinical
    
    
    (744
    )
    
    
    (563
    )
    
    
    (1,360
    )
    
    
    (1,131
    )Corporate overhead
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (3,595
    )
    
    
    (3,089
    )
    
    
    (7,060
    )
    
    
    (6,038
    )Amortization of intangibles:Clinical
    
    
    (348
    )
    
    
    
    
    
    
    (696
    )
    
    
    (348
    )
    
    
    
    
    
    
    (696
    )
    
    
    Income from operations:Pre-clinical
    
    
    12,171
    
    
    
    12,206
    
    
    
    23,915
    
    
    
    20,988Clinical
    
    
    4,534
    
    
    
    2,797
    
    
    
    8,707
    
    
    
    5,060Corporate overhead including share offering
and merger expenses, restructuring and
integration costs and other selling, general
and administrative expenses
    
    
    (7,449
    )
    
    
    (2,062
    )
    
    
    (10,521
    )
    
    
    (4,536
    )9,256
    
    
    
    12,941
    
    
    
    22,101
    
    
    
    21,512Interest income (expense), net
    
    
    171
    
    
    
    (916
    )
    
    
    (627
    )
    
    
    (1,815
    )Income before income taxes
    
    
    9,427
    
    
    
    12,025
    
    
    
    21,474
    
    
    
    19,697Provision for income taxes
    
    
    (1,585
    )
    
    
    (1,866
    )
    
    
    (1,335
    )
    
    
    (2,161
    )Net income
    
    $
    7,842
    
    
    $
    10,159
    
    
    $
    20,139
    
    
    $
    17,536
 - 21 -




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The following table summarizes the above results of operations as a percentage
of net service revenue: Quarter
    
    Quarter
    
    Six months
    
    Six monthsended June 30,
    
    ended June 30,
    
    ended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Net service revenue:Pre-clinical
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Clinical
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Direct costs excluding depreciation:Pre-clinical
    
    
    49.1
    %
    
    
    45.6
    %
    
    
    48.4
    %
    
    
    46.0
    %Clinical
    
    
    56.1
    %
    
    
    59.7
    %
    
    
    57.0
    %
    
    
    59.1
    %Total
    
    
    52.0
    %
    
    
    50.8
    %
    
    
    52.0
    %
    
    
    50.8
    %Selling, general and administrative expenses:Pre-clinical
    
    
    19.4
    %
    
    
    19.5
    %
    
    
    19.3
    %
    
    
    21.1
    %Clinical
    
    
    26.4
    %
    
    
    26.8
    %
    
    
    26.3
    %
    
    
    27.5
    %Total (1)
    
    
    31.4
    %
    
    
    25.2
    %
    
    
    28.9
    %
    
    
    27.1
    %Depreciation:Pre-clinical
    
    
    6.0
    %
    
    
    6.0
    %
    
    
    6.2
    %
    
    
    6.2
    %Clinical
    
    
    2.3
    %
    
    
    2.3
    %
    
    
    2.1
    %
    
    
    2.5
    %Total
    
    
    4.5
    %
    
    
    4.6
    %
    
    
    4.5
    %
    
    
    4.8
    %Amortization of intangibles:Clinical
    
    
    1.1
    %
    
    
    0.0
    %
    
    
    1.1
    %
    
    
    0.0
    %Total
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    0.0
    %Income from operations:Pre-clinical
    
    
    25.7
    %
    
    
    28.9
    %
    
    
    26.1
    %
    
    
    26.7
    %Clinical
    
    
    14.1
    %
    
    
    11.3
    %
    
    
    13.5
    %
    
    
    11.0
    %Total (1)
    
    
    11.7
    %
    
    
    19.3
    %
    
    
    14.2
    %
    
    
    17.2
    %Interest (income) expense, net
    
    
    (0.2
    )%
    
    
    1.4
    %
    
    
    0.4
    %
    
    
    1.5
    %Income before income taxes
    
    
    11.9
    %
    
    
    17.9
    %
    
    
    13.8
    %
    
    
    15.8
    %
   (1)
    
    Including corporate overhead. Significant Matters Affecting Our Financial Condition and Results of Operations Share offering and merger expenses Merger with Charles River Laboratories International, Inc. On June 30, 2004, we entered into an Agreement and Plan of Merger with Charles
River and Indigo Merger I Corp. and Indigo Merger II Corp., both wholly owned
subsidiaries of Charles River. The merger is subject to the satisfaction of
certain closing conditions, including the approval of our stockholders and
receipt of regulatory approvals. Under the terms of the merger agreement, Indigo Merger I Corp. will merge with
and into the Company, whereupon the Company will become a wholly owned
subsidiary of Charles River. Pursuant to, and as part of a single integrated
transaction, the Company will then be merged with and - 22 -




