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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-92383
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1397316
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
251 BALLARDVALE STREET 01887
WILMINGTON, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
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(978) 658-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 23, 2001, the aggregate market value of the Registrant's voting
common stock held by non-affiliates of the Registrant was approximately
$497,976,527. As of that date, there were outstanding 40,127,642 shares of the
Registrant's common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders scheduled to be held on May 8, 2001 (the "2001 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 30, 2000, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2001 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Form 10-K.
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
ITEM PAGE
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PART I
1 Business.................................................... 1
2 Properties.................................................. 16
3 Legal Proceedings........................................... 16
4 Submission of Matters to a Vote of Security Holders......... 17
PART II
5 Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 17
6 Selected Consolidated Financial Data........................ 18
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 29
8 Financial Statements and Supplementary Data................. 30
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 69
PART III
10 Directors and Executive Officers of the Registrant.......... 69
11 Executive Compensation...................................... 69
12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 69
13 Certain Relationships and Related Transactions.............. 69
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 69
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of critical research tools and integrated support
services that enable innovative and efficient drug discovery and development. We
are the global leader in providing the animal research models required in
research and development for new drugs, devices and therapies and have been in
this business for more than 50 years. Since 1992, we have built upon our
research model technologies to develop a broad and growing portfolio of
biomedical products and services. Our wide array of services enables our
customers to reduce costs, increase speed and enhance their productivity and
effectiveness in drug discovery and development. Our customer base, spanning
over 50 countries, includes all of the major pharmaceutical and biotechnology
companies, as well as many leading hospitals and academic institutions. We
currently operate 76 facilities in 15 countries worldwide. Our differentiated
products and services, supported by our global infrastructure and scientific
expertise, enable our customers to meet many of the challenges of early-stage
life sciences research, a large and growing market. In 2000, our net sales were
$306.6 million and our operating income was $65.1 million.
SIGNIFICANT TRANSACTIONS
- On September 29, 1999, CRL Acquisition LLC, a limited liability company
owned by affiliates of DLJ Merchant Banking Partners, II, L.P. ("DLJ"),
our management and other investors, together with our former parent
company, Bausch & Lomb Incorporated, completed a recapitalization
transaction. Concurrent with the recapitalization on September 29, 1999,
we acquired SBI Holdings Inc., ("Sierra") for $23.3 million in cash.
- On February 28, 2000, we acquired an additional 16% of the equity (340,840
common shares) of our 50% equity joint venture company, Charles River
Japan, for $9.1 million in cash and a $3.7 million balloon promissory
note.
- On June 28, 2000, we consummated an initial public offering of 14,000,000
shares of our common stock at a price of $16.00 per share. We issued an
additional 2,100,000 shares of our common stock on July 6, 2000 upon the
exercise of the over-allotment option by the underwriters. Proceeds from
the offering were used to repay a portion of the debt we incurred in
connection with our recapitalization. Our common stock is listed on the
New York Stock Exchange under the symbol "CRL".
- On December 4, 2000, we entered into an agreement with Tufts University
School of Veterinary Medicine to commercialize its proprietary cloning
technology.
- On January 8, 2001, we acquired Pathology Associates International ("PAI")
Corporation for $25.0 million in cash and a $12.0 million convertible note
(redeemable by us through March 31, 2001).
- On February 27, 2001, we acquired Primedica Corporation ("Primedica") for
$26.0 million in cash, $16.5 million in restricted stock (subject to
repurchase by us through July 1, 2001) and $9.5 million in assumed debt.
- On March 21, 2001, we consummated a public offering of 3,500,000 shares of
our common stock, at a price of $19.00 per share. In the offering,
4,550,000 shares of common stock, which included the exercise of the
underwriters' over-allotment option of 1,050,000 shares, were also sold by
existing shareholders. We received proceeds of approximately
$62.5 million, which we intend to use to repay a portion of our
indebtedness, retire obligations incurred in connection with recent
acquisitions and for general corporate purposes.
1
Our product line segments are research models and biomedical products and
services. Financial information with respect to these segments is contained in
Note 15 of the consolidated financial statements included at Item 8 and is
incorporated herein by reference. Financial information about geographic areas
is also contained in Note 15 of the consolidated financial statements and is
incorporated herein by reference.
RESEARCH MODELS. We are the global leader in the production and sale of
research models, principally genetically and virally defined purpose-bred rats
and mice. These products represented 61.2% of our 2000 net sales. We offer over
130 research models, one of the largest selections of small animal models of any
provider worldwide. Our higher-growth models include genetically defined models
and models with compromised immune systems, which are increasingly in demand as
early-stage research tools. The FDA and foreign regulatory bodies typically
require the safety and efficacy of new drug candidates and many medical devices
to be tested on research models like ours prior to testing in humans. As a
result, our research models are an essential part of the drug-discovery and
development process. Our research models are produced in a biosecure environment
designed to ensure that the animals are free of viral and bacterial agents and
other contaminants that can disrupt research operations and distort results.
With our biosecure production capabilities and our ability to deliver
consistent, high quality research models worldwide, we are well positioned to
benefit from the rapid growth in research and development spending by
pharmaceutical and biotechnology companies and the NIH.
BIOMEDICAL PRODUCTS AND SERVICES. We have focused significant resources on
developing a diverse portfolio of biomedical products and services directed at
high-growth areas of drug discovery and development. Our biomedical products and
services business represented 38.8% of our 2000 net sales, and has experienced
strong growth as demonstrated by our 33.7% compound annual growth rate in our
net sales over the past five fiscal years. We expect the drug-discovery and
development markets that we serve will continue to experience strong growth,
particularly as new drug development based on advances in genetics continues to
evolve. There are four areas within this segment of our business:
DISCOVERY SERVICES. Our discovery services are designed to assist our
customers in screening drug candidates faster by providing genetically
defined research models for in-house research and by implementing efficacy
screening protocols to improve the customer's drug-evaluation process. The
market for discovery services is growing rapidly as pharmaceutical and
biotechnology research and development increasingly focuses on selecting
lead drug candidates from the enormous number of new compounds being
generated. We currently offer four major categories of discovery services:
transgenic services, research support services, infectious disease and
genetic testing and contract site management. Transgenic services is our
highest growth area and includes model development, genetic
characterizations, embryo cryopreservation, and rederivation and colony
scale-up.
DEVELOPMENT SERVICES. We currently offer FDA-compliant development services
in three main areas: drug safety assessment, biotech safety testing and
medical device testing. Biotech safety testing services include a broad
range of services specifically focused on supporting biotech or
protein-based drug development, including such areas as protein
characterization, cell banking, methods development and release testing. Our
rapidly growing development services offerings enable our customers to
outsource their high-end, non-core drug development activities.
IN VITRO DETECTION SYSTEMS. We have diversified our product offerings to
include non-animal, or IN VITRO, methods for testing the safety of drugs and
devices. We are strategically committed to being the leader in providing our
customers with IN VITRO alternatives as these methods become scientifically
validated and commercially feasible. Our current products include endotoxin
detection systems that ensure that injectable drugs and devices are free
from harmful contaminants as well as bioactivity software.
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VACCINE SUPPORT PRODUCTS. We provide vaccine manufacturers with
pathogen-free fertilized chicken eggs, a critical ingredient for poultry
vaccine production. We believe there is significant potential for growth in
this area in support of novel human vaccines, such as a nasal spray flu
vaccine currently in development.
COMPETITIVE STRENGTHS
Our leading research models business has provided us with steadily growing
revenues and strong cash flow, while our biomedical products and services
business provides significant opportunities for profitable growth. Our products
and services are critical to both traditional pharmaceutical research and the
rapidly growing fields of genomic, recombinant protein and humanized antibody
research. We believe we are well positioned to compete effectively in all of
these sectors as a result of a diverse set of competitive strengths, which
include:
CRITICAL PRODUCTS AND SERVICES. We provide critical, proven and enabling
products and services that our customers rely upon to advance their early-stage
research efforts and accelerate product development. We offer a wide array of
complementary research tools and discovery and development services that
differentiate us from our competition and have created a sustained competitive
advantage in our markets.
LONG-STANDING REPUTATION FOR SCIENTIFIC EXCELLENCE. We have earned our
long-standing reputation for scientific excellence by consistently delivering
high-quality research models supported by exceptional technical service and
support for over 50 years. As a result, the Charles River brand name is
synonymous with premium quality products and services and scientific excellence
in the life sciences. We have approximately 200 science professionals on staff
with D.V.M.s, Ph.D.s and M.D.s, in areas including laboratory animal medicine,
molecular biology, pathology, immunology, toxicology and pharmacology.
EXTENSIVE GLOBAL INFRASTRUCTURE AND CUSTOMER RELATIONSHIPS. Our operations
are globally integrated throughout North America, Europe and Asia. Our extensive
investment in worldwide infrastructure allows us to standardize our products and
services across borders when required by our multinational customers, while also
offering a customized local presence when needed. We currently operate 76
facilities in 15 countries worldwide, serving a customer base spanning over 50
countries.
BIOSECURITY TECHNOLOGY EXPERTISE. In our research models business, our
commitment to and expert knowledge of biosecurity technology distinguishes us
from our competition. We maintain rigorous biosecurity standards in all of our
facilities to maintain the health profile and consistency of our research
models. These qualities are crucial to the integrity and timeliness of our
customers' research.
PLATFORM ACQUISITION AND INTERNAL DEVELOPMENT CAPABILITIES. We have a
proven track record of successfully identifying, acquiring and developing
complementary businesses and new technologies. With this experience, we have
developed internal expertise in sourcing acquisitions and further developing new
technologies. We believe this expertise will continue to differentiate us from
our competitors as we seek to further expand our business.
EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. Our senior management team
has an average of 18 years of experience with our company, and has evidenced a
strong commitment and capability to deliver reliable performance and steady
growth. Our Chairman and Chief Executive Officer, James C. Foster, has been with
us for 25 years.
3
OUR STRATEGY
Our business strategy is to build upon our core research model business and
to actively invest in higher-growth opportunities where our proven capabilities
and strong relationships allow us to achieve and maintain a leadership position.
Our growth strategies include:
BROADEN THE SCOPE OF OUR DISCOVERY AND DEVELOPMENT SERVICES. Primarily
through acquisitions and alliances, we have improved our ability to offer new
services that complement our existing drug-discovery and development services.
We have targeted services that support transgenic research activities as a
high-growth area. We intend to provide the additional critical support services
needed to create, define, characterize and scientifically validate new genetic
models expected to arise out of the Human Genome and Mouse Genome Projects. In
addition, we plan to broaden our international presence in genetic services,
specialized pathology and drug efficacy analysis. We also continue to add new
capabilities in the biotech safety testing area.
ACQUIRE NEW TECHNOLOGIES IN RESEARCH MODELS. We intend to acquire novel
technologies in transgenics and cloning to increase sales in our research models
business and related transgenic services operations. We also expect to offer
additional genetically modified models for research of specific disease
conditions. These higher-value research models are often highly specialized and
are priced to reflect their greater intrinsic value. In particular, we intend to
acquire and develop transgenic rat technology, where development has been slow
compared to mice. We believe there is a growing need for genetically engineered
rats, which are larger and more accessible research models than mice.
EXPAND OUR PRECLINICAL OUTSOURCING SERVICES. Many of our pharmaceutical and
biotechnology customers outsource a wide variety of research activities that are
not directly associated with their scientific innovation process. We believe the
trend of outsourcing preclinical or early-stage research will continue to
increase rapidly. We are well positioned to exploit both existing and new
outsourcing opportunities, principally through our discovery and development
services offerings. We believe our early successes in the transgenic services
area have increased customer demand for outsourcing and have created significant
opportunities. Our research support services provide pharmaceutical and
biotechnology companies with significant cost and resource allocation advantages
over their existing internal operations. We intend to focus our marketing
efforts on stimulating demand for further outsourcing of preclinical research.
We also intend to expand our opportunities by increasing our international
presence.
EXPAND OUR NON-ANIMAL TECHNOLOGIES. IN VITRO testing technologies are in
their early stages of development, but we plan to continue to acquire and
introduce new IN VITRO products and services as they become scientifically
validated and commercially viable. We are particularly focused on acquiring new
technologies that allow for high through-put screening and testing of new drug
candidates in early stages of development, using such materials and techniques
as human cells and tissues and predictive database software.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Over the past decade, we have
successfully completed 14 acquisitions and alliances. Several of our operations
began as platform acquisitions, which we were able to grow rapidly by developing
and marketing the acquired products or services to our extensive global customer
base. We intend to further pursue strategic platform acquisitions and alliances
to drive our long-term growth.
BUSINESS DIVISIONS
Our business is divided into two segments: research models and biomedical
products and services.
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RESEARCH MODELS
Research models is our historical core business and accounted for 61.2% of
our 2000 net sales and 65.9% of our 1999 net sales. The business is comprised of
the commercial production and sale of animal research models, principally
purpose-bred rats, mice and other rodents for use by researchers. We are the
commercial leader in the small animal research model area, supplying rodents for
research since 1947. Our research models include:
- outbred animals, which have genetic characteristics of a random
population;
- inbred animals, which have essentially identical genes;
- hybrid animals, which are the offspring of two different inbred parents;
- spontaneous mutant animals, which contain a naturally occurring genetic
mutation (such as immune deficiency); and
- transgenic animals, which contain genetic material transferred from
another source.
With over 130 research models, we offer one of the largest selections of
small animal models and provide our customers with high volume and high quality
production. Our rats, mice and other rodent species such as guinea pigs and
hamsters have been and continue to be some of the most extensively used research
models in the world, largely as a result of our continuous commitment to
innovation and quality in the breeding process. We provide our small animal
models to numerous customers around the world, including all major
pharmaceutical and biotechnology companies as well as hospitals and academic
institutions.
The use of animal models is critical to both the discovery and development
of a new drug. The FDA requires safe and effective testing on two species of
animal models, one small and one large, before moving into the clinic for
testing on humans. Animal testing is used in order to identify, define,
characterize and assess the safety of new drug candidates. Increasingly,
genetically defined rats and mice are the model of choice in early discovery and
development work as a more specifically targeted research tool. Outbred rats are
frequently used in safety assessment studies. Our models are also used in life
science research within universities, hospitals and other research institutions.
Unlike drug discovery, these uses are generally not specifically mandated by
regulatory agencies such as the FDA, but instead are governed by the terms of
government grants, institutional protocols as well as the scientific inquiry and
peer review publication processes. We also provide larger animal models,
including miniature swine and primates, to the research community, principally
for use in drug development and testing studies.
We believe that over the next several years, many new research models will
be developed and used in biomedical research, such as transgenic models, cloned
models with identical genes, knock-out models with one or more disabled genes
and models that incorporate or exclude a particular mouse, rat or human gene.
These more highly defined and characterized models will allow researchers to
further focus their investigations into disease conditions and potential new
therapies or interventions. We intend to build upon our position as the leader
in transgenic services to expand our presence in this market for higher value
models, through internal development, licensing, partnerships and alliances, and
acquisitions.
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BIOMEDICAL PRODUCTS AND SERVICES
Our biomedical products and services business consists of our newer,
higher-growth operations, which we organize as follows:
DISCOVERY SERVICES DEVELOPMENT SERVICES IN VITRO DETECTION SYSTEMS VACCINE SUPPORT PRODUCTS
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- - Transgenic Services - Drug Safety Assessment - Endotoxin Detection - Animal Health
- - Research Support Services - Biotech Safety Testing Systems - Human Health
- - Infectious Disease and - Medical Device Testing - BioActivity Software
Genetic Testing
- - Contract Site Management
DISCOVERY SERVICES
Discovery represents the earliest stages of research and development in the
life sciences directed to the identification and selection of a lead compound
for future drug development. Discovery is followed by development activities,
which are directed at validation of the selected drug candidates. Discovery and
development represent most of the preclinical activities in drug development.
Initiated in 1995, the discovery services area of our business addresses the
growing need among pharmaceutical and biotechnology companies to outsource the
non-core aspects of their drug-discovery activities. These discovery services
capitalize on the technologies and relationships developed through our research
model business. We currently offer four major categories of discovery services:
transgenic services, research support services, infectious disease and genetic
testing and contract site management.
TRANSGENIC SERVICES. In this rapidly growing area of our business, we
assist our customers in validating, maintaining, improving, breeding and testing
models purchased or created by them for biomedical research activities. While
the creation of a transgenic, knock-out or cloned model can be a critical
scientific event, it is only the first step in the discovery process. Productive
utilization of research models requires significant additional technical
expertise. We provide transgenic breeding expertise, model characterization and
colony development, genetic characterization, quarantine, embryo
cryopreservation, embryo transfer, rederivation, and health and genetic
monitoring. We provide these services to more than 150 laboratories around the
world from pharmaceutical and biotechnology companies to hospitals and
universities. We maintain nearly 500 different types of research models for our
customers. We expect that the demand for our services will grow as the use of
transgenic, knock-out and cloned animal models continues to grow within the
research community.
RESEARCH SUPPORT SERVICES. Our research support services provide advanced
or specialized research model studies for our customers. These projects
capitalize on our strong research model capabilities and also exploit more
recently developed capabilities in protocol development, animal micro-surgery,
dosing techniques, drug effectiveness testing and data management and analysis.
We believe these services, particularly in oncology and cardiovascular studies,
offer added value to our research customers, who rely on our extensive
expertise, infrastructure and resources. We also manage under contract a
genetically defined, biosecure herd of miniature swine to provide organs for
human transplantation research, known as xenotransplantation.
INFECTIOUS DISEASE AND GENETIC TESTING. We assist our customers in
monitoring and analyzing the health and genetics of the research models used in
their research protocols. We developed this capability internally by building
upon the scientific foundation created by the diagnostic laboratory needs of our
research model business. Depending upon a customer's needs, we may serve as its
sole source testing laboratory, or as an alternative source supporting its
internal laboratory capabilities. We believe that the continued growth in
development and utilization of transgenic, knock-out and cloned
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models will drive our future growth as the reference laboratory of choice for
genetic testing of special models.
CONTRACT SITE MANAGEMENT. Building upon our core capabilities as a leading
provider of high quality research models, we manage animal care operations on
behalf of government, academic, pharmaceutical and biotechnology organizations.
Increasing demand for our services reflects the growing necessity of these large
institutions to outsource internal functions or activities that are not critical
to the core scientific innovation and discovery process. In addition, we believe
that our expertise in managing the laboratory animal environment enhances the
productivity and quality of our customers' research facilities. This area leads
to additional opportunities for us to provide other products and services to our
customers. Site management does not require us to make any incremental
investment, thereby generating a particularly strong return.
DEVELOPMENT SERVICES
Our development services enable our customers to outsource their non-core
drug development activities to us. These activities are typically required for
the identification of the lead compound in order to support the regulatory
filings necessary to obtain FDA approval. We currently offer development
services in three main areas: drug safety assessment, biotech safety testing and
medical device testing.