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into Indigo Merger II LLC, whereupon the separate corporate existence of the
Company will cease and Indigo Merger II LLC will be the surviving corporation. Upon the merger of Indigo Merger I Corp. and the Company, each share of the
Companys common stock will be converted into the right to receive $15.15 in
cash and 0.48 shares of common stock in Charles River. In addition, each
outstanding option to purchase the Companys common stock will be converted
into an option to purchase Charles River stock. Each stock option resulting
from such conversion will continue to have the same terms and conditions
following the merger with Indigo Merger I Corp., except that (i) each option
will be exercisable for that number of whole shares of Charles River stock
equal to the number of shares of Inveresk stock that were issuable upon
exercise of the related Inveresk stock option multiplied by 0.8, rounded down
to the nearest whole number, and (ii) the per share exercise price for the
Charles River stock options will equal the exercise price per share of Inveresk
stock at which the related stock option was exercisable divided by 0.8, rounded
to the nearest whole cent. During the second quarter of 2004, we incurred approximately $5.0 million in
merger costs and we expect to incur significant additional merger-related costs
in the remainder of 2004. These are included in the share offering and merger
expenses caption in the statement of operations for the second quarter. We
expect total merger-related costs during 2004 could amount to up to $14
million, primarily due to financial advisory, legal and accounting fees. The
majority of the merger-related costs expected to occur in the remainder of 2004
are contingent upon the consummation of the merger and, accordingly, are not
expected to significantly impact our results of operations unless and until the
merger is consummated. If the merger agreement is terminated under certain circumstances specified in
the merger agreement, we may be required to pay to or entitled to receive from
Charles River, a termination fee of $38.1 million. In addition, if we fail to
consummate the proposed merger, the price of our common stock may decline as
the current market price may reflect an assumption that the proposed merger
will be consummated and that our stockholders will become stockholders of
Charles River upon closing of the merger. Other Share Offering Expenses On February 18, 2003 we announced a proposed public offering of up to
10,350,000 shares of common stock. 3,000,000 shares were to be offered by the
Company and 7,350,000 shares were to be offered by certain selling
stockholders. On March 7, 2003, we announced the withdrawal of the
registration statement relating to this offering because market conditions at
the time made it inadvisable to proceed with the offering. The costs relating
to this offering were expensed in the first quarter of 2003 and reduced the
first quarter 2003 net income by approximately $0.7 million. We do not expect
such costs to recur in the foreseeable future. In the first quarter of 2004, our principal shareholder Candover Investments
PLC (Candover) requested that we prepare and file a registration statement to
allow Candover and a number of associated Candover entities to sell a portion
of their remaining shares. Pursuant to a registration rights agreement entered
into at the time of our initial public offering in 2002, we bore costs
associated with the registration statement amounting to $0.3 million. These
costs have been included as share offering expenses in our statement of
operations in the first quarter of 2004. PharmaResearch On July 29, 2003 we completed our acquisition of PharmaResearch Corporation
(PharmaResearch) which was formed and began operations in 1995. We acquired
PharmaResearch for $37.1 million in cash, net of cash acquired of $6.0 million.
Its net service revenue and income from operations for the year ended December
31, 2002 were $40.6 million and $4.8 million, respectively. The acquisition of
PharmaResearch allowed us to increase significantly the scale and service of
our North American - 23 -




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clinical development operations. Its strong presence in the field of
respiratory and other infectious diseases enables us to build value-added
clinical laboratory support services for the enlarged client base. The former PharmaResearch business operations have been functionally integrated
into our North American clinical business and accordingly, for financial
reporting purposes, we do not separately present the results of those
operations. Exchange rate fluctuations Our condensed consolidated financial statements are prepared in U.S. dollars.
Our principal businesses are based in the U.S., U.K. and Canada. Our U.K. and
Canadian operations record their transactions in local currencies.
Accordingly, fluctuations in the pound sterling and Canadian dollar exchange
rates will impact the results of operations reported in U.S. dollars. The results of our non-U.S. operations have been translated from pounds
sterling and Canadian dollars using the following average exchange rates: U.S. Dollars per
    
    U.S. Dollars perPound Sterling
    
    Canadian DollarQuarter ended June 30, 2004
    
    
    1.8063
    
    
    
    0.7361Quarter ended June 30, 2003
    
    
    1.6185
    
    
    
    0.7164Six months ended June 30, 2004
    
    
    1.8228
    
    
    
    0.7476Six months ended June 30, 2003
    
    
    1.6107
    
    
    
    0.6896
 The following table sets forth the percentage of our net service revenue
arising in the U.K. and Canada: U.K.
    
    CanadaQuarter ended June 30, 2004
    
    
    45
    %
    
    
    33
    %Quarter ended June 30, 2003
    
    
    47
    %
    
    
    38
    %Six months ended June 30, 2004
    
    
    45
    %
    
    
    32
    %Six months ended June 30, 2003
    
    
    48
    %
    
    
    37
    %
 Our Canadian business invoices a significant proportion of its revenues in U.S.
dollars, although its costs are largely in Canadian dollars. This can result
in transaction exchange gains or losses that are reflected in its statement of
operations. The foreign currency gains or losses recognized in the statement
of operations and included in Selling, general and administrative expenses
was a gain of less than $0.1 million for the quarter ended June 30, 2004 and
$0.5 million for the six months ended June 30, 2004, compared with a loss of
$0.4 million and $1.9 million for the quarter and six months ended June 30,
2003. Second Quarter 2004 Compared to Second Quarter 2003 Net service revenue.Net service revenue in the second quarter of 2004 was
$79.4 million, an increase of $12.4 million or 18% over second quarter 2003 net
service revenue of $67.0 million. Pre-clinical.Net service revenue in the second quarter of 2004 was $47.3
million, an increase of $5.1 million or 12% over revenues of $42.2 million in
the second quarter of 2003. Our pre-clinical operations in Europe and North
America experienced increased demand for their services during the second
quarter, both for safety evaluation services and laboratory sciences services.
In 2003, our North American operations recovered in the second quarter from an
abnormally high level of project delays experienced in the first quarter of
2003. The revenues in these operations in the second quarter of 2003 were the
highest of any quarter in 2003. Assuming constant dollar exchange rates, net
service - 24 -