DRUG SAFETY ASSESSMENT. We offer drug safety assessment services to
pharmaceutical, medical device and biotechnology companies that are principally
focused on conducting regulatory compliance studies producing data to support
FDA submissions. These studies require highly specialized scientific
capabilities. We have expertise in conducting critical developmental studies on
new drug candidates and medical devices that use research models, including
long- and short-term evaluations of potential new treatments for human or animal
disease conditions. We have unique expertise in several areas of safety
assessment and are continuously evaluating and selecting new services areas to
add to our portfolio. We focus on high-end niches of this market where our
scientific capabilities are strongly valued by our customers.
BIOTECH SAFETY TESTING. We provide specialized non-clinical quality control
testing that is frequently outsourced by both pharmaceutical and biotechnology
companies. These services allow our customers to determine if the human protein
drug candidates, or the process for manufacturing those products, are
essentially free of residual biological materials. The bulk of this testing work
is required by the FDA for obtaining new drug approval, maintaining an
FDA-licensed manufacturing capability or releasing approved products for use on
patients. Our scientific staff consults with customers in the areas of process
development, validation, manufacturing scale-up and biological testing. As more
biotechnology drug candidates with stronger potential enter and exit the
development pipeline, we expect to continue to experience strong demand for
these testing services.
MEDICAL DEVICE TESTING. The FDA requires companies introducing medical
devices to test the biocompatibility of any new materials that have not
previously been approved for contact with human tissue. We provide a wide
variety of medical device testing services from prototype feasibility testing to
long-term GLP, or good laboratory practices, studies, primarily in large
research models. These services include cardiovascular surgery, biomaterial
reactivity studies, orthopedic studies and related laboratory services. We
maintain state-of-the-art surgical suites where our skilled professional staff
implement custom surgery protocols provided by our customers.
IN VITRO DETECTION SYSTEMS
While we do not foresee significant replacement of animal models from the
use of IN VITRO techniques, we believe that these techniques may offer a strong
refinement or complement to animal
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test systems after the extended period of scientific validation is successfully
completed. We intend to pursue this area to the extent alternatives become
commercially viable.
ENDOTOXIN DETECTION SYSTEMS. We are a market leader in endotoxin testing,
which is used to test quality control samples of injectable drugs and devices,
their components and the processes under which they are manufactured, for the
presence of endotoxins. Endotoxins are fever producing pathogens or compounds
that are highly toxic to humans when sufficient quantities are introduced into
the body. Quality control testing for endotoxin contamination by our customers
is an FDA requirement for injectable drugs and devices, and the manufacture of
the test kits and reagents is regulated by the FDA as a medical device.
Endotoxin testing uses a processed extract from the blood of the horseshoe crab,
known as limulus amebocyte lysate, or LAL. The LAL test is the first and only
major FDA-validated IN VITRO alternative to an animal model test for testing the
safety and efficiency of new drug candidates. The process of extracting blood is
not harmful to the crabs, which are subsequently returned to their natural ocean
environment. We produce and distribute test kits, reagents, software,
accessories, instruments and associated services to pharmaceutical and
biotechnology companies for medical devices and other products worldwide. We
have filed for a patent relating to our next generation of endotoxin testing
technology.
BIOACTIVITY SOFTWARE. In the life sciences, we have an exclusive strategic
alliance with Multicase, Inc. under which we offer their unique database
software program. This program allows researchers to evaluate the potential
toxicity and pharmacological activity of new chemical compounds. This program
uses a proprietary artificial intelligence capability and nearly twenty years of
data collected from public sources including the FDA. This IN SILICO, or
software, alternative to the use of research animals is in the early stages of
commercialization. We expect that bioactivity software that allows researchers
to more accurately predict defined outcomes for potential new drug candidates
will complement rather than replace the use of research models. We plan to
evaluate adding other software tools through licensing and partnerships that
allow researchers to improve the efficiency and effectiveness of drug discovery
and development.
VACCINE SUPPORT PRODUCTS
ANIMAL HEALTH. We are the global leader for the supply of specific
pathogen-free, or SPF, chickens and fertile chicken eggs. SPF chicken embryos
are used by animal health companies as self-contained "bioreactors" for the
manufacturing of live and killed viruses. These viruses are used as a raw
material in poultry and potential human vaccine applications. The production of
SPF eggs is done under biosecure conditions, similar to our research model
production. We have a worldwide presence that includes several SPF egg
production facilities in the United States, as well as facilities in Germany and
in Australia. We have a joint venture in Mexico and a franchise in India. We
also operate a specialized avian laboratory in the United States, which provides
in-house testing and support services to our customers.
HUMAN HEALTH. We are also applying our SPF egg technology to human vaccine
markets. We have entered into an agreement with a company that is in the late
stages of the FDA approval process for a nasal spray-delivered vaccine for human
flu. If FDA-approved and commercially successful, this human flu vaccine may
significantly increase demand for our SPF eggs.
CUSTOMERS
Our customers consist primarily of large pharmaceutical companies, including
the 10 largest pharmaceutical companies based on 2000 revenues, as well as
biotechnology, animal health, medical device and diagnostic companies and
hospitals, academic institutions and government agencies. We have many
long-term, stable relationships with our customers as evidenced by the fact that
all of our top 20 customers in 1990 remain our customers today.
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During 2000, in both our research models and our biomedical products and
services businesses, approximately two-thirds of our sales were to
pharmaceutical and biotechnology companies, and the balance were to hospitals,
universities and the government. Our top 20 global customers represent only
about 30% of our 2000 net sales, with no individual customer accounting for more
than 3% of net sales.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell our products and services principally through our direct sales
force. As of December 30, 2000, we had approximately 75 employees engaged in
field sales, of which 34 were in the United States, 12 were in Europe and nine
were with Charles River Japan. The direct sales force is supplemented by a
network of international distributors for some areas of our biomedical products
and services business.
Our internal marketing groups support the field sales staff while developing
and implementing programs to create close working relationships with customers
in the biomedical research industry. Our web site, www.criver.com, is an
effective marketing tool, and has become recognized as a valuable resource in
the laboratory animal field by a broad spectrum of industry leaders, recording
over 500,000 hits each month. Our website is not incorporated by reference in
this Annual Report on Form 10-K.
We maintain both customer service and technical assistance departments,
which service our customers' routine and more specialized needs. We frequently
assist our customers in solving problems related to animal husbandry, health and
genetics, biosecurity, protocol development and other areas in which our
expertise is recognized as a valuable customer resource.
RESEARCH AND DEVELOPMENT
We do not maintain a fully dedicated research and development staff. Rather,
this work is done on an individual project basis or through collaborations with
universities or other institutions. Our dedicated research and development
spending was $1.4 million in 1998, $0.5 million in 1999 and $0.9 million in
2000. Our approach to developing new products or services is to extend our base
technologies into new applications and fields, and to license or acquire
technologies to serve as a platform for the development of new businesses that
service our existing customer base. Our research and development focus is
principally on developing projects that improve our productivity or processes.
INDUSTRY SUPPORT AND ANIMAL WELFARE
Among the shared values of our employees is a concern for and commitment to
animal welfare. We have been in the forefront of animal welfare improvements in
our industry, and continue to demonstrate our commitment with special
recognition programs for employees who demonstrate an extraordinary commitment
in this critical area of our business.
We support a wide variety of organizations and individuals working to
further animal welfare as well as the interests of the biomedical research
community. We fund internships in laboratory animal medicine, provide financial
support to non-profit institutions that educate the public about the benefits of
animal research, and provide awards and prizes to outstanding leaders in the
laboratory animal medicine field. One of our businesses dedicates a portion of
its net sales, through a royalty, to support similar programs and initiatives.
EMPLOYEES
As of December 30, 2000, we had approximately 3,500 employees, including
over 100 science professionals with advanced degrees including D.V.M.s, Ph.D.s
and M.D.s. Our employees are not unionized in the United States, though we are
unionized in some European locales, consistent with local custom for our
industry. We believe that we have a good relationship with our employees.
9
COMPETITION
Our strategy is to be the leader in each of the markets in which we
participate. Our competitors are generally different in each of our business and
geographic areas.
In our research models business division, our main competitors include three
smaller competitors in North America, several smaller ones in Europe, and two
smaller ones in Japan. Of our main United States competitors, two are privately
held businesses and the third is a government-financed, non-profit institution.
We believe that none of our competitors for research models has our comparable
global reach, financial strength, breadth of product and services offerings and
pharmaceutical and biotechnology industry relationships.
We have many competitors in our biomedical products and services business
division. A few of our competitors in our biomedical products and services
business are larger than we are and may have greater capital, technical or other
resources than we do; however, many are smaller and more regionalized. We have a
small relative share in the biotech safety testing market, where the market
leader is a well-established company, and in medical device testing, where there
are many larger competitors.
We generally compete on the basis of quality, reputation, and availability,
which is supported by our international presence with strategically located
facilities.
REGULATORY MATTERS
The Animal Welfare Act governs the treatment of particular species intended
for use in research. The AWA imposes a wide variety of specific regulations on
producers and users of these species, most notably cage size, shipping
conditions and environmental enrichment methods. We comply with licensing and
registration requirement standards set by the USDA for handling regulated
species, including breeding, maintenance and transportation. However, rats, mice
and chickens are not currently regulated under the AWA. As a result, most of our
United States small animal research model activities and our vaccine support
services operations are not subject to regulation under the AWA. The United
States Department of Agriculture, or USDA, has agreed, as part of a settlement
of litigation, to propose a change to the regulations issued under the Animal
Welfare Act to include rats, mice and birds, including chickens. Congress,
however, has suspended the USDA's rulemaking authority in this area. Our animal
production facilities in the United States are accredited by a highly regarded
member association known as AAALAC, which maintains standards that often exceed
those of the USDA.
Our biomedical products and services business is also generally regulated by
the USDA, and in the case of our endotoxin detection systems, the FDA. Our
manufacture of test kits and reagents for endotoxin testing is subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act. We are required to register with the FDA as a device manufacturer
and are subject to inspection on a routine basis for compliance with the FDA's
Quality System Regulations and Good Manufacturing Practices. These regulations
require that we manufacture our products and maintain our documents in a
prescribed manner with respect to manufacturing, testing and control activities.
In 1999, we received a "warning letter" from the FDA for quality control
deficiencies with regard to our Charleston, South Carolina facility. We have
since taken corrective action satisfactory to the FDA with respect to these
deficiencies.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report on Form 10-K includes forward-looking statements. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words
10
carefully because they discuss our future expectations, contain projections of
our future results of operations or of our financial condition or state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or control and that may cause
our actual results to differ materially from those discussed as a result of
various factors, including contaminations at our facilities, changes in the
pharmaceutical or biotechnology industries, competition and changes in
government regulations or general economic or market conditions. These factors
should be considered carefully and readers should not place undue reliance on
our forward-looking statements. You should be aware that the occurrence of the
events described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" sections and elsewhere in this annual
report could harm our business, operating results and financial condition. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements and risk
factors discussed below contained throughout this annual report. We are under no
duty to update any of the forward-looking statements after the date of this
annual report or to conform these statements to actual results.
INDUSTRY AND MARKET DATA
In this Annual Report on Form 10-K, we rely on and refer to information and
statistics regarding the research model and biomedical products and services
industries, and our market share in the sectors in which we compete. We obtained
this information and statistics from various third party sources, discussions
with our customers and/or our own internal estimates. We believe that these
sources and estimates are reliable, but we have not independently verified them.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
IF WE ARE NOT SUCCESSFUL IN SELECTING AND INTEGRATING THE BUSINESSES AND
TECHNOLOGIES WE ACQUIRE, OUR BUSINESS MAY SUFFER.
We have recently expanded our business through the PAI and Primedica
acquisitions and we plan to continue to grow our business through acquisitions
of businesses and technologies and the formation of alliances. However,
businesses and technologies may not be available on terms and conditions we find
acceptable. Even if completed, acquisitions and alliances involve numerous risks
which may include:
- difficulties and expenses incurred in assimilating operations, services,
products or technologies;
- difficulties in developing and operating new businesses, including
diversion of management's attention from other business concerns;
- the potential loss of key employees of an acquired business and
difficulties in attracting new employees to grow businesses;
- difficulties in assimilating differences in foreign business practices and
overcoming language barriers;
- difficulties in obtaining intellectual property protections and skills
that we and our employees currently do not have; and
- difficulties in achieving business and financial success.
In the event that the success of an acquired business or technology or an
alliance does not meet expectations, we may be required to restructure. We may
not be able to successfully integrate acquisitions into our existing business or
successfully exploit new business or technologies.
11
CONTAMINATIONS IN OUR ANIMAL POPULATIONS CAN DAMAGE OUR INVENTORY, HARM OUR
REPUTATION FOR CONTAMINANT-FREE PRODUCTION AND RESULT IN DECREASED SALES.
Our research models and fertile chicken eggs must be free of contaminants,
such as viruses and bacteria. The presence of contaminants can distort or
compromise the quality of research results. Contaminations in our isolated
breeding rooms or poultry houses could disrupt our contaminant-free research
model and fertile egg production, harm our reputation for contaminant-free
production and result in decreased sales.
Contaminations typically require cleaning up the contaminated room or
poultry house. This clean-up results in inventory loss, clean-up and start-up
costs, and reduced sales as a result of lost customer orders and credits for
prior shipments. These contaminations are unanticipated and difficult to
predict. We experienced several material contaminations in our animal
populations in 1996 and a few significant contaminations in 1997 that adversely
impacted our 1996 and 1997 financial results. Since then, we have made over
$8 million in capital expenditures designed to strengthen our biosecurity and
have significantly changed our operating procedures. We have not experienced any
significant contaminations since 1997.
MANY OF OUR CUSTOMERS ARE PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES, AND WE ARE
SUBJECT TO RISKS, UNCERTAINTIES AND TRENDS THAT AFFECT COMPANIES IN THOSE
INDUSTRIES.
Sales of our products and services are highly dependent on research and
development expenditures by pharmaceutical and biotechnology companies. We are
therefore subject to risks, uncertainties and trends that affect companies in
those industries, including government regulation, pricing pressure,
technological change and shifts in the focus and scope of research and
development expenditures. For example, over the past several years, the
pharmaceutical industry has undergone significant mergers and combinations, and
many industry experts expect this trend to continue. After recent mergers and
combinations, some customers combined or otherwise reduced their research and
development operations, resulting in fewer animal research activities. We
experienced both temporary disruptions and permanent reductions in sales of our
research models to some of these customers. Future mergers and combinations in
the pharmaceutical or biotechnology industries, or other industry-wide trends,
could adversely affect demand for or pricing of our products.
NEW TECHNOLOGIES MAY BE DEVELOPED, VALIDATED AND INCREASINGLY USED IN BIOMEDICAL
RESEARCH THAT COULD REDUCE DEMAND FOR SOME OF OUR PRODUCTS AND SERVICES.
For many years, groups within the scientific and research community have
attempted to develop models, methods and systems that would replace or
supplement the use of living animals as test subjects in biomedical research.
Companies have developed several techniques that have scientific merit,
especially in the area of cosmetics and household product testing, markets in
which we are not active. Only a few alternative test methods in the discovery
and development of effective and safe treatments for human and animal disease
conditions have been validated and successfully deployed. The principal
validated non-animal test system is the LAL, or endotoxin detection system, a
technology which we acquired and have aggressively marketed as an alternative to
testing in animals. It is our strategy to participate in some fashion with any
non-animal test method as it becomes validated as a research model alternative
or adjunct in our markets. However, these methods may not be available to us or
we may not be successful in commercializing these methods. Even if we are
successful, sales or profits from these methods may not offset reduced sales or
profits from research models.
Alternative research methods could decrease the need for research models,
and we may not be able to develop new products effectively or in a timely manner
to replace any lost sales. In addition, one of the anticipated outcomes of
genomics research is to permit the elimination of more compounds
12
prior to preclinical testing. While this outcome may not occur for several
years, if at all, it may reduce the demand for some of our products and
services.
THE OUTSOURCING TREND IN THE PRECLINICAL AND NONCLINICAL STAGES OF DRUG
DISCOVERY AND DEVELOPMENT, MEANING CONTRACTING OUT TO OTHERS FUNCTIONS THAT
WERE PREVIOUSLY PERFORMED INTERNALLY, MAY DECREASE, WHICH COULD SLOW OUR
GROWTH.
Some areas of our biomedical products and services business have grown
significantly as a result of the increase over the past several years in
pharmaceutical and biotechnology companies outsourcing their preclinical and
nonclinical research support activities. While industry analysts expect the
outsourcing trend to continue for the next several years, a substantial decrease
in preclinical and nonclinical outsourcing activity could result in a diminished
growth rate in the sales of one or more of our expected higher-growth areas.
OUR BUSINESS MAY BE AFFECTED BY CHANGES IN THE ANIMAL WELFARE ACT AND RELATED
REGULATIONS WHICH MAY REQUIRE US TO ALTER OUR OPERATIONS.
The Animal Welfare Act imposes a wide variety of specific regulations on
producers and users of regulated species including cage size, shipping
conditions and environmental enrichment methods. Depending on whether the final
rulemaking in this area includes rats, mice and birds, including chickens, we
could be required to alter our production operations. This may include adding
production capacity, new equipment and additional employees. We believe that
application of the Animal Welfare Act to rats, mice and chickens used in our
research model and vaccine support products operations in the United States will
not result in loss of net sales, margin or market share, since all U.S.
producers and users will be subject to the same regulations. While we do not
anticipate that the addition of rats, mice and chickens to the Animal Welfare
Act would require significant expenditures, changes to the regulations may be
more stringent than we expect and require more significant expenditures.
Additionally, if we fail to comply with state regulations, including general
anti-cruelty legislation, foreign laws and other anti-cruelty laws, we could
face significant civil and criminal penalties.
FACTORS SUCH AS EXCHANGE RATE FLUCTUATIONS AND INCREASED INTERNATIONAL AND U.S.
REGULATORY REQUIREMENTS MAY INCREASE OUR COSTS OF DOING BUSINESS IN FOREIGN
COUNTRIES.
A significant part of our net sales is derived from operations outside the
United States. Our operations and financial results could be significantly
affected by factors such as changes in foreign currency rates, uncertainties
related to regional economic circumstances and the costs of complying with a
wide variety of international and U.S. regulatory requirements.
Because the sales and expenses of our foreign operations are generally
denominated in local currencies, we are subject to exchange rate fluctuations
between local currencies and the U.S. dollar in the reported results of our
foreign operations. These fluctuations may decrease our earnings. We currently
do not hedge against the risk of exchange rate fluctuations.
WE FACE SIGNIFICANT COMPETITION IN OUR BUSINESS, AND IF WE ARE UNABLE TO RESPOND
TO COMPETITION IN OUR BUSINESS, OUR REVENUES MAY DECREASE.
We face significant competition from different competitors in each of our
business areas. Some of our competitors in biotech safety testing and medical
device testing are larger than we are and may have greater capital, technical or
other resources than we do. We generally compete on the basis of quality,
reputation, and availability of service. Expansion by our competitors into other
areas in which we operate, new entrants into our markets or changes in our
competitors' strategy could adversely affect our competitive position. Any
erosion of our competitive position may decrease our revenues or limit our
growth.
13
NEGATIVE ATTENTION FROM SPECIAL INTEREST GROUPS MAY IMPAIR OUR BUSINESS.