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revenues in the pre-clinical segment increased by 6% in the second quarter of
2004 compared with 2003. Clinical.Net service revenue in the second quarter of 2004 was $32.1 million,
an increase of $7.3 million or 29% over revenues of $24.8 million in the second
quarter of 2003. The principal factor behind this growth was the acquisition
of PharmaResearch which we completed in July 2003. Because we have fully
integrated this business into our clinical operations, the precise contribution
of the acquired business to second quarter 2004 net service revenue is not
available. Notwithstanding the impact of the PharmaResearch acquisition, net
service revenue for the clinical segment was impacted by the introduction of
the Clinical Trials Directive in Europe and delayed new business signings in
the first half of 2004, particularly in the U.S. Assuming constant dollar
exchange rates, net service revenue in the clinical segment increased by 23% in
the second quarter of 2004 compared to 2003. Direct costs excluding depreciation.In the second quarter of 2004 direct
costs excluding depreciation totaled $41.3 million, an increase of $7.2
million, or 21% from $34.1 million in the second quarter of 2003. Direct costs
excluding depreciation were 52% of net service revenue in the second quarter of
2004 compared with 51% in the second quarter of 2003. Pre-clinical.Direct costs excluding depreciation in the second quarter of
2004 were $23.2 million, an increase of $4.0 million, or 21%, over costs of
$19.3 million in the second quarter of 2003. In the second quarter of 2004,
direct costs excluding depreciation were 49% of net service revenue, compared
with 46% in the second quarter of 2003. This increase reflects the weaker U.S.
dollar : Canadian dollar exchange rate environment, the less favorable business
mix in our North American pre-clinical operations and an increase in the
proportion of revenues represented by our European operations (which have a
greater proportion of direct costs relative to net service revenue compared
with our North American operations). Clinical.Direct costs excluding depreciation in the second quarter of 2004
were $18.0 million, an increase of $3.2 million, or 22% over costs of $14.8
million in the second quarter of 2003. In the second quarter of 2004 direct
costs excluding depreciation were 56% of net service revenues compared with 60%
in the second quarter of 2003. This reflects improved efficiencies of scale
following the acquisition of PharmaResearch in July 2003. Selling, general and administrative expenses.In the second quarter of 2004,
selling, general and administrative expenses totaled $24.9 million, an increase
of $8.0 million, or 47% from $16.9 million in the second quarter of 2003. Pre-clinical.Selling, general and administrative costs in the second quarter
of 2004 were $9.0 million, an increase of $0.8 million or 10% from $8.2 million
in the second quarter of 2003. Selling, general and administrative costs were
19% of net service revenue in the second quarter of 2004, consistent with 19%
in the second quarter of 2003. Clinical.Selling, general and administrative costs in the second quarter of
2004 were $8.5 million, an increase of $1.8 million or 28% from $6.6 million in
the second quarter of 2003. Selling, general and administrative costs were 26%
of net service revenue in the second quarter of 2004 compared with 27% in the
second quarter of 2003. The decrease in percentage terms is mainly due to the
impact of cost savings following the acquisition of PharmaResearch. Corporate overhead.Corporate overhead amounted to $7.4 million, an increase
of $5.4 million, or 161% over $2.1 million in the second quarter of 2003.
Corporate overhead in the second quarter of 2004 included $5.0 million of
expenses arising from our proposed merger with Charles River Laboratories
International, Inc. that was announced on July 1, 2004. Other corporate
overhead amounted to 3% of net service revenue, consistent with 3% of net
service revenue in the second quarter of 2003. - 25 -




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Income from operations.In the second quarter of 2004 income from operations
amounted to $9.3 million, or 12% of net service revenue. Income from
operations in the second quarter of 2003 amounted to $12.9 million, or 19% of
net service revenue. Pre-clinical.Income from operations was $12.2 million in the second quarter
of 2004 compared with $12.2 million in the second quarter of 2003, for the
reasons set forth above. Clinical.Income from operations was $4.5 million in the second quarter of
2004 compared with $2.8 million in the second quarter of 2003, for the reasons
set forth above. Interest income (expense).Interest income in the second quarter of 2004 was
$0.2 million, a reduction of $1.1 million in the expense of $0.9 million in the
second quarter of 2003. In the second quarter of 2004 interest expense
included $0.4 million of net interest and amortization of deferred debt costs
on our bank facilities and cash resources and a credit of $0.6 million on the
mark-to-market revaluation of our interest rate swaps. In the second quarter of
2003 interest expense included $0.6 million of net interest and amortization of
deferred debt costs on our bank facilities and cash resources and a charge of
$0.3 million on the mark-to-market revaluation of our interest rate swaps. Provision for income taxes.Provision for income taxes was $1.6 million or 17%
of income before taxes in the second quarter of 2004 compared with $1.9 million
or 16% of income before taxes in the second quarter of 2003. U.K. and Canadian
research and development tax credits reduced the provision for income taxes by
$2.0 million or 21% of income before taxes in 2004 and by $1.8 million or 15%
of income before taxes in 2003. We recorded a reduction in income tax expense
amounting to $0.2 million or 6% of income before taxes in the second quarter of
2004 and $0.3 million or 2% of income before taxes in the second quarter of
2003 in respect of gains made by our employees on exercise of stock options.
The tax charge, expressed as a percentage of income before taxes, has also been
impacted by the non-deductibility for tax purposes of the expenses arising in
respect of our proposed merger with Charles River Laboratories International,
Inc. Additionally, in 2004 the tax rate applicable to our operations in Canada
is approximately 2% lower than in 2003. First Six Months of 2004 Compared to First Six Months of 2003 Net service revenue.Net service revenue in the first six months of 2004 was
$156.1 million, an increase of $31.4 million or 25% compared with the first six
months of 2003, where we reported net service revenue of $124.7 million. Pre-clinical.Net service revenue in the first six months of 2004 was $91.7
million, an increase of $13.1 million or 17% over revenues of $78.6 million in
the first six months of 2003. Our pre-clinical operations in Europe and North
America experienced increased demand for their services during the first six
months, both for safety evaluation services and laboratory sciences services.
Assuming constant dollar exchange rates, net service revenues in the
pre-clinical segment increased by 9% in the first six months of 2004 compared
with 2003. Clinical.Net service revenue in the first six months of 2004 was $64.5
million, an increase of $18.3 million or 40% over revenues of $46.2 million in
the first six months of 2003. The principal factor behind this growth was the
acquisition of PharmaResearch which we completed in July 2003. Because we have
fully integrated this business into our clinical operations, the precise
contribution of the acquired business to the first six months of 2004 net
service revenue is not available. Notwithstanding the impact of the
PharmaResearch acquisition, net service revenue for the clinical segment was
impacted by the introduction of the Clinical Trials Directive in Europe and
delayed new business signings in the first half of 2004, particularly in the
U.S. Assuming constant dollar exchange rates, net service revenue in the
clinical segment increased by 32% in the first six months of 2004 compared to
2003. - 26 -