Our core research model activities with rats, mice and other rodents have
not historically been the subject of animal rights media attention. However, the
large animal component of our business has been the subject of adverse attention
and on-site protests. We closed our small import facility in England due in part
to protests by animal right activists, which included threats against our
facilities and employees. Future negative attention or threats against our
facilities or employees could impair our business.
ONE OF OUR LARGE ANIMAL OPERATIONS IS DEPENDENT ON A SINGLE SOURCE OF SUPPLY,
WHICH IF INTERRUPTED COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on a single, international source of supply for one of our large
animal operations. Disruptions to their continued supply may arise from export
or import restrictions or embargoes, foreign government or economic instability,
or severe weather conditions. Any disruption of supply could harm our business
if we cannot remove the disruption or are unable to secure an alternative or
secondary source on comparable commercial terms.
TAX BENEFITS WE EXPECT TO BE AVAILABLE IN THE FUTURE MAY BE SUBJECT TO
CHALLENGE.
In connection with the recapitalization, our shareholders, CRL Acquisition
LLC and Bausch & Lomb Incorporated, or B&L, made a joint election intended to
permit us to increase the depreciable and amortizable tax basis in our assets
for federal income tax purposes, thereby providing us with expected future tax
benefits. In connection with our initial public offering, CRL Acquisition LLC
reorganized, terminated its existence as a corporation for tax purposes and
distributed a substantial portion of our stock to its members. It is possible
that the Internal Revenue Service may contend that this reorganization and
liquidating distribution should be integrated with our original
recapitalization. We believe that the reorganization and liquidating
distribution should not have any impact upon the election for federal income tax
purposes. However, the Internal Revenue Service may reach a different
conclusion. If the Internal Revenue Service were successful, the expected future
tax benefits would not be available and we would be required to write off the
related deferred tax asset reflected in our balance sheet by recording a
non-recurring tax expense in our results of operations in an amount equal to
such deferred tax asset. See "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES OR
RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR BUSINESS.
Our success depends to a significant extent on the continued services of our
senior management and other members of management. James C. Foster, our Chief
Executive Officer since 1992, has held various positions with Charles River for
25 years and became our Chairman last year. We have no employment agreement with
Mr. Foster, nor with any other executive officer. If Mr. Foster or other members
of management do not continue in their present positions, our business may
suffer.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. There
is intense competition for qualified personnel in the pharmaceutical and
biotechnological fields. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our business. The loss of
the services of existing personnel, as well as the failure to recruit additional
key scientific, technical and managerial personnel in a timely manner could harm
our business.
14
DLJ MERCHANT BANKING PARTNERS, II, L.P. AND ITS AFFILIATES HAVE SUBSTANTIAL
CONTROL OVER OUR COMPANY AND MAY HAVE DIFFERENT INTERESTS THAN THOSE OF OTHER
HOLDERS OF OUR COMMON STOCK.
DLJ Merchant Banking Partners II, L.P. and affiliated funds, which we refer
to as the DLJMB Funds, beneficially own approximately 30.0% of our outstanding
common stock. As a result of their stock ownership and contractual rights they
received in the recapitalization, these entities have substantial control over
our business, policies and affairs, including the power to:
- elect a majority of our directors;
- appoint new management;
- prevent or cause a change of control; and
- substantially control any action requiring the approval of the holders of
common stock, including the adoption of amendments to our certificate of
incorporation and approval of mergers or sales of substantially all of our
assets.
The directors elected by the DLJMB Funds have the ability to control
decisions affecting the business and management of our company including our
capital structure. This includes the issuance of additional capital stock, the
implementation of stock repurchase programs and the declaration of dividends.
The DLJMB Funds and the directors they appoint may have different interests than
those of other holders of our common stock.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information in this Annual Report on Form 10-K for
the periods prior to the recapitalization may not reflect what our results of
operations, financial position and cash flows would have been had we been a
separate, stand-alone company during the periods presented or in the future. We
made some adjustments and allocations to the historical financial statements in
this Annual Report on Form 10-K because B&L did not account for us as a single
stand-alone business for all periods presented. Our adjustments and allocations
made in preparing our historical consolidated financial statements may not
appropriately reflect our operations during the periods presented as if we had
operated as a stand-alone company.
HEALTHCARE REFORM COULD REDUCE OR ELIMINATE OUR BUSINESS OPPORTUNITIES.
The United States and many foreign governments have reviewed or undertaken
healthcare reform, most notably price controls on new drugs, which may adversely
affect research and development expenditures by pharmaceutical and biotechnology
companies, resulting in a decrease of the business opportunities available to
us. We cannot predict the impact that any pending or future healthcare reform
proposals may have on our business.
15
ITEM 2. PROPERTIES
The following charts provide summary information on our properties. The
first chart lists the sites we own, and the second chart the sites we lease.
Most of our material leases expire from 2001 to 2005.
SITES--OWNED
COUNTRY NO. OF SITES TOTAL SQUARE FEET PRINCIPAL FUNCTIONS
- ------- ------------ ----------------- ------------------------------
Belgium.............................. 1 16,140 Office, Production
Canada............................... 1 59,194 Office, Production, Laboratory
China................................ 1 19,372 Office, Production, Laboratory
France............................... 5 663,689 Office, Production, Laboratory
Germany.............................. 3 131,096 Office, Production, Laboratory
Italy................................ 1 46,700 Office, Production, Laboratory
Japan................................ 2 116,340 Office, Production, Laboratory
United Kingdom....................... 2 58,240 Office, Production, Laboratory
United States........................ 23 861,408 Office, Production, Laboratory
-- ---------
Total................................ 39 1,972,179
== =========
SITES--LEASED
COUNTRY NO. OF SITES TOTAL SQUARE FEET PRINCIPAL FUNCTIONS
- ------- ------------ ----------------- ------------------------------
Australia............................ 1 8,518 Office, Production
Czech Republic....................... 2 8,802 Office, Production, Laboratory
Hungary.............................. 2 11,567 Office, Production, Laboratory
Japan................................ 6 61,917 Office, Production, Laboratory
Netherlands.......................... 1 11,841 Office, Production
Spain................................ 1 3,228 Sales Office
Sweden............................... 1 8,072 Sales Office
United States........................ 23 586,345 Office, Production, Laboratory
-- -------
Total................................ 37 700,291
== =======
ITEM 3. LEGAL PROCEEDINGS
Our operations and properties are subject to extensive foreign and federal,
state and local environmental protection and health and safety laws and
regulations. These laws and regulations govern, among other things, the
generation, storage, handling, use and transportation of hazardous materials and
the handling and disposal of hazardous and biohazardous waste generated at our
facilities. Under such laws and regulations, we are required to obtain permits
from governmental authorities for some of our operations. If we violate or fail
to comply with these laws, regulations or permits, we could be fined or
otherwise sanctioned by regulators. Under some environmental laws and
regulations, we could also be held responsible for all of the costs relating to
any contamination at our past or present facilities and at third party waste
disposal sites. As a result of disputes with federal, state and local
authorities and private environmental groups regarding damage to mangrove plants
on two islands in the Florida Keys, we agreed to refoliate the islands at our
cost. Although we have not been able to completely replant, principally due to
the presence of a free-range animal population and storms, we believe that the
cost of refoliation will not have a material adverse effect on our business.
Although we believe that our costs of complying with current and future
environmental laws, and our liabilities arising from past or future releases of,
or exposure to, hazardous substances will not materially adversely affect our
business, results of operations or financial condition, we cannot assure you
that they will not do so.
16
We are not a party to any other material legal proceedings, other than
ordinary routine litigation incidental to our business that is not otherwise
material to our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange on
June 23, 2000 under the symbol "CRL." The following table sets forth for the
periods indicated below the high and low closing prices for our common stock, as
reported on the NYSE Composite Tape.
2000 HIGH LOW
- ---- -------- --------
Second Quarter (from June 23, 2000)...................... $ 22.00 $ 22.00
Third Quarter............................................ 33.06 21.19
Fourth Quarter........................................... 34.00 20.50
STOCKHOLDERS
As of March 23, 2001, there were approximately 70 stockholders of record of
the outstanding shares of Common Stock.
DIVIDENDS
We have not declared or paid any cash dividends on shares of our common
stock in the past two years except to our former parent company and we do not
intend to pay cash dividends in the foreseeable future. We currently intend to
retain any earnings to finance future operations and expansion and to reduce
indebtedness. We are a holding company and are dependent on distributions from
our subsidiaries to meet our cash requirements. The terms of the indenture
governing our senior subordinated notes and our credit facility restrict the
ability of our subsidiaries to make distributions to us and, consequently,
restrict our ability to pay dividends on our common stock.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected consolidated financial data and
other data as of and for the fiscal years ended December 28, 1996, December 27,
1997, December 26, 1998, December 25, 1999 and December 30, 2000. You should
read the information contained in this table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 and our consolidated financial statements and the related
notes contained in Item 8.
FISCAL YEAR(1)
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total net sales........................................... $165,563 $181,227 $205,061 $231,413 $306,585
Cost of products sold and services provided............... 107,736 121,974 134,307 146,729 186,654
Selling, general and administrative expenses.............. 28,327 30,451 34,142 39,765 51,204
Amortization of goodwill and intangibles.................. 610 834 1,287 1,956 3,666
Restructuring charges..................................... 4,748 5,892 -- -- --
-------- -------- -------- -------- --------
Operating income.......................................... 24,142 22,076 35,325 42,963 65,061
Interest income........................................... 654 865 986 536 1,644
Other income.............................................. -- -- -- 89 390
Interest expense.......................................... (491) (501) (421) (12,789) (40,691)
Gain (loss) from foreign currency, net.................... 84 (221) (58) (136) (319)
-------- -------- -------- -------- --------
Income before income taxes, minority interests and
earnings from equity investments........................ 24,389 22,219 35,832 30,663 26,085
Provision for income taxes................................ 10,889 8,499 14,123 15,561 7,837
-------- -------- -------- -------- --------
Income before minority interests and earnings from equity
investments............................................. 13,500 13,720 21,709 15,102 18,248
Minority interests........................................ (5) (10) (10) (22) (1,396)
Earnings from equity investments.......................... 1,750 1,630 1,679 2,044 1,025
-------- -------- -------- -------- --------
Income before extraordinary item.......................... 15,245 15,340 23,378 17,124 17,877
Extraordinary loss, net of tax............................ -- -- -- -- (29,101)
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 15,245 $ 15,340 $ 23,378 $ 17,124 $(11,224)
======== ======== ======== ======== ========
OTHER DATA:
Depreciation and amortization............................. $ 9,528 $ 9,703 $ 10,895 $ 12,318 $ 16,766
Capital expenditures...................................... 11,572 11,872 11,909 12,951 15,565
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................. $ 19,657 $ 17,915 $ 24,811 $ 15,010 $ 33,129
Working capital........................................... 48,955 46,153 42,574 27,574 55,417
Total assets.............................................. 196,981 196,211 234,254 359,096 410,608
Total debt................................................ 1,645 1,363 1,582 386,044 202,912
Total shareholders' equity (deficit)...................... 153,818 149,364 168,259 (110,142) 116,927
- ------------------------------
(1) Our fiscal year consists of 12 months ending on the last Saturday on or
prior to December 31.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS FILED FEBRUARY 14, 2001.
OVERVIEW
We are a leading provider of critical research tools and integrated support
services that enable innovative and efficient drug discovery and development. We
are the global leader in providing the animal research models required in
research and development for new drugs, devices and therapies and have been in
this business for more than 50 years.
We operate in two segments for financial reporting purposes: research models
and biomedical products and services. In addition, since services represent over
10% of our net sales, our consolidated financial statements also provide a
breakdown of net sales between net sales related to products, which include both
research models and biomedical products, and net sales related to services,
which reflect biomedical services, and a breakdown of costs between costs of
products sold and costs of services provided. The following tables show the net
sales and the percentage contribution of our segments, research models and
biomedical products and services, for the past three years. They also show costs
of products sold and services provided, selling, general and administrative
expenses and operating income for both research models and biomedical products
and services by segment and as percentages of their respective segment net
sales.
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
(DOLLARS IN MILLIONS)
Net sales:
Research models......................................... $144.9 $152.5 $187.7
Biomedical products and services........................ 60.2 78.9 118.9
Costs of products sold and services provided:
Research models......................................... $ 96.1 $ 96.5 $113.3
Biomedical products and services........................ 38.2 50.2 73.4
Selling, general and administrative expenses:
Research models......................................... $ 18.1 $ 22.2 $ 30.9
Biomedical products and services........................ 9.7 12.5 18.2
Operating income:
Research models......................................... $ 30.5 $ 33.7 $ 43.1
Biomedical products and services........................ 11.1 14.4 24.1
19
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
(AS A PERCENT OF NET SALES)
Net sales:
Research models......................................... 70.6% 65.9% 61.2%
Biomedical products and services........................ 29.4 34.1 38.8
Costs of products sold and services provided:
Research models......................................... 66.3% 63.3% 60.4%
Biomedical products and services........................ 63.5 63.6 61.7
Selling, general and administrative expenses:
Research models......................................... 12.5% 14.6% 16.5%
Biomedical products and services........................ 16.1 15.8 15.3
Operating income:
Research models......................................... 21.0% 22.1% 23.0%
Biomedical products and services........................ 18.4 18.3 20.3
NET SALES. We recognize revenue with respect to research model sales upon
transfer of title, which is when the risks and rewards of ownership pass to the
customer. We recognize revenues with respect to services as these services are
performed. Over the past three years, unit volume of small animal research
models has increased modestly in North America and has decreased modestly in
Europe. During the same period, sales in both North America and Europe have
increased, principally as a result of price increases and a shift in mix towards
higher priced research models. In recent years, we have increased our focus on
the sale of specialty research models, such as special disease models, which
have contributed to additional sales growth.
Our customers typically place orders for research models with less than a
week's lead time. Meeting such demand requires efficient inventory management
and strong customer service support. We improved inventory availability in the
last three years through better forecasting and production mix, and most
importantly, improved biosecurity, thereby reducing contaminations.
Biomedical products and services have grown at a compounded rate of 36.3%
from 1998 to 2000. Our growth in this business demonstrated our ability to
capitalize on our core research model technology and enter into related product
development activities undertaken by our customers.
PRICING. We maintain published list prices for all of our research models,
biomedical products and some of our services. We also have pricing agreements
with our customers which provide some discounts, usually based on volume. Many
of our services are based on customized orders and are priced accordingly. While
pricing has been competitive, some of our products are priced at a premium due
to the higher quality, better availability and superior customer support that
our customers associate with our products.
BIOSECURITY. Biosecurity is one of our highest operational priorities.
Prior breaches of biosecurity have adversely affected our results of operations,
and we cannot assure you that future breaches would not materially affect our
results of operations. A biosecurity breach typically results in additional
expenses from the need to clean up the contaminated room, which in turn results
in inventory loss, clean-up and start-up costs, and can reduce net sales as a
result of lost customer orders and credits for prior shipments. We experienced a
few significant contaminations in 1997 in our isolation rooms for research
models and in our poultry houses for vaccine support products. Since January 1,
1997, we have made over $8 million of capital expenditures designed to
strengthen our biosecurity, primarily by upgrading our production facilities. In
addition, we have made significant changes to our operating procedures for
isolation rooms and poultry houses designed to further minimize the risks of
20
contamination, including, for example, increasing the frequency of replacing
masks and gowns, and most importantly, increasing awareness and training among
our employees. These improvements to our operating procedures increased annual
ongoing biosecurity-related expenses by approximately $0.5 million in 1999.
While we cannot assure you that we will not experience future significant
isolation room or poultry house contaminations in the future, we believe these
changes have contributed to our absence of significant contaminations during
1998, 1999 and 2000.
ACQUISITIONS. Since January 1, 1998, we have successfully acquired and
integrated four companies, which contributed $47.4 million in sales in 2000,
representing 15.5% of total sales. On September 29, 1999, we acquired Sierra for
an initial total purchase price of $23.3 million, including approximately
$17.3 million in cash paid to former shareholders and assumed debt of
approximately $6.0 million, which we immediately retired. In addition, we are
obligated to pay $2.0 million in additional purchase price due to specified
financial objectives being reached by December 30, 2000. The additional
consideration was recorded as additional goodwill in the year ended
December 30, 2000. We have also agreed to pay (a) up to $10.0 million in
performance-based bonus payments if specified financial objectives are reached
in the five years following the acquisition date, with no payment in any
individual year to exceed $2.7 million and (b) $3.0 million in retention and
non-competition payments contingent upon the continuing employment of specified
key scientific and managerial personnel through June 30, 2001. Sierra became
part of our drug safety assessment area.
The $10.0 million in performance-based bonus payments, will, if paid, be
expensed during the periods in which it becomes reasonably certain that the
financial objectives will be achieved. Approximately $1.4 million of
performance-based bonus payments were made on December 31, 2000 and were
recorded as compensation expense in the year ended December 30, 2000. We
expensed $1.4 million in fiscal 1999 and $1.0 million in fiscal 2000 of the
$3.0 million in retention and non-competition payments. The $0.6 million
remaining will be expensed ratably through June 2001.
Effective January 8, 2001 we purchased 100% of the common stock of PAI. We
paid consideration of $37 million with respect to this acquisition, consisting
of $25 million in cash and a $12 million callable convertible note.
On February 27, 2001 we acquired Primedica for consideration of
approximately $52 million. The consideration is comprised of $26 million in
cash, $16.5 million in restricted stock (which we may repurchase through
July 1, 2001) and $9.5 million in assumed debt.
JOINT VENTURES. At December 25, 1999, we had two unconsolidated joint
ventures. As of February 28, 2000, we acquired an additional 16% equity interest
in one of the joint ventures, Charles River Japan, increasing our ownership
interest to 66%. The purchase price for the 16% equity interest was 1.4 billion
yen, or $12.8 million, of which 400 million yen, or $3.7 million, was paid by a
three-year balloon promissory note secured by a pledge of the purchased
interest. The note bears interest at the long-term prime rate in Japan. Charles
River Japan is engaged principally in the research model business. Our royalty
agreement provides us with 3% of the sales of locally produced research models,
and having acquired majority ownership, we have consolidated its operations for
financial reporting purposes from the effective date of the acquisition in the
first quarter of fiscal 2000. This contributed $36.6 million in sales in 2000.
We also receive dividends based on our pro-rata share of net income. Charles
River Japan paid dividends prior to the additional equity investment amounted to
$0.7 million, $0.8 million and $0.0 million in 1998, 1999 and 2000,
respectively. Our other unconsolidated joint venture is Charles River Mexico, an
extension of our vaccine support products area, which is not significant to our
business.
ALLOCATION OF COSTS FROM BAUSCH & LOMB. Historically, B&L charged us for
some direct expenses, including insurance, information technology and other
miscellaneous expenses, based upon actual charges incurred on our behalf.
However, these charges and estimates are not necessarily indicative of
21
the costs and expenses which would have resulted had we incurred these costs as
a stand-alone entity. The actual amounts of expenses we incur in future periods
may vary significantly from these allocations and estimates.
THE RECAPITALIZATION AND SIERRA ACQUISITION. The recapitalization, which
was consummated on September 29, 1999, was accounted for as a leveraged
recapitalization and had no impact on the historical basis of our assets and
liabilities. The Sierra acquisition was accounted for under the purchase method
of accounting with the purchase price allocated to the assets and liabilities of
Sierra based on an estimate of their fair value, with the remainder allocated to
goodwill. We incurred various costs of approximately $22.6 million (pre-tax) in
connection with consummating the recapitalization. We have capitalized and are
amortizing the portion of these costs that represents deferred financing costs
(approximately $14.4 million) over the life of the related financing. We have
charged a portion of the expenses related to the recapitalization (approximately
$8.2 million) to retained earnings.
DEFERRED TAX ASSETS. In conjunction with the recapitalization, CRL
Acquisition LLC and B&L made a joint election under section 338(h)(10) of the
Internal Revenue Code of 1986, as amended. Such election resulted in a step-up
in the tax basis of the underlying assets and a net deferred tax asset of
$99.5 million was recorded in the consolidated financial statements. The tax
purchase price allocation related to the election was not finalized until the
second quarter of 2000, and an adjustment of $4.5 million was recorded in that
quarter to reduce the net deferred tax asset balance and capital in excess of
par in accordance with the final allocation. In addition, we have used the
proceeds from our initial public offering to repay a portion of our outstanding
debt and expect to be more profitable in the future, due to reduced interest
costs. We therefore reassessed the need for a valuation allowance associated
with the deferred asset balance discussed above and reduced this valuation
allowance by $4.8 million. This reduction in valuation allowance was recorded as
a tax benefit in the second quarter of 2000. The net deferred tax asset
pertaining to the election under section 338(h)(10) of the Internal Revenue Code
as of December 30, 2000 of approximately $92.3 million is expected to be
realized over 15 years through future tax deductions which are expected to
reduce future tax payments. It is possible that the Internal Revenue Service may
challenge the availability of the section 338(h)(10) election. If the Internal
Revenue Service were successful, the expected future tax benefits from the
election would not be available, and we would be required to write off the
related deferred tax assets by recording a non-recurring expense in our results
of operations in an amount equal to such deferred tax assets. See Note (9) to
the consolidated financial statements. We believe that the reorganization and
liquidating distribution should not have any impact upon the election for
federal income tax purposes. However, the Internal Revenue Service may reach a
different conclusion. See "Item 1--Business, Tax benefits we expect to be
available in the future may be subject to challenge."
INITIAL PUBLIC OFFERING. The net proceeds of our initial public offering
were used to repay approximately $204.7 million in outstanding indebtedness,
including issuance discounts, in the third quarter of 2000. In connection with
this repayment we also have paid premiums and written off deferred financing
costs. We recorded an extraordinary loss of $29.1 million, net of tax benefits
of $15.7 million, in the third quarter of 2000.
22
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net sales for the periods shown:
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Net sales............................................... 100.0% 100.0% 100.0%
Costs of products sold and services provided............ 65.5 63.4 60.9
Selling, general and administrative expenses............ 16.6 17.2 16.7
Amortization of goodwill and other intangibles.......... 0.6 0.8 1.2
Interest income......................................... 0.5 0.2 0.5
Interest expense........................................ 0.2 5.5 13.3
Provision for income taxes.............................. 6.9 6.7 2.6
Earnings from equity investment......................... 0.8 0.9 0.3
Minority interests...................................... -- -- 0.5
----- ----- -----
Net income.............................................. 11.4% 7.4% 5.8%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES. Net sales in 2000 were $306.6 million, an increase of
$75.2 million, or 32.5%, from $231.4 million in 1999. Results for 2000 and 1999
on a pro forma basis for the strategic transactions, which include the
acquisition of Sierra in September 1999 and the acquisition of control of our
Japanese joint venture in February 2000, reflect a 10% increase for the year,
12.4% excluding the impact of foreign currencies.
RESEARCH MODELS. Net sales of research models in 2000 were $187.7 million,
an increase of $35.2 million, or 23.1%, from $152.5 million in 1999. Small
animal research model sales increased in North America by 12.3% due to continued
improved pricing, a shift to higher priced specialty units and an increase in
unit volume. Excluding negative currency translation of $7.6 million and the
reduction in lab equipment sales of $1.8 million which tends to be variable,
European small animal research model sales increased by 3.2%. Small animal
research model sales in Japan, which we began consolidating during the first
quarter of 2000, were $36.2 million in 2000. We also experienced an increase
during 2000 in our large animal import and conditioning business of 5.2%. Our
large animal breeding colony in Florida, which was sold in the first quarter of
2000, accounted for $2.8 million of sales in 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services in 2000 were $118.9 million, an increase of $40.0 million, or 50.7%,
from $78.9 million in 1999. Sierra contributed $26.8 million of sales growth in
2000 due to the full year impact of its acquisition. The remaining product lines
increased 18.3% in total in 2000 primarily due to increased outsourcing by our
customers.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided in 2000 was $186.7 million, an increase of $40.0 million, or
27.3%, from $146.7 million in 1999. Cost of products sold and services provided
in 2000 was 60.9% of net sales compared to 63.4% of net sales in 1999.
RESEARCH MODELS. Cost of products sold and services provided for research
models in 2000 was $113.3 million, an increase of $16.8 million, or 17.4%,
compared to $96.5 million in 1999. Cost of products sold and services provided
in 2000 was 60.4% of net sales compared to 63.3% of net sales in 1999. Cost of
products sold and services provided increased at a lower rate than net sales due
to increased sales volume resulting in improved capacity utilization.
23
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services in 2000 was $73.4 million, an
increase of $23.2 million, or 46.2%, compared to $50.2 million in 1999. Cost of
products sold and services provided as a percentage of net sales in 2000 was
61.7%, an improvement from 63.6% in 1999. The favorable cost of products sold
and services provided as a percent of net sales in 2000 is attributable to our
increased sales and improved Sierra profitability.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 2000 were $51.2 million, an increase of
$11.4 million, or 28.6%, from $39.8 million in 1999. Selling, general and
administrative expenses for 2000 were 16.7% of net sales compared to 17.2% of
net sales in 1999.
RESEARCH MODELS. Selling, general and administrative expenses for research
models in 2000 were $30.9 million, an increase of $8.7 million, or 39.2%,
compared to $22.2 million in 1999. The $8.7 million increase is mainly due to
consolidation of Charles River Japan in the first quarter of 2000 along with a
$1.3 million restructuring charge for a plant closing and personnel reductions
in one of our small animal research models locations in France. Selling, general
and administrative expenses for 2000 were 16.5% of net sales, compared to 14.6%
for 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services in 2000 were $18.2 million, an
increase of $5.7 million, or 45.6%, compared to $12.5 million in 1999. The
acquisition of Sierra in the fourth quarter of 1999 accounts for $2.9 million of
the increase. Selling, general and administrative expenses in 2000 decreased to
15.3% of net sales, compared to 15.8% of net sales in 1999, due to greater
economies of scale realized though our acquisition of Sierra and increased
sales.
UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $2.1 million in 2000 compared to
$5.1 million in 1999. Unallocated corporate overhead has decreased mainly due to
pension income from favorable investment returns.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles in 2000 was $3.7 million, an increase of $1.7 million from
$2.0 million in 1999. The increase was due mainly to the full year effect of the
amortization of intangibles from our Sierra acquisition.
OPERATING INCOME. Operating income in 2000 was $65.1 million, an increase
of $22.1 million, or 51.4%, from $43.0 million in 1999. Operating income in 2000
was 21.2% of net sales, compared to 18.6% of net sales in 1999. Operating income
increased in total and as a percentage of net sales due to our sales growth,
acquisition of Sierra and improved capacity utilization.
RESEARCH MODELS. Operating income from sales of research models in 2000 was
$43.1 million, an increase of $9.4 million, or 27.9%, from $33.7 million in
1999. Operating income from sales of research models in 2000 was 23.0% of net
sales, compared to 22.1% in 1999. The increased operating income was
attributable to the growth in sales coupled with improved capacity utilization.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services in 2000 was $24.1 million, an increase of $9.7 million, or
67.4%, from $14.4 million in 1999. Operating income from sales of biomedical
products and services in 2000 increased to 20.3% of net sales, compared to 18.3%
of net sales in 1999. The increase is attributable to our acquisition of Sierra
as well as our increased sales.
INTEREST EXPENSE. Interest expense in 2000 was $40.7 million compared to
$12.8 million in 1999. The $27.9 million increase from 1999 was primarily due to
the additional debt incurred as a result of the recapitalization which occurred
on September 29, 1999 partially offset by the debt repayment in the third
quarter.
24
INCOME TAXES. The effective tax rate in 2000 excluding the reversal of the
deferred tax valuation allowance of $4.8 million was 48.3% as compared to 50.7%
in 1999. The impact of leverage in the first half of the year had an unfavorable
impact on our tax rate by lowering our pre-tax income, and increasing the impact
of the permanent timing differences on the tax rate. The effective tax rate did
improve in the last six months. The $4.8 million reversal of the valuation
allowance associated with the deferred tax asset, was recorded as a tax benefit
in the second quarter of 2000 due to a reassessment of the need for a valuation
allowance following our initial public offering.
INCOME BEFORE THE EXTRAORDINARY LOSS. Income before the extraordinary loss
in 2000 was $17.9 million, an increase of $0.8 million from $17.1 million in
1999. The increase is driven by the increase in operating income and the
reversal of the deferred tax valuation allowance, which is partially offset by
the full year impact of interest expense.
EXTRAORDINARY LOSS. We recorded an extraordinary loss of $29.1 million
during the third quarter of 2000. The pre-tax loss of $44.8 million is the
result of premiums related to the early repayment of debt and the write off of
deferred financing costs and issuance discounts associated with the debt
repayments, and is recorded net of tax benefits of $15.7 million.
NET INCOME (LOSS). The loss in 2000 was $11.2 million, a decrease of
$28.3 million from net income of $17.1 million in 1999. The increased income
from operations and the reversal of the deferred tax valuation allowance was
offset by the extraordinary loss associated with the debt repayment and the full
year impact of interest expense.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales in 1999 were $231.4 million, an increase of
$26.3 million, or 12.8%, from $205.1 million in 1998.
RESEARCH MODELS. Net sales of research models in 1999 were $152.5 million,
an increase of $7.6 million, or 5.2%, from $144.9 million in 1998. Sales
increased due to the increase in small animal research model sales in North
America and Europe of $7.1 million, resulting from improved pricing, a more
favorable product mix (meaning a shift to higher priced units) and an increase
in unit volume. We also experienced an increase in the large animal import and
conditioning area of $0.6 million, mainly due to pricing.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services in 1999 were $78.9 million, an increase of $18.7 million, or 31.1%,
from $60.2 million in 1998. At the beginning of the second quarter of 1998, we
made two acquisitions that contributed $3.4 million of this sales growth, and on
September 29, 1999, we acquired Sierra which had sales of $5.9 million in the
fourth quarter. The remaining increase was due to significant sales increases of
transgenic and research support services of $2.9 million and endotoxin detection
systems of $2.2 million, and sales from our contract site management services of
$1.8 million, primarily due to better customer awareness of our outsourcing
solutions.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided in 1999 was $146.7 million, an increase of $12.4 million, or
9.2%, from $134.3 million in 1998.
RESEARCH MODELS. Cost of products sold and services provided for research
models in 1999 was $96.5 million, an increase of $0.4 million, or 0.4%, compared
to $96.1 million in 1998. Cost of products sold and services provided in 1999
was 63.3% of net sales compared to 66.3% of net sales in 1998. Cost of products
sold and services provided increased at a lower rate than net sales due to the
more favorable product mix and better pricing, as well as improved capacity
utilization.
25
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services in 1999 was $50.2 million, an
increase of $12.0 million, or 31.4%, compared to $38.2 million in 1998. Cost of
products sold and services provided as a percentage of net sales was essentially
unchanged at 63.6% in 1999 compared to 63.5% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1999 were $39.8 million, an increase of
$5.7 million, or 16.7%, from $34.1 million in 1998. Selling, general and
administrative expenses in 1999 were 17.2% of net sales compared to 16.6% of net
sales in 1998. Selling, general and administrative expenses also included
research and development expense of $0.5 million in 1999 compared to
$1.4 million in 1998.
RESEARCH MODELS. Selling, general and administrative expenses for research
models in 1999 were $22.2 million, an increase of $4.1 million, or 22.7%,
compared to $18.1 million in 1998. Selling, general and administrative expenses
in 1999 were 14.6% of net sales, compared to 12.5% in 1998. The increase was
attributable to additional worldwide marketing efforts, additional salespeople
in the United States and the impact of selling efforts in Europe for ESD, a
business acquired at the end of 1998.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services in 1999 were $12.5 million, an
increase of $2.8 million, or 28.9%, compared to $9.7 million in 1998. Selling,
general and administrative expenses in 1999 decreased to 15.8% of net sales,
compared to 16.1% of net sales in 1998, due to greater economies of scale.
UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $5.1 million in 1999, a decrease of
$1.2 million, or 19.0%, compared to $6.3 million in 1998. The decrease was
principally from the increase in cash surrender value associated with our
supplemental executive retirement program.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles in 1999 was $2.0 million, an increase of $0.7 million, or
53.8%, from $1.3 million in 1998. The increase was due to the effect of
additional amortization of intangibles resulting from four recent acquisitions,
two in April 1998, one in December 1998, and Sierra in September 1999.
RESTRUCTURING CHARGES. There were no restructuring charges in 1999 or 1998.
During 1999, we charged $1.1 million against the previously recorded
restructuring reserves, bringing the balance at year-end to zero.
OPERATING INCOME. Operating income in 1999 was $43.0 million, an increase
of $7.7 million, or 21.8%, from $35.3 million in 1998. Operating income in 1999
was 18.6% of net sales, compared to 17.2% of net sales in 1998. Operating income
increased in total and as a percentage of net sales for the reasons described
above.
RESEARCH MODELS. Operating income from sales of research models in 1999 was
$33.7 million, an increase of $3.2 million, or 10.5%, from $30.5 million in
1998. Operating income from sales of research models in 1999 was 22.1% of net
sales, compared to 21.0% in 1998. The increase was attributable to the factors
described above.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services in 1999 was $14.4 million, an increase of $3.3 million, or
29.7%, from $11.1 million in 1998. Operating income from sales of biomedical
products and services in 1999 decreased to 18.3% of net sales, compared to 18.4%
of net sales in 1998. This was primarily due to the acquisition of Sierra and
the impact of additional amortization of intangibles.
26
OTHER INCOME. We recorded a $1.4 million gain on the sale of two small
facilities, one located in Florida, and the other located in the Netherlands,
and a charge of $1.3 million for stock compensation expense.
INTEREST EXPENSE. Interest expense for 1999 was $12.8 million compared to
$0.4 million for 1998. The $12.4 million increase was primarily due to the
additional debt incurred in the recapitalization.
INCOME TAXES. The effective tax rate of 50.7% in 1999 as compared to 39.4%
in 1998 reflects the remittance of cash dividends of $20.7 million from our
foreign subsidiaries which, in turn, were remitted to B&L. The related amounts
were previously considered permanently reinvested in the foreign jurisdictions
for U.S. income tax reporting purposes. Therefore, we were required to provide
additional taxes upon their repatriation to the United States. In addition, in
1999, an election was made by B&L to treat some foreign entities as branches for
U.S. income tax purposes. As a result, all previously untaxed accumulated
earnings of such entities became immediately subject to tax in the United
States. The receipt of the cash dividends from the foreign subsidiaries and the
foreign tax elections made resulted in incremental United States taxes of
$2.0 million, net of foreign tax credits, in 1999.
NET INCOME. Net income in 1999 was $17.1 million, a decrease of
$6.3 million, or 26.9%, from $23.4 million in 1998. The decrease was
attributable to the increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal sources of liquidity were cash flow from
operations, borrowings under our credit facility and proceeds from our initial
public offering.
In September 1999, we received a $92.4 million equity investment from DLJMB
and affiliated funds, management and some other investors, we issued
$37.6 million senior discount debentures with warrants to purchase common stock
and $150.0 million units consisting of senior subordinated notes due in 2009
with warrants to purchase common stock, and borrowed $162.0 million under our
senior secured credit facility. We redeemed 87.5% of our outstanding capital
stock held by B&L for $400.0 million and a $43.0 million subordinated discount
note. We simultaneously acquired Sierra for an initial purchase price of
$23.3 million including $17.3 million paid to its former stockholders and
$6.0 million of assumed debt which we immediately retired.
Borrowings under the credit facility bear interest at a rate per year equal
to a margin over either a base rate or LIBOR. The $30.0 million revolving loan
commitment will terminate six years after the date of the initial funding of the
credit facility. The revolving credit facility may be increased by up to
$25.0 million at our request, which will only be available to us under some
circumstances, under the same terms and conditions of the original
$30.0 million revolving credit facility. The term loan facility under the credit
facility consists of a $40.0 million term loan A facility and a $120.0 million
term loan B facility. The term loan A facility matures six years after the
closing date of the facility and the term loan B facility matures eight years
after the closing date of the facility. In February, 2001, in connection with
the anticipated Primedica acquisition, we amended our credit facility to add a
$25 million term C loan facility and to increase the interest rate on the
term A loan facility to LIBOR plus 1.75% from LIBOR plus 1.5%. As of
January 30, 2001, the interest rate on the term A loan facility was 8.1375%, the
interest rate on the term B loan facility was 10.3875%, the interest rate on the
term C loan facility was 8.1375% and there was an aggregate of $116.1 million
outstanding under our loan facilities. The credit facility contains customary
covenants and events of default, including substantial restrictions on our
subsidiary's ability to declare dividends or make distributions. The term loans
are subject to mandatory prepayment with the proceeds of certain asset sales and
a portion of our excess cash flow.
In February 2000, the 13.5% senior subordinated notes were exchanged for
registered notes having the same financial terms and covenants as the notes
issued in September 1999. Interest on the notes is
27
payable semi-annually in cash. The notes contain customary covenants and events
of default, including covenants that limit our ability to incur debt, pay
dividends and make particular investments.
In the third quarter of 2000, we consummated an initial public offering of
16,100,000 shares of our common stock at a price of $16.00 per share. We used
the net proceeds from the offering of approximately $236.0 million to redeem a
portion of the outstanding senior subordinated notes, including associated
premiums and to repay our senior discount debentures, subordinated discount note
and a portion of our bank debt.
On March 21, 2001, we consummated a public offering of 3,500,000 shares of
our common stock, at a price of $19.00 per share. In the offering, 4,550,000
shares of common stock, which included the exercise of the underwriters'
over-allotment option of 1,050,000 shares were also sold by existing
shareholders. We received proceeds of approximately $62.5 million, which we
intend to use to repay a portion of our indebtedness, retire obligations
incurred in connection with recent acquisitions and for general corporate
purposes.
We anticipate that our operating cash flow, together with borrowings under
our credit facility, will be sufficient to meet our anticipated future operating
expenses, capital expenditures and debt service obligations as they become due.
However, Charles River Laboratories International, Inc. is a holding company
with no operations or assets other than its ownership of 100% of the common
stock of its subsidiary, Charles River Laboratories, Inc. We have no source of
liquidity other than dividends from our subsidiary.