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Direct costs excluding depreciation.In the first six months of 2004 direct
costs excluding depreciation totaled $81.2 million, an increase of $17.8
million, or 28% from $63.4 million in the first six months of 2003. Direct
costs excluding depreciation were 52% of net service revenue in the first six
months of 2004 compared with 51% in the first six months of 2003. Pre-clinical.Direct costs excluding depreciation in the first six months of
2004 were $44.4 million, an increase of $8.3 million, or 23%, over costs of
$36.1 million in the first six months of 2003. In the first six months of
2004, direct costs excluding depreciation were 48% of net service revenue,
compared with 46% in the first six months of 2003. This increase reflects the
weaker U.S. dollar : Canadian dollar exchange rate environment, the less
favorable business mix in our North American pre-clinical operations and an
increase in the proportion of revenues represented by our European operations
(which have a greater proportion of direct costs relative to net service
revenue compared with our North American operations). Clinical.Direct costs excluding depreciation in the first six months of 2004
were $36.8 million, an increase of $9.5 million, or 35% over costs of $27.3
million in the first six months of 2003. In the first six months of 2004
direct costs excluding depreciation were 57% of net service revenues compared
with 59% in the first six months of 2003. This reflects improved efficiencies
of scale following the acquisition of PharmaResearch in July 2003. Selling, general and administrative expenses.In the first six months of 2004,
selling, general and administrative expenses totaled $45.1 million, an increase
of $11.3 million, or 33% from $33.8 million in the first six months of 2003. Pre-clinical.Selling, general and administrative costs in the first six
months of 2004 were $17.7 million, an increase of $1.1 million or 7% from $16.6
million in the first six months of 2003. Selling, general and administrative
costs were 19% of net service revenue in the first six months of 2004, compared
with 21% in the first six months of 2003. Selling, general and administrative
costs were reduced in the first six months of 2004 as a consequence of exchange
gains of $0.5 million during the period compared with exchange losses of $1.8
million in the first six months of 2003. The remaining costs represented 20%
of net service revenue in the first six months of 2004 compared with 19% in the
corresponding period in 2003. This increase is attributable to adverse U.S.
dollar : Canadian dollar exchange rate movements over the past twelve months. A
significant proportion of our revenues in our Canadian operations arise in U.S.
dollars, but our costs arise predominantly in Canadian dollars. Clinical.Selling, general and administrative costs in the first six months of
2004 were $16.9 million, an increase of $4.2 million or 33% from $12.7 million
in the first six months of 2003. Selling, general and administrative costs
were 26% of net service revenue in the first six months of 2004 compared with
28% in the first six months of 2003. The decrease in percentage terms is mainly
due to the impact of cost savings following the acquisition of PharmaResearch. Corporate overhead.Corporate overhead amounted to $10.5 million, an increase
of $6.0 million, or 132% over the first six months of 2003. Corporate overhead
in the first six months of 2004 included share offering expenses of $0.3
million, $0.1 million relating to restructuring costs arising from the
integration of PharmaResearch and $5.0 million arising from our proposed merger
with Charles River Laboratories International, Inc. announced on July 1, 2004.
Selling, general and administrative expenses in the first six months of 2003
included an expense of $0.7 million relating to the share offering announced
and withdrawn in the first quarter. Before taking account of these costs,
other corporate overhead of $5.1 million in the first six months of 2004
represented 3% of net service revenue which is consistent with the first six
months of 2003. Income from operations.In the first six months of 2004, income from
operations amounted to $22.1 million, or 14% of net service revenue. Income
from operations in the first six months of 2003 amounted to $21.5 million, or
17% of net service revenue. - 27 -




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Pre-clinical.Income from operations increased to $23.9 million in the first
six months of 2004 compared with $21.0 million in the first six months of 2003,
for the reasons set forth above. Clinical.Income from operations was $8.7 million in the first six months of
2004 compared with $5.1 million in the first six months of 2003, for the
reasons set forth above. Interest expense.Interest expense in the first six months of 2004 was $0.6
million, a reduction of $1.2 million or 65% from $1.8 million in the first six
months of 2003. In the first six months of 2004 interest expense included $0.8
million of net interest and amortization of deferred debt costs on our bank
facilities and cash resources and a credit of $0.2 million on the
mark-to-market revaluation of our interest rate swaps. In the first six months
of 2003 interest expense included $1.3 million of net interest and amortization
of deferred debt costs on our bank facilities and cash resources and a charge
of $0.5 million on the mark-to-market revaluation of our interest rate swaps. Provision for income taxes.Provision for income taxes was $1.3 million in the
first six months of 2004. Following the completion of the integration of
PharmaResearch Corporation into the clinical operations in the U.S., in the
first quarter of 2004, the Company reassessed the valuation allowance
previously established to reduce the value of the deferred tax assets (mainly
arising on net operating losses) in the U.S. As a consequence, the valuation
allowance has been reduced by $15.4 million, of which $1.7 million was
recognized in the income statement in the first quarter of 2004. The remaining
$13.7 million was recorded as a reduction in goodwill as the associated
deferred tax assets were acquired in 2001, at which time a valuation allowance
was established. The tax charge, expressed as a percentage of income before
taxes, has also been impacted by the non-deductibility for tax purposes of the
expenses arising in respect of our proposed merger with Charles River
Laboratories International, Inc. After eliminating these factors, the
remaining provision for income taxes represented 12% of income before taxes in
the first six months of 2004. Provision for income taxes was $2.2 million or
11% of income before taxes in the first six months of 2003. U.K. and Canadian
research and development tax credits reduced the provision for income taxes by
$3.9 million in the first six months of 2004 and by $3.5 million in the first
six months of 2003. We recorded a reduction in income tax expense amounting to
$0.4 million in the first six months of 2004 and $0.9 million in the first six
months of 2003 in respect of gains made by our employees on exercise of stock
options. Additionally, in 2004 the tax rate applicable to our operations in
Canada is approximately 2% lower than in 2003. Liquidity and capital resources Cash and cash equivalents totaled $21.1 million at June 30, 2004 compared with
$24.6 million at December 31, 2003. Our principal sources of liquidity are
cash flow from operations and borrowings under our credit facilities. At June 30, 2004 our bank credit facilities totaled $129.5 million comprised of
$54.5 million of term loans in U.S. dollars and up to $75 million of loans
available in multiple currencies under a revolving credit arrangement. At June
30, 2004, we had drawn down $54.5 million of term loans under the facility,
which is repayable in quarterly instalments over the period to December 2007.
Our bank credit facilities bear interest at floating, LIBOR-based rates. We
have limited our exposure to interest rate fluctuations on the loans drawn
under this facility through a series of interest rate swaps. Our credit
facilities subject us to significant affirmative, negative and financial
covenants, are guaranteed by us and our significant subsidiaries and are
secured by liens on substantially all of our assets. Working capital balances which arise from our contracts with customers comprise
accounts receivable, unbilled receivables and advance billings. A summary of
these balances at the last five quarter ends, together with the number of
equivalent days sales they represent, is set forth below. - 28 -




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June 30, 2004
    
    March 31, 2004
    
    December 31, 2003
    
    September 30, 2003
    
    June 30, 2003No. of
    
    
    
    
    
    No. of
    
    
    
    
    
    No. of
    
    
    
    
    
    No. of
    
    
    
    
    
    No. ofBalance
    
    Days Net
    
    Balance
    
    Days Net
    
    Balance
    
    Days Net
    
    Balance
    
    Days Net
    
    Balance
    
    Days Net($'000s)
    
    Revenue
    
    ($'000s)
    
    Revenue
    
    ($'000s)
    
    Revenue
    
    ($'000s)
    
    Revenue
    
    ($'000s)
    
    RevenueAccounts receivable
    
    $
    44,476
    
    
    
    52
    
    
    $
    42,459
    
    
    
    50
    
    
    $
    53,391
    
    
    
    71
    
    
    $
    45,012
    
    
    
    62
    
    
    $
    36,428
    
    
    
    53Unbilled
receivables
    
    
    29,046
    
    
    
    34
    
    
    
    32,759
    
    
    
    39
    
    
    
    24,331
    
    
    
    33
    
    
    
    26,144
    
    
    
    36
    
    
    
    25,643
    
    
    
    37Sub total
    
    
    73,522
    
    
    
    86
    
    
    
    75,218
    
    
    
    89
    
    
    
    77,722
    
    
    
    104
    
    
    
    71,156
    
    
    
    98
    
    
    
    62,071
    
    
    
    90Advance billings
    
    
    (50,423
    )
    
    
    (59
    )
    
    
    (57,462
    )
    
    
    (68
    )
    
    
    (56,745
    )
    
    
    (76
    )
    
    
    (48,266
    )
    
    
    (67
    )
    
    
    (40,840
    )
    
    
    (59
    )$
    23,099
    
    
    
    27
    
    
    $
    17,756
    
    
    
    21
    
    
    $
    20,977
    
    
    
    28
    
    
    $
    22,890
    
    
    
    31
    
    
    $
    21,231
    
    
    
    31
 - 29 -




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The impact of the above balances on our cash flow from operations in the first
two quarters of 2004 and the last three quarters of 2003, excluding translation
effects, was as follows: Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarterended
    
    ended
    
    ended
    
    ended
    
    endedJune 30,
    
    March 31,
    
    December
    
    September
    
    June 30,2004
    
    2004
    
    31, 2003
    
    30, 2003
    
    2003Cash inflow (outflow)
    
    (Dollars in thousands)Accounts receivable including unbilled receivables
    
    $
    1,795
    
    
    $
    2,504
    
    
    $
    (6,566
    )
    
    $
    2,884
    
    
    $
    (1,411
    )Advance billings
    
    
    (7,402
    )
    
    
    717
    
    
    
    8,479
    
    
    
    (2,806
    )
    