FISCAL 2000 COMPARED TO FISCAL 1999
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of Charles River totaled $33.1 million at
December 30, 2000 compared with $15.0 million at December 25, 1999. Our
principal sources of liquidity were cash flows from operations, borrowings under
our credit facilities and cash provided by our initial public offering.
Net cash provided by operating activities for the year 2000 was
$33.8 million compared to net cash provided of $37.6 million in 1999. Net loss
for the year 2000 was $11.2 million compared to net income of $17.1 million in
1999. Net income was impacted by the extraordinary loss of $29.1 million net of
tax benefits of $15.7 million.
Net cash used in investing activities during the year 2000 was
$14.6 million compared to $34.2 million in 1999. On February 28, 2000, we
acquired an additional 16% of the equity (340,840 common shares) of our 50%
equity joint venture, Charles River Japan, from Ajinomoto Co., Inc. The purchase
price for the equity was 1.4 billion yen or $12.8 million. One billion yen, or
$9.2 million was paid at closing and the balance of 400 million yen, or
$3.7 million was deferred pursuant to a three year balloon promissory note. In
addition, we acquired $3.2 million in cash. In January of 2000 we sold our
primate colony in Florida for $7.0 million. In September of 1999 we purchased
100% of the common stock of Sierra for $23.3 million including $17.3 million
paid to Sierra's former stockholders and $6.0 million of assumed debt which was
immediately retired. Capital expenditures in the year 2000 were $15.6 million
compared to $13.0 million in 1999.
Net cash provided by financing activities during 2000 was $0.8 million
compared to cash used of $11.5 million in 1999. We received $236.0 million from
our initial public offering of which we used $204.4 million to pay down our
existing debt, including issuance discounts, and $31.5 million to pay premiums
associated with the early repayment of the debt. In 1999, we received a
$92.4 million equity investment from DLJMB and affiliated funds, management and
some other investors, we issued $37.6 million senior discount debentures, which
were retired in full in 2000, with warrants to purchase common stock. During
1999 we also issued $150.0 million units consisting of senior subordinated
notes, of which $52.5 million was retired in 2000, with warrants to purchase
common stock. Furthermore in
28
1999 we borrowed $162.0 million under our senior secured credit facility and
paid off $63.9 million in 2000. In 1999 we redeemed 87.5% of our outstanding
capital stock held by B&L for $400.0 million and a $43.0 million subordinated
discount note, which we repaid in 2000. Net activity with B&L, our 100%
shareholder up until the recapitalization in 1999, was $29.4 million in net
payments in 1999.
We anticipate that our operating cash flows, together with borrowings under
our credit facility, will be sufficient to meet our anticipated future operating
expenses, capital expenditures and debt service obligations as they become due.
FISCAL 1999 COMPARED TO FISCAL 1998
Cash flows from operating activities in 1999 were $37.6 million compared to
$37.4 million in 1998. Net cash used in investing activities in 1999 was
$34.2 million compared to $23.0 million in 1998. The increase was primarily due
to the acquisition of Sierra for $23.3 million. Capital expenditures in 1999
were $13.0 million versus $11.9 million in 1998.
Net cash used in financing activities in 1999 was $11.5 million versus
$8.0 million in 1998. The activity in 1999 consisted of payments for deferred
financing costs of $14.4 million and transactions costs of $8.2 million
associated with the recapitalization. We also paid a dividend of $29.4 million
to B&L, which was excess cash at the time of the recapitalization, and the
recapitalization consideration was $400.0 million. The above was offset by the
proceeds from the issuance of long-term debt of $339.0 million, the issuance of
warrants of $10.6 million, and the issuance of common stock of $92.4 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. This statement also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 30, 1999. However, Statement of
Financial Accounting Standards No. 137, "Deferral of the Effective Date of SFAS
No. 133," was issued to defer adoption of SFAS No. 133 to fiscal years beginning
after June 30, 2000. Based on the analysis prepared by the Company to date, the
adoption of this statement will not have a material impact on the Company's
results of operations or financial position.
ITEM 7A. 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 results from
changes in LIBOR or the base rate which are used to determine the applicable
interest rates under our term loans and revolving credit facility. We have
entered into an interest rate protection agreement designed to protect us
against fluctuations in interest rates with respect to at least 50% of the
aggregate principal amount of the term loans and the senior subordinated notes.
Our potential loss over one year that would result from a hypothetical,
instantaneous and unfavorable change of 100 basis points in the interest rate on
all of our variable rate obligations would be approximately $1.3 million.
Fluctuations in interest rates will not affect the interest payable on the
senior subordinated notes, which is fixed.
We do not use financial instruments for trading or other speculative
purposes.
We also have exposure to some foreign currency exchange rate fluctuations
for 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.
Currently, we do not engage in any foreign currency hedging activities as we do
not believe that our foreign currency exchange rate risk is material.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants......................... 31
Consolidated Statements of Operations for the years ended
December 26, 1998, December 25, 1999 and December 30,
2000.................................................... 32
Consolidated Balance Sheets as of December 25, 1999 and
December 30, 2000....................................... 33
Consolidated Statements of Cash Flows for the years ended
December 26, 1998, December 25, 1999 and December 30,
2000.................................................... 34
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 27, 1997, December 26,
1998, December 25, 1999, and December 30, 2000.......... 35
Notes to Consolidated Financial Statements................ 36
FINANCIAL STATEMENT SCHEDULES:
Schedule I. Parent Company Condensed Financial
Statements.............................................. 63
Schedule II. Valuation and Qualifying Accounts............ 67
SUPPLEMENTARY DATA:
Quarterly Information (Unaudited)......................... 68
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and shareholders of
Charles River Laboratories International, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Charles River Laboratories International, Inc. and its subsidiaries
(the "Company") at December 30, 2000 and December 25, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedules based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2001
31
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Net sales related to products......................... $181,137 $192,406 $229,217
Net sales related to services......................... 23,924 39,007 77,368
----------- ----------- -----------
Total net sales....................................... 205,061 231,413 306,585
Costs and expenses
Cost of products sold............................... 118,906 121,065 136,161
Cost of services provided........................... 15,401 25,664 50,493
Selling, general and administrative................. 34,142 39,765 51,204
Amortization of goodwill and intangibles............ 1,287 1,956 3,666
----------- ----------- -----------
Operating income...................................... 35,325 42,963 65,061
Other income (expense)
Interest income..................................... 986 536 1,644
Other income and expense............................ -- 89 390
Interest expense.................................... (421) (12,789) (40,691)
Loss from foreign currency, net..................... (58) (136) (319)
----------- ----------- -----------
Income before income taxes, minority interests,
earnings from equity investments and extraordinary
item................................................ 35,832 30,663 26,085
Provision for income taxes............................ 14,123 15,561 7,837
----------- ----------- -----------
Income before minority interests, earnings from equity
investments and extraordinary item.................. 21,709 15,102 18,248
Minority interests.................................... (10) (22) (1,396)
Earnings from equity investments...................... 1,679 2,044 1,025
----------- ----------- -----------
Income before extraordinary item...................... 23,378 17,124 17,877
Extraordinary loss, net of tax benefit of $15,670..... -- -- (29,101)
----------- ----------- -----------
Net income/(loss)..................................... $ 23,378 $ 17,124 $ (11,224)
=========== =========== ===========
Earnings per common share before extraordinary item
Basic................................................. $ 1.18 $ 0.86 $ 0.64
Diluted............................................... $ 1.18 $ 0.86 $ 0.56
Earnings/(loss) per common share after extraordinary
item
Basic................................................. $ 1.18 $ 0.86 $ (0.40)
Diluted............................................... $ 1.18 $ 0.86 $ (0.35)
Weighted average number of common shares outstanding
Basic................................................. 19,820,369 19,820,369 27,737,677
Diluted............................................... 19,820,369 19,820,369 31,734,354
See Notes to Consolidated Financial Statements.
32
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 25, DECEMBER 30,
1999 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents............................... $ 15,010 $ 33,129
Trade receivables, less allowances of $978 and $1,036,
respectively.......................................... 36,293 45,949
Inventories............................................. 30,534 33,890
Deferred tax asset...................................... 632 2,055
Due from affiliates..................................... 1,233 83
Other current assets.................................... 5,293 4,631
-------- --------
Total current assets.................................. 88,995 119,737
Property, plant and equipment, net........................ 85,413 117,001
Goodwill and other intangibles, less accumulated
amortization of $7,220 and $10,810, respectively........ 36,958 41,893
Investments in affiliates................................. 21,722 2,442
Deferred tax asset........................................ 97,600 105,027
Deferred financing costs.................................. 14,015 7,979
Other assets.............................................. 14,393 16,529
-------- --------
Total assets.......................................... $359,096 $410,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt....................... $ 3,290 $ 231
Current portion of capital lease obligations............ 253 181
Accounts payable........................................ 9,291 10,767
Accrued compensation.................................... 10,792 16,997
Deferred income......................................... 7,643 5,223
Accrued liabilities..................................... 18,479 24,187
Accrued interest........................................ 8,935 3,451
Accrued income taxes.................................... 2,738 3,283
-------- --------
Total current liabilities............................. 61,421 64,320
Long-term debt............................................ 381,706 201,957
Capital lease obligations................................. 795 543
Accrued ESLIRP............................................ 8,315 10,116
Other long-term liabilities............................... 3,499 3,415
-------- --------
Total liabilities..................................... 455,736 280,351
-------- --------
Commitments and contingencies (Note 13)
Minority interests........................................ 304 13,330
Redeemable common stock................................... 13,198 --
Shareholders' equity
Common stock (Note 6)................................... 198 359
Capital in excess of par value.......................... 206,940 451,404
Retained earnings....................................... (307,351) (318,575)
Loans to officers....................................... (920) (920)
Accumulated other comprehensive income.................. (9,009) (15,341)
-------- --------
Total shareholders' equity............................ (110,142) 116,927
-------- --------
Total liabilities and shareholders' equity............ $359,096 $410,608
======== ========
See Notes to Consolidated Financial Statements.
33
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income/(loss)......................................... $23,378 $ 17,124 $(11,224)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 10,895 12,318 16,766
Amortization of debt issuance costs and discounts......... -- 681 2,104
Accretion of debenture and discount note.................. -- 2,644 6,500
Provision for doubtful accounts........................... 181 148 121
Extraordinary loss, net of tax............................ -- -- 29,101
Earnings from equity investments.......................... (1,679) (2,044) (1,025)
Minority interests........................................ 10 22 1,396
Deferred income taxes..................................... (3,133) 8,625 (887)
Gain on sale of facilities................................ -- (1,441) --
Property, plant and equipment disposals................... -- 1,803 1,243
Other non-cash items...................................... 333 610 (1,021)
Changes in assets and liabilities
Trade receivables......................................... (1,712) (3,333) (1,021)
Inventories............................................... (1,250) 133 (2,343)
Due from affiliates....................................... 538 (251) 178
Other current assets...................................... (241) (2,911) 682
Other assets.............................................. (4,309) (1,943) (4,837)
Accounts payable.......................................... 2,853 (2,374) (1,141)
Accrued compensation...................................... 2,090 868 6,757
Accrued ESLIRP............................................ 821 570 1,801
Deferred income........................................... 1,278 4,223 (2,420)
Accrued interest.......................................... -- 8,930 (5,556)
Accrued liabilities....................................... 2,351 3,111 (467)
Accrued income taxes...................................... 5,605 (11,264) (619)
Other long-term liabilities............................... (629) 1,319 (320)
------- -------- --------
Net cash provided by operating activities............... 37,380 37,568 33,768
------- -------- --------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Proceeds from sale of facilities.......................... -- 1,860 --
Proceeds from sale of animal colony....................... 7,000
Dividends received from equity investments................ 681 815 --
Capital expenditures...................................... (11,909) (12,951) (15,565)
Contingent payments for prior year acquisitions........... (681) (841) --
Acquisition of businesses net of cash acquired............ (11,121) (23,051) (6,011)
------- -------- --------
Net cash used in investing activities................... (23,030) (34,168) (14,576)
------- -------- --------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Loans to officers......................................... -- (920) --
Payments of deferred financing costs...................... -- (14,442) (694)
Proceeds from long-term debt.............................. 199 339,007 --
Payments on long-term debt and net payments on revolving
credit facility......................................... (1,247) (252) (202,632)
Premiums paid for early retirement of debt................ -- -- (31,532)
Payments on capital lease obligations..................... (48) (307) (324)
Net activity with Bausch & Lomb........................... (6,922) (29,415) --
Proceeds from issuance of warrants........................ -- 10,606 --
Proceeds from issuance of common stock, net of transaction
fees.................................................... -- 92,387 235,964
Recapitalization transaction costs........................ -- (8,168) --
Recapitalization consideration............................ -- (400,000) --
------- -------- --------
Net cash used in financing activities................... (8,018) (11,504) 782
------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................. 564 (1,697) (1,855)
Net change in cash and cash equivalents..................... 6,896 (9,801) 18,119
------- -------- --------
Cash and cash equivalents, beginning of year................ 17,915 24,811 15,010
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $24,811 $ 15,010 $ 33,129
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for taxes....................................... $ 4,681 $ 4,656 $ 8,539
Cash paid for interest.................................... 177 538 37,638
See Notes to Consolidated Financial Statements.
34
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER CAPITAL
RETAINED COMPREHENSIVE COMMON IN EXCESS LOANS TO
TOTAL EARNINGS INCOME STOCK OF PAR OFFICERS
--------- --------- -------------- -------- --------- --------
BALANCE AT DECEMBER 27, 1997........................ $ 149,364 $ 139,652 $ (8,125) $ 1 $ 17,836 $ 0
Components of comprehensive income (net of tax):
Net income...................................... 23,378 23,378 -- -- -- --
Foreign currency translation.................... 2,839 -- 2,839 -- -- --
Minimum pension liability adjustment............ (400) -- (400) -- -- --
---------
Total comprehensive income.................... 25,817 -- -- -- -- --
---------
Net activity with Bausch & Lomb............... (6,922) (6,922) -- -- -- --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 26, 1998........................ $ 168,259 $ 156,108 $ (5,686) $ 1 $ 17,836 $ 0
========= ========= ======== ==== ======== =====
Components of comprehensive income (net of tax):
Net income...................................... 17,124 17,124 -- -- -- --
Foreign currency translation.................... (3,437) -- (3,437) -- -- --
Minimum pension liability adjustment............ 114 -- 114 -- -- --
---------
Total comprehensive income.................... 13,801 -- -- -- -- --
---------
Net activity with Bausch & Lomb................... (29,415) (29,415) -- -- -- --
Loans to officers................................. (920) -- -- -- -- (920)
Transaction costs................................. (8,168) (8,168) -- -- -- --
Deferred tax asset................................ 99,506 -- -- -- 99,506 --
Issuance of common stock.......................... 92,387 -- -- 102 92,285 --
Recapitalization consideration.................... (443,000) (443,000) -- -- -- --
Redeemable common stock classified outside of
equity.......................................... (13,198) -- -- -- (13,198) --
Warrants.......................................... 10,606 -- -- -- 10,606 --
Exchange of stock................................. -- -- -- 95 (95) --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 25, 1999........................ $(110,142) $(307,351) $ (9,009) $198 $206,940 $(920)
========= ========= ======== ==== ======== =====
Components of comprehensive income (net of tax):
Net loss........................................ (11,224) (11,224) -- -- -- --
Foreign currency translation.................... (5,299) -- (5,299) -- -- --
Minimum pension liability adjustment............ (1,033) -- (1,033) -- -- --
---------
Total comprehensive income........................ (17,556) -- -- -- -- --
---------
Deferred tax asset................................ (4,537) -- -- -- (4,537) --
Issuance of common stock.......................... 235,964 -- -- 161 235,803 --
Redeemable common stock classified outside of
equity.......................................... 13,198 -- -- -- 13,198 --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 30, 2000........................ $ 116,927 $(318,575) $(15,341) $359 $451,404 $(920)
========= ========= ======== ==== ======== =====
See Notes to Consolidated Financial Statements.
35
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Charles River Laboratories Holdings, Inc. changed its name to Charles River
Laboratories International, Inc in the year ended December 30, 2000. The
consolidated financial statements and related notes presented herein reflect
this name change.
Charles River Laboratories International, Inc. (together with its
subsidiaries the "Company") is a holding company with no operations or assets
other than its ownership of 100% of the outstanding common stock of Charles
River Laboratories, Inc. For the periods presented in these consolidated
financial statements that are prior to September 29, 1999, Charles River
Laboratories International, Inc. and Charles River Laboratories, Inc. were 100%
owned by Bausch & Lomb Incorporated ("B&L"). The assets, liabilities, operations
and cash flows relating to Charles River Laboratories, Inc. and its subsidiaries
were held by B&L and certain of its affiliated entities. As more fully described
in Note 3, effective September 29, 1999, pursuant to a recapitalization
agreement all such assets, liabilities and operations were contributed to an
existing dormant subsidiary which was subsequently renamed Charles River
Laboratories, Inc. Under the terms of the recapitalization, Charles River
Laboratories, Inc. became a wholly owned subsidiary of Charles River
Laboratories International, Inc. These financial statements include all such
assets, liabilities, results of operations and cash flows on a combined basis
for all periods prior to September 29, 1999 and on a consolidated basis
thereafter.
On June 5, 2000, a 1.927 exchange of stock was approved by the Board of
Directors of the Company in connection with the Company's initial public
offering (Note 2). This exchange of stock was effective June 21, 2000. All
earnings per common share amounts, references to common stock and shareholders'
equity have been restated as if the exchange of stock had occurred as of the
earliest period presented.
DESCRIPTION OF BUSINESS
The Company is a leading provider of critical research tools and integrated
support services that enable innovative and efficient drug discovery and
development. The Company's fiscal year is the twelve-month period ending the
last Saturday in December.
PRINCIPLES OF CONSOLIDATION
The financial statements include all majority-owned subsidiaries.
Intercompany accounts, transactions and profits are eliminated. Affiliated
companies over which the Company does not have the ability to exercise control
are accounted for using the equity method (Note 12).
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Actual results could differ from those estimates.
36
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents include time deposits and highly liquid investments with
remaining maturities at the purchase date of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally on the average cost method. Costs for primates are accumulated in
inventory until the primates are sold.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including improvements that significantly add
to productive capacity or extend useful life, are recorded at cost, while
maintenance and repairs are expensed as incurred. Depreciation is calculated for
financial reporting purposes using the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 20 to 40 years;
machinery and equipment, 2 to 20 years; and leasehold improvements, shorter of
estimated useful life or the lease periods.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over periods
ranging from 5 to 20 years. Intangible assets consist primarily of goodwill and
customer lists.
OTHER ASSETS
Other assets consist primarily of the cash surrender value of life insurance
policies, the net value of primate breeders and a defined benefit plan pension
asset. During fiscal 2000 the Company sold all of its primate breeders and no
longer owns primate breeders. Primate breeders were amortized over 20 years on a
straight line basis. Total amortization expense for primate breeders was $323,
$300 and $0 for 1998, 1999 and 2000, respectively, and is included in costs of
products sold.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets and intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposal are less than its carrying amount. In such instances, the
carrying value of long-lived assets is reduced to the estimated fair value, as
determined using an appraisal or discounted cash flow, as appropriate.