    
    215$
    5,607
    
    
    $
    3,221
    
    
    $
    1,913
    
    
    $
    78
    
    
    $
    (1,196
    )
 The cash generated by operating activities was $18.2 million in the first six
months of 2004, and $56.3 million in the year ended December 31, 2003. When
compared with operating cash flows, the cash flows relating to working capital
movements have not had a significant impact on liquidity. During the twelve months from July 1, 2004 to June 30, 2005, we are scheduled
to make repayments of $7.5 million of principal indebtedness under our bank
credit facility. We anticipate that our operating cash flow, together with
available borrowings under our bank credit facility and the net proceeds we
receive from any offerings, will be sufficient to meet our anticipated future
operating expenses, capital expenditures (including our planned expansions at
our pre-clinical facilities) and debt service obligations as they become due
over the next twelve months. Second quarter 2004 compared to second quarter 2003 Cash flow from operations in the second quarter of 2004 was $7.1 million
compared with $12.2 million in the second quarter of 2003. Cash payments for
items of capital expenditures were $8.5 million in the second quarter of 2004
compared with $4.2 million in the second quarter of 2003. Recent completion of
an expansion at our Edinburgh facility and the further expansion of our
facilities in Montreal accounts for most of the increase. In the second quarter of 2004 we repaid $1.9 million of our bank debt compared
with $5.0 repaid in the second quarter of 2003. First six months of 2004 compared to first six months of 2003 Cash flow from operations in the first six months of 2004 was $18.2 million
compared with $17.0 million in the first six months of 2003. Cash payments for
items of capital expenditures were $17.2 million in the first six months of
2004 compared with $8.5 million in 2003. Recent completion of an expansion at
our Edinburgh facility and the further expansion of our facilities in Montreal
accounts for most of the increase. In the first six months of 2004 we repaid $3.8 million of our bank debt
compared with $10.0 million repaid in the first six months of 2003. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates and assumptions are affected by
the way we apply our accounting policies. An accounting estimate is considered
critical if the estimate requires us to make assumptions about matters that
were highly uncertain at the time the estimate was made; if different estimates
reasonably could have been used; or if changes in the estimate that would have
a material impact on our financial
condition or results of operations are reasonably likely to occur from period
to period. We believe that - 30 -




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the accounting estimates employed are appropriate
and resulting balances are reasonable; however, actual results could differ
from the original estimates, requiring adjustments to these balances in future
periods. The accounting policies which we consider to be critical accounting
policies include revenue recognition, accounting for income taxes and
accounting for pension obligations. A discussion of our policies on revenue
recognition and accounting for pension obligations is included in our Form 10-K
for the year ended December 31, 2003. Income Taxes We operate in numerous countries but the tax regulations in the U.S., Canada
and the U.K. have the most significant effect on our income tax and deferred
tax assets and liabilities and our income tax expense. The tax regulations are
highly complex and while we aim to ensure the estimates of tax assets and
liabilities that we record are accurate, there may be instances where the
process of agreeing our tax liabilities with the tax authorities may possibly
require significant adjustments, which cannot presently be quantified, to be
made to estimates previously recorded. Our provision for income taxes is
affected by various factors. We receive research and development tax credits in Canada and the U.K. The
level of such credits is dependent upon the amount of qualifying costs in these
jurisdictions. We estimate the amounts of these credits each period based on
our experience and knowledge of the relevant tax regulations. Because the
level of the credits is based on the levels of qualifying costs, the tax
credits are not directly related to income before income taxes and therefore
the level of tax credits may fluctuate from period to period when compared to
income before income taxes. Research and development tax credits reduced our
income tax expense by $3.9 million in the first six months of 2004 and by $3.5
million in the first six months of 2003. We have deferred tax assets of $24.5 million and $25.9 million at June 30, 2004
and December 31, 2003. We assess the likelihood of the utilization of such
assets and based on the historical performance of the relevant operations,
limitations on the utilization of the assets and anticipated operating results,
we establish valuation allowances. In the first six months of 2004, we reduced
the valuation allowances to $0.1 million at June 30, 2004 from $15.8 million at
December 31, 2003. The major factor behind this change was the completion of
the combination of PharmaResearch Corporation and our existing clinical
operations in the U.S. into one operating legal entity in the first quarter of
2004. Based on our assessment of the profitability of that combined entity, we
believe that the valuation allowance previously established to reduce the value
of the deferred tax assets (mainly arising on net operating losses) in the
U.S., is no longer required. As a consequence, the valuation allowance has
been reduced, resulting in a reduction of $13.7 million in goodwill relating to
deferred tax assets acquired in 2001 and a tax benefit of $1.7 million which
was recognized in the statement of operations in the first quarter of 2004. We will continue to assess the allowances on the information available each
period and our assessment may change in future periods. - 31 -




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to market risks arising from changes in interest rates and
foreign currency exchange rates. Our primary interest rate exposure is in respect of future changes in the LIBOR
or base rates that are used to determine the amounts of interest we are
required to pay on borrowings under our bank credit facility. The outstanding
indebtedness at June 30, 2004 under our bank credit facility, bore interest at
a rate equal to LIBOR plus a margin of 1.25%. That margin is set each quarter
based on specified financial ratio tests and may vary between LIBOR plus 1.25%
and LIBOR plus 2.0%. We have entered into two interest rate swap arrangements to hedge the interest
rate exposure on our bank borrowings. The first arrangement is an interest rate
swap with a notional amount of $50 million, which expires on September 30,
2005. Under this arrangement the LIBOR rate applicable to $50 million of bank
debt is fixed at 2.9975%. The second arrangement is an interest rate swap with
a notional amount of $10 million, which expires on September 30, 2004. Under
this arrangement the LIBOR rate applicable to $10 million of bank debt is fixed
at 2.5225%. The interest rate swaps exceed our bank borrowings at June 30, 2004 by $5.5
million and this amount is exposed to fluctuations in interest rates. Our
potential loss over one year that would result from a hypothetical,
instantaneous change of 100 basis points in the interest rate is not
significant. We have not designated the interest rate swaps as hedges for financial
reporting purposes pursuant to SFAS 133. As a consequence, we record, through
the interest expense category in our statement of operations, any changes in
the fair value of the swaps. The fair value of the swaps will fluctuate, mainly
as a consequence of changes in market rates of interest. Accordingly, changes
in market rates of interest can cause fluctuations in the level of our recorded
interest expense from period to period. Our Canadian business has a significant proportion of its working capital
represented by assets and liabilities that are denominated in U.S. dollars.
Accordingly, fluctuations in the U.S. dollar/Canadian dollar exchange rate
give rise to exchange gains and losses. These gains and losses arise from the
conversion of U.S. dollars to Canadian dollars and the retranslation of cash,
accounts receivable and unbilled receivable balances and to a lesser extent
accounts payable balances. We have entered into a forward contract to sell
U.S.$11.6 million and buy CDN$15.6 million (Canadian dollars) on June 30, 2004.
This contract reduces our exposure to exchange gains and losses arising from
the retranslation of the above balances during the life of the contract. The
amounts of the U.S. dollar denominated balances held by our Canadian subsidiary
fluctuate from time to time and based on the average balances in the the first
five months of 2004, offset by the effects of the forward contract, we estimate
that a hypothetical instantaneous 10% devaluation of the U.S. dollar against
the Canadian dollar would give rise to recognition of an exchange loss (which
would be included for financial reporting purposes in selling, general and
administrative expenses) of approximately $0.1 million, before income tax
effects. On the same basis, we estimate that a hypothetical instantaneous 10%
devaluation of the Canadian dollar against the U.S. dollar would give rise to
recognition of an exchange gain (which for financial reporting purposes would
be netted against and therefore reduce selling, general and administrative
expenses) of approximately $0.1 million before income tax effects. A significant proportion of the revenues in our Canadian operations arise in
U.S. dollars but the costs in these operations arise mainly in Canadian
dollars. To monitor this we look at the results of operations of our Canadian
business that arise in Canadian dollars. This is a net expense because it
excludes the U.S. dollar denominated revenue stream but includes most of the
costs of our Canadian operations. In 2003, we estimate that the net expense
arising in Canadian dollars in our Canadian operations amounted to
approximately $29 million. In the second quarter of 2004, we purchased for a
cost of $0.3 million, a series of options to sell U.S. $20 million and purchase
Canadian dollars (U.S. $2.5 million on a specified date each month from May
2004 through December 2004) at a rate of - 32 -




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U.S.$1: CDN$1.3630. We have designated these options as cash flow hedges of
our forecasted U.S. dollar denominated sales invoices arising in our Canadian
operations. The cost of the options, together with any gains arising on
exercise of the options will be written off over the collection period of the
invoices being hedged. The effect of the options is to reduce the exposure in
our Canadian operations to reductions in revenue if the U.S. dollar exchange
rate was to fall below the option rate of U.S.$1: CDN$1.3630. Based on the
exchange rate of U.S.$1: CDN$1.3339 as at June 30, 2004, and excluding the
effects of a change in this exchange rate on the U.S. dollar denominated
working capital in our Canadian subsidiary as described in the preceding
paragraph, we estimate that a 10% strengthening of the Canadian dollar against
the U.S. dollar would have no significant effect on our group net income over
the last six months of 2004 and a 10% weakening of the Canadian dollar against
the US dollar would increase group net income by approximately $1.2 million
over the same period. Our European operations are less exposed to fluctuations in exchange rates than
our Canadian operations. However, the net income of our European operations is
recorded in the local currencies of the operations, pricipally pounds sterling,
and then translated into U.S. dollars. In 2003, the net income arising in
pounds sterling amounted to approximately $18 million. Based on this, a 10%
strengthening of the pound sterling against the U.S. dollar would increase our
group net income by $1.8 million over a period of a year and a 10% weakening of
the pound sterling against the U.S. dollar would decrease group net income by
$1.8 million over a period of a year. We also would potentially have exposure to foreign currency exchange rate
fluctuations in respect of the cash flows received from our foreign affiliates.
This risk is mitigated by the fact that their operations are conducted in their
respective local currencies, and it is not our intention to repatriate earnings
prospectively. We do not use financial instruments for trading or other speculative purposes. Our management does not believe that inflation in past years has had a
significant impact on our results from operations. Our management believes
that, in the event inflation affects our costs in the future, we will offset
the effect of inflation and maintain appropriate margins through increased
fees. - 33 -




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ITEM 4. CONTROLS AND PROCEDURES The Chief Executive Officer and the Chief Financial Officer are responsible for
establishing and maintaining a system of disclosure controls and procedures to
ensure the accuracy and completeness of the Companys quarterly and annual
reports. They are also responsible for conducting a review of the
effectiveness of the disclosure controls and procedures as of a date within 90
days of the filing date of the quarterly or annual report and disclosing their
conclusions about the effectiveness of the disclosure controls and procedures
based on the review. Description of Principal Disclosure Controls and Procedures The system of disclosure controls and procedures cannot provide absolute
assurance on the accuracy and completeness of the Companys annual and
quarterly reports, but it has been designed to meet the Groups needs and the
risks to which it is exposed. There is a continuous process of identifying, evaluating and managing the risks
to which the Company is exposed that has been in place throughout the current
fiscal year and up to the date of this filing. The key elements of the process
are:  
    
    Formal reporting on a monthly basis to the Chief Executive Officer and Chief Financial Officer on the results of operations
and on any emerging risks and issues. The monthly results are analyzed by business segment, and all significant variations
from budget and the prior year are investigated. The day-to-day responsibility for each business unit rests with
experienced management and the Company has a clear organization structure that includes appropriate delegation of
authority. There is regular contact between the Chief Executive Officer and Chief Financial Officer and the President of
each business unit.
    