STOCK-BASED COMPENSATION PLANS
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), the Company accounts for
its stock-based compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company adopted FASB Interpretation No. 44 "Accounting
37
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
for Certain Transactions Involving Stock Compensation an Interpretation of APB
Opinion No. 25 Accounting for Stock Issued to Employees" (FIN 44) in 2000 with
no material impact on the results of operations or financial position of the
Company.
REVENUE RECOGNITION
Sales are recorded net of returns. The Company adopted Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101) in 2000
with no material impact on the results of operations or financial position of
the Company. Revenue is recognized with respect to product sales upon transfer
of title, when the risk and rewards of ownership pass to the customer. This is
generally on delivery of products to the customer's site. Revenues with respect
to services are recognized as these services are performed.
In accordance with the Emerging Issues Task Force final consensus Issue
00-10 "Accounting for Shipping and Handling Revenues and Costs", which requires
amounts billed for shipping and handling to be classified as revenues in the
statement of operations, the Company has reclassified $11,760, $12,137 and
$13,236 in 1998, 1999 and 2000, respectively, to revenues from cost of sales.
Shipping and handling costs are recorded as cost of sales in the statement of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's significant financial instruments,
which include accounts receivable and debt, approximates their fair values at
December 25, 1999 and December 30, 2000.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(FAS 109). The asset and liability approach underlying FAS 109 requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax basis
of the Company's assets and liabilities.
FOREIGN CURRENCY TRANSLATION
In accordance with the Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," the financial statements of all non-U.S.
subsidiaries are translated into U.S. dollars as follows: assets and liabilities
at year-end exchange rates; income, expenses and cash flows at average exchange
rates; and shareholders' equity at historical exchange rates. The resulting
translation adjustment is recorded as a component of accumulated other
comprehensive income in the accompanying balance sheet. Exchange gains and
losses on foreign currency transactions are recorded as other income or expense.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables from customers within the
pharmaceutical and biomedical industries. As
38
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
these industries have experienced significant growth and its customers are
predominantly well-established and viable, the Company believes its exposure to
credit risk to be minimal.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
(FAS 130). As it relates to the Company, comprehensive income is defined as net
income plus the sum of currency translation adjustments and the change in
minimum pension liability (collectively, other comprehensive income), and is
presented in the Consolidated Statement of Changes in Shareholders' Equity.
SEGMENT REPORTING
In accordance with Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (FAS 131), the Company
discloses financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available and regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company operates in two business segments, research models and
biomedical products and services.
EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share is calculated by adjusting the weighted average number of common
shares outstanding to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been issued
(Note 5).
PENDING ACCOUNTING PRONOUNCEMENTS
The Company will be required to adopt FASB Statement No. 133 "Accounting for
Derivative Instruments and for Hedging Activities" (FAS 133) in the first
quarter of 2001. Based on the analysis prepared by the Company to date, the
adoption of this statement will not have a material impact on the Company's
results of operations or financial position.
RECLASSIFICATIONS
Certain amounts in prior year financial statements and related notes have
been reclassified to conform with current year presentation.
2. INITIAL PUBLIC OFFERING
On June 28, 2000, the Company consummated an initial public offering ("the
Offering") of 16,100,000 shares of its common stock at a price of $16.00 per
share. The number of shares includes the exercise of an over-allotment option by
the underwriters. The Company received proceeds of $235,964, net of
underwriter's commissions and offering costs. Proceeds from the Offering were
used to pay down a portion of the Company's existing debt as described below.
39
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. INITIAL PUBLIC OFFERING (CONTINUED)
The Company used the proceeds from the Offering plus cash on hand of $300 to
repay $204,732 of its existing debt, including issuance discounts. Premiums
totaling $31,532 were paid as a result of the early repayment of the senior
discount debentures and a portion of the senior subordinated notes.
The sources and uses of cash from the Offering are as follows:
SOURCES OF FUNDS:
Proceeds from offering...................................... $257,600
Cash on hand................................................ 300
USES OF FUNDS:
Redemption of senior subordinated notes..................... (52,500)*
Premium on redemption of principal amount of senior
subordinated notes........................................ (7,088)
Repayment of subordinated discount note..................... (46,884)
Repayment of senior discount debentures..................... (42,348)*
Premium on early extinguishment of senior discount
debentures................................................ (24,444)
Repayment of term loan A.................................... (14,500)
Repayment of term loan B.................................... (43,500)
Repayment of revolver....................................... (5,000)
Transaction fees and expenses............................... (21,636)
--------
Net adjustment to cash.................................. $--
- ------------------------
* Includes issuance discount.
An extraordinary loss before tax of $44,771 was recorded due to the payment
of premiums relating to the early extinguishment of debt, ($31,532); the
write-off of issuance discounts ($8,537) and deferred financing costs ($5,226);
offset by a book gain of $524 on the subordinated discount note. This
extraordinary loss has been recorded net of a tax benefit of $15,670.
3. RECAPITALIZATION AND RELATED FINANCING
On September 29, 1999 CRL Acquisition LLC, an affiliate of DLJ Merchant
Banking Partners II, L.P. and affiliated funds ("DLJMB Funds"), consummated a
transaction in which it acquired 87.5% of the common stock of Charles River
Laboratories, Inc. from B&L for approximately $443 million. This transaction was
effected through Charles River Laboratories International, Inc. and was
accounted for as a leveraged recapitalization, which had no impact on the
historical basis of assets and liabilities. The transaction did, however, affect
the capitalization structure of the Company as further described below. In
addition, concurrent with the transaction, and as more fully described in
Note 4, the Company purchased all of the outstanding shares of common stock of
SBI Holdings, Inc. ("Sierra"), a pre-clinical biomedical services company, for
$23.3 million.
The recapitalization transaction and related fees and expenses were funded
as follows:
- issuance of 150,000 units, each consisting of a $1,000 principal amount of
a 13.5% senior subordinated note and one warrant to purchase 7.596 shares
of common stock of the Company;
- borrowings by the Company of $162.0 million under a new senior secured
credit facility;
- an equity investment of $92.4 million;
40
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
- issuance of $37.6 million senior discount debentures with warrants; and
- issuance of a $43.0 million subordinated discount note to B&L.
The Company incurred approximately $14,442 in debt issuance costs related to
these transactions. As further described in Note 2, $5,226 of these costs were
written off in 2000 as a result of the repayment of debt in connection with the
Offering. These costs have been capitalized as long-term assets and are being
amortized over the terms of the indebtedness. Amortization expense of $426 and
$1,503 was recorded in the accompanying combined financial statements for the
years ended December 25, 1999 and December 30, 2000, respectively. In addition,
the Company also incurred transaction costs of $8,168, which were recorded as an
adjustment to retained earnings in 1999.
Subsidiaries of B&L retained 12.5% of their equity investment in the Company
in the recapitalization. The Company estimated the fair value attributable to
this equity to be $13,198 which was reclassified in 1999 from additional paid in
capital to the mezzanine section of the balance sheet due to the existence of a
put option held by subsidiaries of B&L. As a result of the Offering on June 28,
2000, the put option expired. Accordingly, this amount has been reclassified as
permanent equity in additional paid in capital in the December 30, 2000 balance
sheet.
RECONCILIATION OF RECAPITALIZATION TRANSACTION
The funding to consummate the 1999 recapitalization transaction was as
follows:
Funding:
Available cash.............................................. $ 4,886
Senior subordinated notes with Warrants..................... 150,000
Senior secured credit facility.............................. 162,000
Senior discount debentures with warrants.................... 37,600
DLJMB funds, management and other investor equity........... 92,387
--------
Total cash funding...................................... 446,873
Subordinated discount note.................................. 43,000
Equity retained by subsidiaries of B&L...................... 13,198
--------
Total funding........................................... $503,071
--------
Uses of funds:
Recapitalization consideration.............................. $443,000
Equity retained by subsidiaries of B&L...................... 13,198
Cash consideration for Sierra acquisition (Note 4).......... 23,343
Debt issuance costs......................................... 14,442
Transaction costs........................................... 8,168
Loans to officers........................................... 920
--------
Total uses of funds..................................... $503,071
--------
41
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
SENIOR SUBORDINATED NOTES AND WARRANTS
As part of the recapitalization transaction, the Company issued 150,000
units, each comprised of a $1,000 senior subordinated note and a warrant to
purchase 7.596 shares of common stock of Charles River Laboratories
International, Inc. for total proceeds of $150,000. The senior subordinated
notes will mature on October 1, 2009. The Company allocated the $150,000
offering proceeds between the senior subordinated notes ($147,872) and the
warrants ($2,128), based upon the estimated fair value. The discount on the
senior subordinated notes is being amortized over the life of the notes and
amounted to $53 and $186 in 1999 and 2000, respectively. The portion of the
proceeds allocated to the warrants is reflected as capital in excess of par in
the accompanying consolidated financial statements. Each warrant entitles the
holder, subject to certain conditions, to purchase 7.596 shares of common stock
of Charles River Laboratories International, Inc. at an exercise price of $5.19
per share of common stock, subject to adjustment under some circumstances. Upon
exercise, the holders of warrants would be entitled to purchase 1,139,551 shares
of common stock of Charles River Laboratories International, Inc. representing
approximately 3.6% of the outstanding shares of stock of Charles River
Laboratories International, Inc., on a fully diluted basis as of December 30,
2000. The warrants will be exercisable on or after October 1, 2001 and will
expire on October 1, 2009.
During the third quarter of 2000 the Company used a portion of the proceeds
from the Offering (Note 2) to repay $52,500, including $671 of discount of the
senior subordinated notes. A premium of $7,088 was also paid as a result of this
redemption. At December 30, 2000 $96,291 was outstanding.
As a result of the Offering, the senior subordinated notes are subject to
redemption at any time at the option of the issuer at redemption prices set
forth in the senior subordinated notes. Interest on the senior subordinated
notes accrues at a rate of 13.5% per annum and is paid semiannually in arrears
on October 1 and April 1 of each year. The payment of principal and interest on
the senior subordinated notes are subordinated in right to the prior payment of
all senior debt.
Upon the occurrence of a change in control, the Company will be obligated to
make an offer to each holder of the senior subordinated notes to repurchase all
or any part of such holder's senior subordinated notes at an offer price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
Restrictions under the senior subordinated notes include certain sales of
assets, certain payments of dividends and incurrence of debt, and limitations on
certain mergers and transactions with affiliates. The Company is also required
to maintain compliance with certain covenants with respect to the notes.
SENIOR SECURED CREDIT FACILITY
The senior secured credit facility includes a $40,000 term loan A facility,
a $120,000 term loan B facility and a $30,000 revolving credit facility. The
term loan A facility will mature on October 1, 2005, the term loan B facility
will mature on October 1, 2007, and the revolving credit facility will mature on
October 1, 2005. Interest on the term loan A and revolving credit facility
accrues at either a base rate plus 1.75% or LIBOR plus 3.0%, at the Company's
option (8.14% at December 30, 2000). Interest on the term loan B accrues at
either a base rate plus 2.50% or LIBOR plus 3.75% (10.39% at December 30, 2000).
Interest is paid quarterly in arrears. At December 30, 2000, the Company had no
outstanding borrowings on its revolving credit facility. A commitment fee in an
amount equal to 0.50%
42
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
per annum on the daily average unused portion of the revolving credit facility
is paid quarterly in arrears. The credit facility requires the Company to remain
in compliance with certain financial ratios as well as other restrictive
covenants. During the third quarter of 2000 the Company used a portion of its
proceeds from the Offering (Note 2) to repay $14,500 of the term loan A facility
and $43,500 of term loan B facility.
During the first quarter of 2000 the Company obtained a waiver and amended
the credit agreement to allow for the additional 16% equity investment in
Charles River Japan (Note 4). In the third quarter of 2000 the Company obtained
a waiver and amended the credit agreement to permit the consummation of the
initial public offering.
OTHER FINANCING
In connection with the acquisition of an additional 16% of its joint venture
company, Charles River Japan on February 28, 2000 (Note 4), the Company entered
into a 400 million yen (or $3,670) three year promissory note with Ajinomoto
Co., Inc.. The note is denominated in Japanese Yen and translated to U.S.
dollars for financial statement purposes. The note bears interest at the long
term prime rate in Japan, and is secured by the additional 16% of shares
acquired.
As part of the recapitalization in 1999, the Company issued senior discount
debentures with other warrants ("the DLJMB Warrants") to the "DLJMB Funds" and
other investors for $37,600. The Company has estimated the fair value of the
warrants to be $8,478 and allocated the $37,600 in proceeds between the discount
debentures ($29,122) and the warrants ($8,478). The senior discount debentures
were repaid in full during the third quarter of 2000 (Note 2). As a result of
the repayment, the Company paid $24,444 in premiums. The portion of the proceeds
allocated to the DLJMB warrants is reflected as capital in excess of par in the
accompanying consolidated financial statements. Each of the 1,831,093 DLJMB
warrants will entitle the holders thereof to purchase one share of common stock
of the Company at an exercise price of not less than $0.01 per share subject to
customary antidilution provisions and other customary terms. The DLJMB Warrants
are exercisable at any time through April 1, 2010.
The $43,000 subordinated discount note issued by the Company in connection
with the recapitalization transaction was repaid in full during the third
quarter of 2000 (Note 2).
MINIMUM FUTURE PRINCIPAL REPAYMENTS
Minimum future principal payments of long-term debt at December 30, 2000 are
as follows:
FISCAL YEAR
- -----------
2001........................................................ $ 231
2002........................................................ 210
2003........................................................ 3,821
2004........................................................ 3,710
2005........................................................ 10,326
Thereafter.................................................. 183,890
--------
Total................................................... $202,188
========
43
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
The estimated fair values of the senior subordinated notes and the senior
secured credit facility at December 30, 2000 approximate recorded book value.
4. BUSINESS ACQUISITIONS AND DISPOSALS
ACQUISITIONS
The Company acquired several businesses during the three-year period ended
December 30, 2000. All acquisitions have been accounted for under the purchase
method of accounting. The results of operations of the acquired business are
included in the consolidated financial statements from the date of acquisition.
Significant acquisitions include the following:
On February 28, 2000, the Company acquired an additional 16% of the equity
(340,840 common shares) of its 50% equity joint venture company, Charles River
Japan, from Ajinomoto Co., Inc. The purchase price for the equity was
1.4 billion yen, or $12,844. One billion yen, or $9,174, was paid at closing,
and the balance of 400 million yen, or $3,670, was deferred pursuant to a
three-year balloon promissory note secured by a pledge of the additional 16% of
shares. Effective with the acquisition of this additional interest, the Company
has control of, and is consolidating, the operations of Charles River Japan. The
estimated fair value of the incremental net assets acquired is $6,207. Goodwill
of $6,637 has been recorded in the accompanying consolidated financial
statements and is being amortized over its estimated useful life of 15 years.
On September 29, 1999, Charles River Laboratories, Inc acquired 100% of the
outstanding stock of SBI Holdings, Inc. ("Sierra"), a pre-clinical biomedical
services company, for $23,343 in cash of which $6,000 was used to repay existing
debt. The estimated fair value of assets acquired and liabilities assumed
relating to the Sierra acquisition are summarized below:
ALLOCATION OF PURCHASE PRICE:
Net current assets (including cash of $292)................ $ 1,807
Property, plant and equipment.............................. 5,198
Other non-current assets................................... 254
Intangible assets:
Customer list............................................ 11,491
Work force............................................... 2,941
Other identifiable intangibles........................... 1,251
Goodwill................................................. 852 16,535
------ -------
23,794
Less long-term liabilities assumed......................... 451
-------
$23,343
=======
Goodwill and other intangibles related to the Sierra acquisition are being
amortized on a straight-line basis over their established lives, which range
from 5 to 15 years. As the transaction was effected through the acquisition of
the stock of Sierra, the historical tax basis of Sierra continues and a deferred
tax liability and offsetting goodwill of $4,374 were recorded.
44
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
In conjunction with the Sierra acquisition, the Company is obligated to pay
additional consideration as of December 30, 2000 of $2,000 to the former
shareholders, as Sierra achieved specified financial targets in the year ended
December 30, 2000. The additional consideration of $2,000 was recorded as
additional goodwill in the year ended December 30, 2000. In addition, during
1998 and 1999 the Company made contingent payments of $681, $841, respectively,
and is obligated to pay $250 as of December 30, 2000, to the former owners of
acquired businesses in connection with additional purchase price commitments.
The Company has agreed to pay up to $10,000 in performance-based bonuses to
employees if specified financial objectives are reached over the five years
following the acquisition of Sierra. At the time these contingencies become
probable, the bonuses, if any, are recorded as compensation expense. The Company
has entered into employment agreements with certain key scientific and
management personnel of Sierra that contain retention and non-competition
payments totaling $3,000 to be paid upon their continuing employment with the
Company at December 31, 1999 and June 30, 2001. The Company has recorded
compensation expense of $1,435 in fiscal 1999 relating to the first payment
which was made on December 31, 1999 and $963 in fiscal 2000 relating to the
payment due on June 30, 2001. The remaining $602 will be expensed ratably
through June 30, 2001.
On March 30, 1998, the Company acquired 100% of the outstanding stock of
Tektagen, Inc. ("Tektagen") for $8,000 and assumed debt equal to approximately
$850. Tektagen provides quality control testing and consulting services to the
biotechnology and pharmaceutical industries. The purchase price exceeded the
fair value of the net assets acquired by approximately $6,600, which is being
amortized on a straight line basis over 15 years. In addition, during 1998 the
Company acquired an additional biomedical service business and one research
model business; the impact of each is considered immaterial to the Company's
financial statements taken as a whole.
45
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
The following selected unaudited pro forma consolidated results of
operations are presented as if each of the acquisitions had occurred as of the
beginning of the period immediately preceding the period of acquisition after
giving effect to certain adjustments for the amortization of goodwill and
related income tax effects. The pro forma data is for informational purposes
only and does not necessarily reflect the results of operations had the
companies operated as one during the period. No effect has been given for
synergies, if any, that may have been realized through the acquisitions.
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 27, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
Net sales............................... $228,613 $247,447 $313,987
Operating income........................ 37,917 43,852 67,056
Income before extraordinary items....... 24,094 19,652 18,005
Net income/(loss)....................... 24,094 19,652 (11,096)
Earnings per common share before
extraordinary item
Basic................................. $ 1.22 $ 0.99 $ 0.65
Diluted............................... $ 1.22 $ 0.99 $ 0.57
Earnings/(loss) per common share after
extraordinary item
Basic................................. $ 1.22 $ 0.99 $ (0.40)
Diluted............................... $ 1.22 $ 0.99 $ (0.35)
Refer to Note 5 for further discussion of the method of computation of
earnings per share.
DISPOSALS
The Company had the following disposals during the fiscal year 2000:
During December of 2000 the Board of Directors approved and announced its
plans to close a subsidiary in France. As a result, pre-tax restructuring
charges of $1,290 were recorded in selling, general and administrative expenses
in the accompanying consolidated statement of operations for the year ended
December 30, 2000. The major components of the plans are summarized in the table
below:
2000
--------
Employee separations........................................ $ 993
Asset writedowns............................................ 212
Other....................................................... 85
------
$1,290
======
The overall purpose of the restructuring charges was to reduce costs and
improve profitability by closing excess capacity. Approximately 60 employees are
expected to be terminated as a result of this restructuring. As of December 30,
2000 the Company has disposed of assets of $212 and expects to incur the
employee separation and other costs in the first quarter of 2001.
46
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
On March 10, 2000 the Company announced the closure of its Shamrock primate
import and conditioning business in Small Dole, England. This closure was
completed during the second quarter of 2000. The Company does not expect that
the animal sales previously made by Shamrock will be significantly affected by
the closure. A charge of $751 related to the closure was recorded in selling,
general and administrative expenses in the first quarter of 2000. This reserve
was fully utilized in the second quarter of 2000.
During January 2000, the Company sold a product line within its research
model business segment. The selling price of $7,000 approximated the net book
value of the underlying assets at the time of the sales. In addition, the
Company had approximately $900 of deferred revenue which related to cash
payments received in advance of shipping the research models. Under the terms of
the sale agreement, the Company is no longer obligated to ship research models
and, accordingly, recorded this amount as income in the first quarter of 2000.
Fiscal 1999 sales associated with this product line approximated $2,800.
5. EARNINGS (LOSS) PER SHARE
As more fully described in Note 3, pursuant to the recapitalization
agreement effective September 29, 1999, all of the assets, liabilities,
operations and cash flows relating to Charles River Laboratories, Inc., were
contributed to an existing dormant subsidiary which was subsequently renamed
Charles River Laboratories, Inc. Under the terms of the recapitalization,
Charles River Laboratories, Inc., became a wholly owned subsidiary of Charles
River Laboratories International, Inc. The capital structure in place for
periods prior to September 29, 1999 was significantly different than the capital
structure of the Company after the recapitalization. The consolidated statement
of operations for years ended December 26, 1998 and December 25, 1999 also
include operations of certain B&L entities which were not historically supported
by the combined capital structure of Charles River Laboratories
International, Inc. and Charles River Laboratories, Inc. As a result, the
presentation of historical earnings per share data determined using the combined
historical capital structure for the years ended December 26, 1998 and
December 25, 1999, would not be meaningful and has not been included in these
consolidated financial statements. Rather, earnings per share for the years
ended December 26, 1998 and December 25, 1999 have been computed assuming that
the shares outstanding after the recapitalization had been outstanding for these
periods.
As a result of the recapitalization DLJ Merchant Banking Partners II, L.P.
and affiliated funds, management and other investors indirectly owned 87.5% of
the capital stock of the Company, and subsidiaries of B&L owned the remaining
12.5% as of September 25, 1999. Based upon the amounts invested, shares
outstanding of common stock in Charles River Laboratories International, Inc. at
the date of the recapitalization totaled 19,820,369. Basic earnings per share
for the year ended December 26, 1998 and December 25, 1999 were computed by
dividing earnings available to common shareholders for these periods, by the
weighted average number of common shares outstanding in the period subsequent to
the recapitalization. Basic earnings (loss) per share for the year ended
December 30, 2000 was computed by dividing earnings available to common
shareholders for these periods by the weighted average number of common shares
outstanding in the respective periods.
For purposes of calculating diluted earnings per share for the years ended
December 26, 1998 and December 25, 1999, the weighted average number of common
shares used in the basic earnings per
47
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EARNINGS (LOSS) PER SHARE (CONTINUED)
share computation described above has not been adjusted to include common stock
equivalents, as these common stock equivalents were issued in connection with
the recapitalization financing and are not assumed to be outstanding for
purposes of computing earnings per share in these periods. The weighted average
number of common shares outstanding for the year ended December 30, 2000 has
been adjusted to include common stock equivalents for the purpose of calculating
diluted earnings per share before and after the extraordinary item for this
period.
The following table illustrates the reconciliation of the numerator and
denominator of the basic and diluted earnings per share before and after the
extraordinary item computations:
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
Numerator--basic and diluted earnings per share:
Income before extraordinary item...................... $23,378 $17,124 $17,877
Extraordinary loss.................................... -- -- (29,101)
Income (loss) after extraordinary item................ 23,378 17,124 (11,224)
Denominator:
Basic earnings per share--weighted
average shares outstanding.......................... 19,820,369 19,820,369 27,737,677
Effect of dilutive securities--stock options and
warrants............................................ -- -- 3,996,677
----------- ----------- -----------
Diluted earnings per share--weighted
average shares outstanding.......................... 19,820,369 19,820,369 31,734,354
=========== =========== ===========
Basic earnings per share before extraordinary item.... $ 1.18 $ 0.86 $ 0.64
Diluted earnings per share before extraordinary
item................................................ $ 1.18 $ 0.86 $ 0.56
Basic loss per share on extraordinary item............ -- -- $ (1.04)
Diluted loss per share on extraordinary item.......... -- -- $ (0.91)
Basic earnings/(loss) per share after extraordinary
item................................................ $ 1.18 $ 0.86 $ (0.40)
Diluted earnings/(loss) per share after extraordinary
item................................................ $ 1.18 $ 0.86 $ (0.35)
In the computation of the diluted loss per share on the extraordinary loss
and net loss, the common stock equivalents have an antidilutive impact. They
have been included in the computation as they are dilutive with respect to
income from continuing operations.
6. SHAREHOLDERS' EQUITY
As more fully described in Note 1, the capital structure of the Company is
presented on a consolidated basis at December 25, 1999 and December 30, 2000.
Capital stock information at each date is as follows:
DECEMBER 25, 1999
- -----------------
Common stock $0.01 par value, 77,079,207 shares authorized,
19,820,369 shares issued and outstanding.................. $198
====
48
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. SHAREHOLDERS' EQUITY (CONTINUED)
The Company had 250,000 shares of $0.01 par value Series A Redeemable
Preferred Stock and 10,000,000 shares of $0.01 par value preferred stock
authorized. At December 25, 1999 no shares were issued and outstanding.
DECEMBER 30, 2000
- -----------------
Common stock $0.01 par value, 120,000,000 shares authorized,
35,920,369 shares issued and outstanding.................. $359
====
The Company had 20,000,000 shares of $0.01 par value preferred stock
authorized. At December 30, 2000 no shares were issued and outstanding.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of inventories is as follows:
DECEMBER 25, DECEMBER 30,
1999 2000
------------- -------------
Raw materials and supplies.......................... $ 4,196 $ 4,052
Work in process..................................... 1,608 910
Finished products................................... 24,730 28,928
------- -------
Inventories..................................... $30,534 $33,890
======= =======
The composition of property, plant and equipment is as follows:
DECEMBER 25, DECEMBER 30,
1999 2000
------------- -------------
Land................................................ $ 7,022 $ 9,367
Buildings........................................... 90,730 142,569
Machinery and equipment............................. 82,131 95,407
Leasehold improvements.............................. 4,668 5,747
Furniture and fixtures.............................. 1,826 1,992
Vehicles............................................ 2,689 2,378
Construction in progress............................ 4,679 5,102
-------- --------
193,745 262,562
Less accumulated depreciation....................... (108,332) (145,561)
-------- --------
Net property, plant and equipment............... $ 85,413 $117,001
======== ========
Depreciation and amortization expense for the years ended 1998, 1999, and
2000 was $9,168, $10,062, and $13,099, respectively.
49
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. LEASES
CAPITAL LEASES
The Company has one capital lease for a building and numerous capital leases
for equipment. These leases are capitalized using interest rates considered
appropriate at the inception of each lease. Assets under capital lease are not
significant.
Capital lease obligations amounted to $1,048 and $724 at December 25, 1999
and December 30, 2000, respectively, with maturities through 2005 at interest
rates ranging from 9.5% to 14.6%. Future minimum lease payments under capital
lease obligations at December 30, 2000 are as follows:
2001........................................................ $ 289
2002........................................................ 282
2003........................................................ 442
2004........................................................ 12
------
Total minimum lease payments................................ 1,025
Less amount representing interest........................... (301)
------
Present value of net minimum lease payments................. $ 724
======
OPERATING LEASES
The Company has various operating leases for machinery and equipment,
automobiles, office equipment, land and office space. Rent expense for all
operating leases was $5,926 in 2000, $4,453 in 1999, and $3,273 in 1998. Future
minimum payments by year and in the aggregate, under noncancellable operating
leases with initial or remaining terms of one year or more consist of the
following at December 30, 2000:
2001........................................................ $ 5,894
2002........................................................ 4,740
2003........................................................ 3,192
2004........................................................ 2,310
2005........................................................ 1,812
Thereafter.................................................. 5,373
-------
$23,321
=======
9. INCOME TAXES
In the year ended December 26, 1998 and for the nine-month period ended
September 29, 1999, the Company was not a separate taxable entity for federal
and state income tax purposes and its income for these periods was included in
the consolidated B&L income tax returns. The Company accounted for income taxes
for these periods under the separate return method in accordance with FAS 109.
Under the terms of the recapitalization agreement, B&L has assumed all income
tax consequences associated with the periods through September 29, 1999.
Accordingly, all current and deferred income tax attributes reflected in the
Company's consolidated financial statements on the effective date of the
recapitalization will ultimately be settled by B&L. In line with this the
domestic
50
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
income tax attributes have been included in the net activity with B&L and have
been charged off against retained earnings. Foreign subsidiaries are responsible
for remitting taxes in their local jurisdictions. Payments associated with
periods prior to September 29, 1999 will ultimately be reimbursed by B&L, and
this reimbursement will be recorded as an adjustment to retained earnings at the
time of such reimbursement.
In addition, in connection with the recapitalization transaction, the
Company elected under Internal Revenue Code Section 338(h)(10) to treat the
transaction as a purchase resulting in a step-up in the tax basis of the
underlying assets. The election resulted in the recording of a deferred tax
asset in 1999, net of valuation allowance, of approximately $99,506,
representing the estimated future tax benefits associated with the increased tax
basis of its assets. The Company expects to realize the net benefit of the
deferred tax asset over a 15 year period. For financial reporting purposes the
benefit was treated as a contribution to capital in 1999.
During the second quarter of 2000, the tax purchase price allocation
pertaining to the Section 338(h)(10) election described above was finalized. An
adjustment was recorded to reduce the deferred tax asset balance by $5,395 and
the related valuation allowance by $858, with the offset of $4,537 being
recorded to capital in excess of par in the second quarter of 2000.
An analysis of the components of income before income taxes and minority
interests and the related provision for income taxes is presented below:
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS, EARNINGS
FROM EQUITY INVESTMENTS AND EXTRAORDINARY ITEM
U.S................................................... $22,364 $14,608 $14,407
Non-U.S............................................... 13,468 16,055 11,678
------- ------- -------
$35,832 $30,663 $26,085
======= ======= =======
INCOME TAX PROVISION
Current:
Federal............................................. $ 7,730 $ 9,522 $ --
Foreign............................................. 6,171 6,035 5,646
State and local..................................... 1,833 1,895 --
------- ------- -------
Total current..................................... 15,734 17,452 5,646
------- ------- -------
Deferred:
Federal............................................. $ (597) $(2,000) $ 6,688
Foreign............................................. (887) 53 (447)
State............................................... (127) 56 (4,050)
------- ------- -------
Total deferred.................................... (1,611) (1,891) 2,191
------- ------- -------
$14,123 $15,561 $ 7,837
======= ======= =======
51
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
The Company recorded an extraordinary loss before tax of $44,771 on the
consummation of the Offering (Note 2). The tax benefit associated with this loss
(recorded in the third quarter of 2000) was $15,670.
Deferred taxes, detailed below, recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for financial
statement purposes and such amounts measured in accordance with tax laws.
DECEMBER 25, 1999 DECEMBER 30, 2000
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Current:
Accruals........................................... $ 632 $ -- $ 2,055 $ --
-------- ------ -------- ---------
$ 632 -- $ 2,055 --
-------- ------ -------- ---------
Non-current:
Goodwill and other intangibles..................... 100,657 -- 88,531 --
Net operating loss and credit carryforwards........ 2,220 -- 22,756 --
Depreciation and amortization...................... 162 -- (626) --
Accrued Interest................................... 854 -- -- --
Other.............................................. 844 1,030 (1,110) --
-------- ------ -------- ---------
104,737 1,030 109,551 --
Valuation allowance.................................. (7,137) -- (4,524) --
-------- ------ -------- ---------
97,600 1,030 105,027 --
-------- ------ -------- ---------
Total deferred taxes............................. $ 98,232 $1,030 $107,082 $ --
======== ====== ======== =========
As of December 30, 2000, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $50,117 expiring
between 2004 and 2020. Additionally, the Company has foreign tax credit
carryforwards of $2,320 expiring in 2004 and 2005. As a result of the Offering,
the Company expects to be significantly more profitable in the future, due to
reduced interest costs. Accordingly, during the second quarter of 2000 the
Company reassessed the need for a valuation allowance relating to state income
taxes associated with the deferred tax asset balance recorded on the
recapitalization transaction discussed above. As a result of this reassessment,
$4,762 of the valuation allowance relating to state tax benefits was released in
the second quarter of 2000, and recorded as a tax benefit. This release of the
valuation allowance was offset by an increase of $3,007, pertaining mainly to
the realization of state income tax benefits associated with the extraordinary
loss recorded in the third quarter of 2000. The Company has recorded the balance
of the net deferred tax asset on the belief that it is more likely than not that
it will be realized. This belief is based upon a review of all available
evidence, including historical operating results, projections of taxable income,
and tax planning strategies.
52
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
Reconciliations of the statutory U.S. federal income tax rate to effective
tax rates are as follows:
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
Tax at statutory U.S. tax rate.......... 35.0% 35.0% 35.0%
Foreign tax rate differences............ 1.6 7.4 3.8
Non-deductible goodwill amortization.... 0.6 0.5 1.5
State income taxes, net of federal tax
benefit............................... 3.1 3.6 2.3
Change in valuation allowance before
extraordinary item.................... -- 2.4 (16.1)
High yield debt interest................ -- 0.1 2.4
Other................................... (0.8) 1.7 1.1
---- ---- -----
39.5% 50.7% 30.0%
==== ==== =====
During the year ended December 25, 1999, substantially all of the
accumulated earnings of the Company's foreign subsidiaries through
September 29, 1999 were repatriated to the United States to B&L in connection
with the recapitalization transaction. Accordingly, a provision for U.S. federal
and state income taxes, net of foreign tax credits, has been provided on such
earnings in the year ended December 25, 1999. In addition, for periods
subsequent to September 29, 1999, the Company elected to treat certain foreign
subsidiaries in Germany and the United Kingdom as disregarded entities for U.S.
federal and state income tax purpose and, accordingly, is providing for U.S.
federal and state income taxes on such earnings. The Company's other foreign
subsidiaries have accumulated earnings subsequent to September 29, 1999. These
earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. taxes and withholdings taxes payable to the various foreign
countries.
10. EMPLOYEE BENEFITS
The Company sponsors one defined contribution plan and three defined benefit
plans. The Company's defined contribution plan, the Charles River Laboratories
Employee Savings Plan, qualifies under section 401(k) of the Internal Revenue
Code. It covers substantially all U.S. employees and contains a provision
whereby the Company matches employee contributions. The costs associated with
the defined contribution plan totaled $498, $588 and $716 in 1998, 1999, and
2000, respectively.
One of the Company's sponsored defined benefit plans, the Charles River
Laboratories, Inc. Pension Plan, is a qualified, non-contributory plan that also
covers substantially all U.S. employees. Benefits are based on participants'
final average monthly compensation and years of service. Participants' rights
vest upon completion of five years of service. The Charles River Japan defined
benefit pension plan is a non-contributory plan that covers all employees.
Benefits are based upon length of service and final salary.
53
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFITS (CONTINUED)
Under another defined benefit plan, the Company provides some executives
with supplemental retirement benefits. This plan, the Executive Supplemental
Life Insurance Retirement Plan or ESLIRP, is generally unfunded and
non-qualified under the provisions of the Employee Retirement Income Securities
Act of 1974. The Company has, however, taken out several key person life
insurance policies with the intention of using its cash surrender value to fund
the ESLIRP Plan. At December 30, 2000, the cash surrender value of these
policies was $8,595.
The following table provides reconciliations of the changes in benefit
obligations, fair value of plan assets and funded status of the three defined
benefit plans. Note that due to Charles River Japan being consolidated with the
Company's financial results beginning February 28, 2000, the Charles River Japan
pension plan is incorporated into the fiscal year 2000 disclosures below and not
included in fiscal year 1999.
FISCAL YEAR
-------------------
1999 2000
-------- --------
RECONCILIATION OF BENEFIT OBLIGATION
Benefit/obligation at beginning of year................. $25,112 $31,045
Service cost............................................ 958 1,386
Interest cost........................................... 1,738 2,040
Benefit payments........................................ (738) (958)
Actuarial loss (gain)................................... (73) 3,060
Effect of foreign exchange.............................. -- (75)
------- -------
Benefit/obligation at end of year....................... $26,997 $36,498
======= =======
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year.......... $26,493 $53,600
Actual return on plan assets............................ 24,781 (5,820)
Employer contributions.................................. 259 665
Benefit payments........................................ (738) (958)
------- -------
Fair value of plan assets at end of year................ $50,795 $47,487
======= =======
FUNDED STATUS
Funded status........................................... $23,797 $10,989
Unrecognized transition obligation...................... 423 336
Unrecognized prior-service cost......................... (24) (29)
Unrecognized gain....................................... (29,108) (12,970)
------- -------
Accrued benefit (cost).................................. $(4,912) $(1,674)
======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET
Accrued benefit cost.................................... $(7,237) $(5,237)
Intangible asset........................................ 215 143
Accumulated other comprehensive income.................. 2,110 3,420
------- -------
Net amount recognized................................... $(4,912) $(1,674)
======= =======
54
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFITS (CONTINUED)
Key weighted-average assumptions used in the measurement of the Company's
benefit obligations are shown in the following table:
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Discount rate........................... 7% 7% 6.5%
Expected return on plan assets.......... 10% 10% 10%
Rate of compensation increase........... 4.75% 4.75% 4.75%
The following table provides the components of net periodic benefit cost for
the three defined benefit plans for 1998, 1999 and 2000:
DEFINED BENEFIT PLANS
------------------------------
1998 1999 2000
-------- -------- --------
Components of net periodic benefit cost/(income):
Service cost...................................... $ 795 $ 958 $ 1,386
Interest cost..................................... 1,588 1,738 2,040
Expected return on plan assets.................... (1,901) (2,623) (5,132)
Amortization of transition obligation............. 141 141 154
Amortization of prior-service cost................ (3) (4) (5)
Amortization of net gain.......................... (85) (301) (1,625)
------- ------- -------
Net periodic benefit cost/(income)................ $ 535 $ (91) $(3,182)
======= ======= =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $8,761, $8,315, and $0 at December 25, 1999 and
$14,493, $12,312 and $2,780, as of December 30, 2000.