    Formal Board approval of the annual budget for each financial year. Annual budgets are prepared in detail for each
business unit.
    
    Review of each quarterly or annual report by the Audit Committee. The Audit Committee also meets with the Companys
external auditors on a quarterly basis to discuss the results of the external auditors review of the quarterly financial
statements and any internal control matters arising from such review.
    
    Confirmation each quarter from the President of each business unit covering the accuracy of the reported financial results
of the business and confirmation that all significant issues affecting the business have been reported to the Chief
Executive Officer and Chief Financial Officer.
    
    Confirmation from the Vice-President of Finance for each business unit that certain financial control procedures have been
completed.
    
    Consultation on significant matters with the Companys professional advisers. In addition to the above procedures, the Company has introduced an internal
audit function and a formal plan is now in place. The internal audit function
has been outsourced to one of the big four international accounting firms other
than our external independent auditors. The internal audit team reports
regularly to the Audit Committee and senior management. Evaluation of Disclosure Controls and Procedures Based on their review of the disclosure controls and procedures as of June 30,
2004, the Chief Executive Officer and Chief Financial Officer have concluded
that the Company has effective disclosure controls and procedures. - 34 -




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Changes in Internal Controls During the period covered by this report, and up to and including the date of
this report, there have been no significant changes in the internal controls
nor in other factors that are reasonably likely to materially affect these
controls. 
 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information provided in Note 10 to the financial statements contained
in Part I of this Form 10-Q is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. N/A ITEM 3. DEFAULTS UPON SENIOR SECURITIES. N/A ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Companys Annual Meeting of Stockholders was held on May 4, 2004. Proposal
I, submitted to a vote of stockholders at the meeting, was the election of
directors. The following director, being the only Class II director of the
Company, was elected at the meeting, with the number of votes cast indicated: Nominee
    
    For
    
    WithheldJohn T. Henderson
    
    
    34,333,221
    
    
    
    394,404
 Dr. Ian P. Sword, formerly a Class II director, did not stand for re-election. The following directors, being all of the Class III directors of the Company,
are serving pursuant to terms which will not expire until the annual meeting in
2005: Walter S. Nimmo;
S. Louise McCrary. The following directors, being all of the Class I directors of the Company, are
serving pursuant to terms which will not expire until the annual meeting in
2006: John Urquhart;
Vanessa Chang. Proposal II, to amend the Inveresk Research Group, Inc. 2002 Stock Option Plan,
was submitted to a vote of stockholders, with the number of votes cast as
indicated: For
    
    Against
    
    Abstain
    
    Broker Non-Votes23,750,129
    
    
    9,251,366
    
    
    
    7,550
    
    

    1,718,580
 Proposal III, a proposal to ratify the appointment of Deloitte & Touche LLP as
the Companys independent public accountants for the year ending December 31,
2004, was submitted to a vote of stockholders, with the number of votes cast as
follows: - 35 -




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For
    
    Against
    
    Abstain34,270,581
    
    
    456,934
    
    
    
    110
 ITEM 5. OTHER INFORMATION. N/A ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 2.1
    
    -
    
    Agreement and Plan of Merger dated as of June 30, 2004, by
and among Charles River Laboratories International, Inc., Inveresk
Research Group, Inc., Indigo Merger I Corp. and Indigo Merger II
Corp. (incorporated by reference to our Current Report on Form 8-K,
filed on July 1, 2004)3.1
    
    -
    
    Amended and Restated Certificate of Incorporation of Inveresk
Research Group, Inc. (incorporated by reference to Amendment No. 1,
filed on May 14, 2002, to our Registration Statement on Form S-1
(File No. 333-83536))3.2
    
    -
    
    Amended and Restated By-laws of Inveresk Research Group, Inc.
(incorporated by reference to Amendment No. 1, filed on May 14,
2002, to our Registration Statement on Form S-1 (File No.
333-83536))4.1
    
    -
    
    Form of Stock Certificate. (incorporated by reference to
Amendment No. 1, filed on May 14, 2002, to our Registration
Statement on Form S-1 (File No. 333-83536))10.1
    
    -
    
    Form of Change-Of-Control Severance Agreement, dated as of June 10,
2004, between Inveresk Research Group, Inc. and the officers listed
on the schedule attached thereto.
 - 36 -




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31.1
    
    -
    
    Certification of Walter S. Nimmo, Chief Executive Officer,
President and Director of Inveresk Research Group, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    Certification of D. J. Paul E. Cowan, Chief Financial
Officer and Treasurer of Inveresk Research Group, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by Walter S. Nimmo, Chief Executive Officer, President and
Director of Inveresk Research Group, Inc.32.2
    
    -
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by D. J. Paul E. Cowan, Chief Financial Officer and
Treasurer of Inveresk Research Group, Inc.
 (b) Reports on Form 8-K. We filed a current report on Form 8-K on April 2, 2004, including our
press release announcing the sale of 5,000,000 shares of common stock by our
principal shareholder. We filed a current report on Form 8-K on April 2, 2004, including a copy
of the form of underwriting agreement relating to the sale of 5,000,000 shares
of common stock by our principal shareholder. We filed a current report on Form 8-K on May 6, 2004, including a copy of
our Code of Ethics, as amended on May 3, 2004. - 37 -




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: August 4, 2004
    
    INVERESK RESEARCH GROUP, INC.By:
    
    /s/ D.J. Paul E. CowanD.J. Paul E. CowanChief Financial Officer and Treasurer
 - 38 -