The Company had an adjusted minimum pension liability of $2,110 $(1,266, net
of tax) and $3,420 $(2,299 net of tax) as of December 25, 1999 and December 30,
2000 respectively, which represented the excess of the minimum accumulated net
benefit obligation over previously recorded pension liabilities.
11. STOCK COMPENSATION PLANS
As part of the recapitalization, the equity investors agreed and committed
to establish a stock option plan for the Company, for the purpose of providing
significant equity incentives to management. The 1999 Management Incentive Plan
(the "1999 Plan") is administered by the Company's Compensation Committee of the
Board of Directors. A total of 1,784,384 shares were reserved for the exercise
of option grants under the Plan. Awards of 1,726,332 non-qualified stock
options, of which 75,958 are currently exercisable, were awarded in the year
ended December 25, 1999. Options to purchase shares of Charles River
Laboratories International, Inc. granted pursuant to the 1999 Plan are subject
to a vesting schedule based on three distinct measures. Certain options vest
solely with the passage of time (incrementally over five years so long as the
optionee continues to be employed by the Company). The remainder of the options
vest over time but contain clauses providing for the acceleration of vesting
upon the achievement of certain performance targets or the occurrence of
55
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
certain liquidity events. All options expire on September 29, 2009. The exercise
price of all of the options initially granted under the Plan is $5.33, the fair
value of the underlying common stock at the time of the grant.
Effective June 5, 2000 the Board of Directors adopted and the Company's
shareholders approved the 2000 Incentive Plan (the "2000 Plan"), which provides
for the grant of incentive and nonstatutory stock options, stock appreciation
rights, restricted or unrestricted common stock and other equity awards. The
2000 Plan has a total of 1,189,000 shares available to be granted. Options to
purchase shares of Charles River Laboratories International, Inc. granted
pursuant to the 2000 Plan vest incrementally over three years so long as the
employee continues to be employed by the Company. All options granted expire on
or before December 31, 2010. The exercise price of all the options granted under
the 2000 Plan is the fair value of the underlying common stock at the time of
grant. A total of 476,300 stock option awards were made under the 2000 plan in
2000. No awards granted under the 2000 Plan are currently exercisable.
In conjunction with the 2000 Plan the Board of Directors adopted, and the
Company's shareholders approved, the 2000 Directors Stock Plan ("Directors
Plan"), which provides for the grant of both automatic and discretionary
nonstatutory stock options to our non-employee directors. Pursuant to the plan,
each independent director will be automatically granted an option to purchase
20,000 shares of our common stock on the date he or she is first elected or
named a director. On the day of each annual meeting of stockholders, each
independent director who served during the prior year will be awarded an option
to purchase 4,000 shares of our common stock (pro-rated if the director did not
serve for the entire preceding year). The Directors Plan has a total of 100,000
shares available to be granted. Awards of 60,000 stock options, none of which
are currently exercisable, were ratified and granted by the Compensation
Committee on June 5, 2000. Options to purchase shares of Charles River
Laboratories International, Inc. granted pursuant the Directors Plan cliff vest
upon the earlier of the first anniversary of the date of grant or the business
day prior to the date of the Company's next annual meeting. All options granted
expire on June 23, 2005. The exercise price of the options granted under the
Directors Plan is $16.00, the fair value of the underlying common stock at the
time of grant.
56
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes stock option activity under the 1999 Plan,
the 2000 Plan, and the Directors Plan:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- --------------- ----------------
Options outstanding as of December 26, 1998........ 0 -- --
Options Granted.................................... 1,726,332 $5.33 $ 5.33
Options Exercised.................................. 0
Options Canceled................................... 0
---------
Options outstanding as of December 25, 1999........ 1,726,332 $5.33 $ 5.33
Options Granted.................................... 536,300 $16.00-$27.38 $16.60
Options Exercised.................................. 0
Options Canceled................................... 16,500 $16.00 $16.00
---------
Options Outstanding as of December 30, 2000........ 2,246,132 $5.33-$27.38 $ 7.94
Options Exercisable as of December 30, 2000........ 75,958 $5.33 $ 5.33
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------------
RANGE OF OUTSTANDING AS OF CONTRACTURAL WEIGHTED AVERAGE EXERCISABLE AS OF WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 30, 2000 LIFE (YEARS) EXERCISE PRICE DECEMBER 30, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 5.00 - $10.00...... 1,726,332 8.7 $ 5.33 75,958 $5.33
$10.01 - $20.00...... 491,600 8.8 $16.00 0 $0.00
$20.01 - $30.00...... 28,200 10.0 $27.38 0 $0.00
--------- ------ -----
2,246,132 $ 7.94 $5.33
The company accounts for stock-based compensation plans under the provisions
of APB 25. Because the exercise price of the employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income is required by FAS 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.
For purposes of this disclosure, the fair value of the fixed option grants
were estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants outstanding:
Risk-free interest rate..................................... 6.37%
Volatility factor........................................... 49.83%
Weighted average expected life (years)...................... 6
57
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation expense for the Company's portion of fixed options been
determined consistent with FAS 123, the Company's net income (loss) for the
years ended December 25, 1999 and December 30, 2000 would have been reduced to
the pro forma amounts indicated below:
1999 2000
-------- --------
Reported net income (loss)............................... $17,124 $(11,224)
Proforma net income (loss)............................... 17,030 (11,948)
Reported diluted earnings (loss) per common share........ $ 0.86 $ (0.35)
Proforma diluted earning (loss) per common share......... $ 0.86 $ (0.38)
Until September 29, 1999, employees of the Company participated in a stock
option plan sponsored by B&L. As a result of the recapitalization transaction
described in Note 2, employees participating in the B&L Stock Option Plan
exercised all vested options and were compensated for all unvested options. The
Company recorded compensation expense of $1,300 in the fourth quarter of 1999
based upon the amount that B&L compensated these employees. The Company received
a capital contribution by B&L for this amount during the fourth quarter of 1999,
which has been recorded as part of the net activity with B&L. As management's
participation in the B&L plan was discontinued in 1999, and the Company has
established its own plan based on current facts and circumstances, the
historical FAS 123 disclosures relating to the B&L plan are not considered
relevant.
12. JOINT VENTURES
The Company holds investments in several joint ventures. These joint
ventures are separate legal entities whose purpose is consistent with the
overall operations of the Company and represent geographical expansions of
existing markets. For the year ended December 30, 2000 the financial results of
three of the joint ventures are consolidated into the Company's results as the
Company has the ability to exercise control over these entities. On
February 28, 2000 the Company acquired an additional equity interest in Charles
River Japan (Note 4). Upon consummation of the additional equity investment, the
Company had control of, and began consolidating, the operations of Charles River
Japan. The interests of the outside joint venture partners in these joint
ventures has been recorded as minority interests totaling $304 at December 25,
1999 and $13,330 at December 30, 2000.
Prior to the additional equity investment on February 28, 2000, Charles
River Japan was accounted for under the equity method. Charles River Japan is a
joint venture with Ajinomoto Co., Inc. and is an extension of the Company's
research model business in Japan. Dividends received from Charles River Japan
prior to the additional equity investmant amounted to $601 in 1998, $815 in
1999, and $0 in 2000. The Company also has another joint venture, Charles River
Mexico, which is accounted for under
58
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. JOINT VENTURES (CONTINUED)
the equity method. Charles River Mexico, an extension of the Company's avian (or
bird) business in Mexico, is not significant to the Company's operations.
Summarized financial statement information for the unconsolidated joint
ventures is as follows:
Note that the condensed income statement information for the year ended
December 30, 2000 includes only two months of Charles River Japan activity and
the balance sheet as of December 30, 2000 excludes Charles River Japan.
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
CONDENSED COMBINED STATEMENTS OF INCOME
Net sales............................. $39,798 $44,826 $13,541
Operating income...................... 6,756 7,658 2,922
Net income............................ 3,445 4,221 2,132
DECEMBER 25, DECEMBER 30,
1999 2000
------------ ------------
CONDENSED COMBINED BALANCE SHEETS
Current assets.................................... $20,486 $1,180
Non-current assets................................ 39,720 2,932
------- ------
$60,206 $4,112
======= ======
Current liabilities............................... $11,330 $ 333
Non-current liabilities........................... 6,163 42
Shareholders' equity.............................. 42,713 3,737
------- ------
$60,206 $4,112
======= ======
13. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company maintains insurance for workers' compensation, auto liability,
employee medical and general liability. The per claim loss limits are $250, with
annual aggregate loss limits of $1,500. Related accruals were $2,813 and $3,461
on December 25, 1999 and December 30, 2000, respectively. Separately, the
Company has provided a letter of credit in favor of the insurance carriers in
the amount of $350.
LITIGATION
Various lawsuits, claims and proceedings of a nature considered normal to
its business are pending against the Company. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements. The most potentially
significant claim is described below.
59
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently under a court order issued in June 1997 to remove
its primate operations from two islands located in the Florida Keys. The mandate
asserts that the Company's operations have contributed to the defoliation of
some protected plant life. The Company continues to hold discussions with the
state of Florida authorities regarding the extent of refoliation required on the
islands and believes the reserves recorded in the accompanying consolidated
financial statements are sufficient to provide for the estimated exposure in
connection with the refoliation. The Company has provided a letter of credit in
regards to the completion of the refoliation on the island for $350.
14. RELATED PARTY TRANSACTIONS
As more fully described in Note 3, the Company completed a recapitalization
in September 1999 and became a stand-alone entity. Until the recapitalization,
the Company historically had operated autonomously from B&L. Some costs and
expenses including insurance, information technology and other miscellaneous
expenses were charged by B&L to the Company on a direct basis, however,
management believes these charges were based upon assumptions that were
reasonable under the circumstances. These charges and estimates are not
necessarily indicative of the costs and expenses which would have resulted had
the Company incurred these costs as a separate entity. Charges of approximately
$250 and $88 for these items are included in costs of products sold and services
rendered and selling, general and administrative expense in the accompanying
consolidated financial statements for the years ended 1998 and for the nine
months ended 1999, respectively. The Company does not expect its stand-alone
costs to be significantly different from the historical costs allocated by B&L
due to the autonomy with which the Company operated.
As more fully described in Note 3, the accompanying consolidated financial
statements include a line item "net activity with Bausch and Lomb" which
comprises the above referenced intercompany allocations, net distributions made
by the Company to B&L, and settlements with B&L as a result of the
recapitalization.
On October 11, 1999 the Company loaned to certain officers $920 to purchase
stock in Charles River International, Inc. through CRL Acquisition LLC. These
loans are full recourse and bear interest at a rate of 6.75%. The year-end
balance of $920 is classified as a reduction from shareholders equity.
15. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company is organized into geographic regions for management reporting
with operating income being the primary measure of regional profitability. Some
general and administrative expenses, including some centralized services
provided by regional offices, are allocated based on business segment sales. The
accounting policies used to generate geographic results are the same as the
Company's overall accounting policies.
The following table presents sales and other financial information by
geography for the years 1998, 1999 and 2000. Included in the other non-U.S.
category below are the Company's operations located in Canada, China, Germany,
Italy, Netherlands, United Kingdom, Australia, Belgium, Czech Republic, Hungary,
Spain and Sweden. Sales to unaffiliated customers represent net sales
originating in entities
60
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION (CONTINUED)
physically located in the identified geographic area. Long-lived assets include
property, plant and equipment, goodwill and intangibles, other investments and
other assets.
OTHER NON
U.S. FRANCE JAPAN U.S. CONSOLIDATED
-------- -------- -------- --------- ------------
1998
Sales to unaffiliated customers.......... $122,267 $27,968 N/A $54,826 $205,061
Long-lived assets........................ 76,289 12,751 N/A 23,743 112,783
1999
Sales to unaffiliated customers.......... $144,617 $30,523 N/A $56,273 $231,413
Long-lived assets........................ 103,261 12,234 N/A 20,191 135,686
2000
Sales to unaffiliated customers.......... $192,919 $28,474 $36,624 $48,568 $306,585
Long-lived assets........................ 118,271 10,618 39,720 17,235 185,844
The Company's product line segments are research models and biomedical
products and services. The following table presents sales and other financial
information by product line segment for the fiscal years 1998, 1999 and 2000.
Sales to unaffiliated customers represent net sales originating in entities
primarily engaged in either provision of research models or biomedical products
and services. Long-lived assets include property, plant and equipment, goodwill
and intangibles, other investments, and other assets.
1998 1999 2000
-------- -------- --------
Research models
Net sales................................... $144,841 $152,494 $187,643
Operating income............................ 30,517 33,663 43,067
Total assets................................ 180,983 269,034 313,763
Depreciation and amortization............... 5,534 8,008 9,840
Capital expenditures........................ 8,127 6,983 7,502
Biomedical products and services
Net sales................................... $ 60,220 $ 78,919 $118,942
Operating income............................ 11,117 14,428 24,103
Total assets................................ 53,271 90,062 96,845
Depreciation and amortization............... 5,361 4,310 6,926
Capital expenditures........................ 3,782 5,968 8,063
A reconciliation of segment operating income to consolidated operating
income is as follows:
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Total segment operating income.......... $41,634 $48,091 $67,170
Unallocated corporate overhead.......... (6,309) (5,128) (2,109)
------- ------- -------
Consolidated operating income........... $35,325 $42,963 $65,061
======= ======= =======
61
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
15. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION (CONTINUED)
A summary of identifiable long-lived assets of each business segment at year
end is as follows:
DECEMBER 25, DECEMBER 30,
1999 2000
------------ ------------
Research Models..................................... $ 69,257 $117,046
Biomedical Products and Services.................... 66,429 68,798
-------- --------
$135,686 $185,844
======== ========
16. SUBSEQUENT EVENTS (UNAUDITED)
Effective January 8, 2001, we purchased 100% of the common stock of
Pathology Associates International Corporation ("PAI"). Consideration of $37,000
was paid with respect to this acquisition, consisting of $25,000 in cash and a
$12,000 callable convertible note. The convertible note has a five year term and
bears interest at 2% per annum. Under certain conditions the note is convertible
into shares of the Company's common stock at a premium to the Company's stock
price on the date the note was issued. This acquisition will be recorded as a
purchase business combination.
On February 27, 2001, we acquired Primedica Corporation for consideration of
approximately $52,000. The consideration was comprised of $26,000 in cash,
$16,500 in restricted stock and $9,500 in assumed debt. This acquisition will be
recorded as a purchase business combination. In connection with the anticipated
Primedica acquisition the Company amended its credit facility to add a $25,000
term C loan facility and to increase the interest rate on the term A loan
facility.
On March 21, 2001, the Company consummated a public offering of 3,500,000
shares of its common stock at a price of $19.00 per share. In the offering,
4,550,000 shares of common stock, which included the exercise of the
underwriters' over-allotment option of 1,050,000 shares, were also sold by
existing shareholders. The Company has 40,127,642 shares of common stock
outstanding after this offering, which includes those shares issued as a result
of the Primedica acquisition, and received net proceeds of approximately
$62,500. The Company plans to use these proceeds to repay a portion of its
indebtedness, retire obligations incurred in connection with recent acquisitions
and for general corporate purposes.
62
FINANCIAL STATEMENTS SCHEDULES
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
SCHEDULE I -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED PARENT COMPANY STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
THREE MONTHS FISCAL YEAR
ENDED ENDED
DECEMBER 25, 1999 DECEMBER 30, 2000
----------------- -----------------
Operating income............................ $ -- $ --
Interest expense............................ (2,846) (6,917)
-------- --------
(Loss) before income taxes, income (loss)
from equity investment in subsidiary and
extraordinary item........................ (2,846) (6,917)
Income tax benefit.......................... 653 1,880
-------- --------
(Loss) before income (loss) from equity
investment in subsidiary and extraordinary
item...................................... (2,193) (5,037)
Income (loss) from equity investment in
subsidiary................................ (635) 14,469
-------- --------
Net income (loss) before extraordinary
item...................................... (2,828) 9,432
Extraordinary loss, net of a tax benefit of
$11,122................................... -- (20,656)
-------- --------
Net loss.................................... $ (2,828) $(11,224)
======== ========
63
CONDENSED PARENT COMPANY BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 25, 1999 DECEMBER 30, 2000
----------------- -----------------
Non-Current Assets
Deferred tax asset........................ $ 653 $ 13,656
Investment in equity accounted
subsidiary.............................. -- 103,271
-------- --------
Total assets.............................. $ 653 $116,927
======== ========
Liabilities and shareholders' equity
Non-current liabilities
Excess of liabilities over assets in
equity accounted subsidiary........... $ 22,616 $ --
Long term debt.......................... 74,981 --
-------- --------
Total liabilities..................... 97,597 --
-------- --------
Redeemable common stock................... 13,198 --
Shareholders' equity
Common stock............................ 198 359
Capital in excess of par................ 206,940 451,404
Retained earnings....................... (307,351) (318,575)
Loans to officers....................... (920) (920)
Accumulated other comprehensive
income................................ (9,009) (15,341)
-------- --------
Total shareholders' equity.............. (110,142) 116,927
-------- --------
Total liabilities and shareholders'
equity.............................. $ 653 $116,927
======== ========
64
CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS FISCAL YEAR
ENDED ENDED
DECEMBER 25, 1999 DECEMBER 30, 2000
----------------- -----------------
Cash flows relating to operating activities
Net loss.................................. $ (2,828) $(11,224)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Accretion of debenture and discount
note.................................... 2,644 6,500
Amortization of discounts................. 202 417
Deferred income taxes..................... (653) (1,880)
(Income) Loss from equity investment...... 635 (14,469)
Extraordinary loss, net of tax............ -- 20,656
-------- --------
Net cash provided by operating
activities.............................. $ -- $ --
-------- --------
Cash flows relating to financing activities
Proceeds from issuance of common stock,
net of transaction fees................. -- 235,964
Payments on long-term debt................ -- (89,221)
Premiums paid for early retirement of
debt.................................... -- (24,444)
Additional investment in equity accounted
subsidiary.............................. -- (122,299)
-------- --------
Net cash used in financing activities..... $ -- $ --
-------- --------
Net change in cash and cash equivalents... $ -- $ --
-------- --------
Cash and cash equivalents, beginning of
period.................................. $ -- $ --
-------- --------
Cash and cash equivalents, end of
period.................................. $ -- $ --
-------- --------
65
FINANCIAL STATEMENT SCHEDULES
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
These condensed parent company financial statements have been prepared in
accordance with Rule 12-04, Schedule 1 of Regulation S-X, as the restricted net
assets of Charles River Laboratories Inc. exceed 25% of the consolidated net
assets of Charles River Laboratories International, Inc. (the Parent Company).
As disclosed in note 3 to the accompanying consolidated financial statements, in
order to repay its obligations, the Parent Company is dependent upon either
dividends from Charles River Laboratories, Inc., which are restricted by terms
contained in the indenture governing the senior subordinated notes and the
senior secured credit facility, or through a refinancing or equity transaction.
The Parent Company's 100% investment in Charles River Laboratories Inc. has
been recorded using the equity basis of accounting in the accompanying condensed
parent company financial statements. The condensed income statement and
statement of cash flows are presented for the fiscal year ended December 30,
2000 and for the three month period ended December 25, 1999, as the dividend
restrictions and the current capital structure of the Parent Company were
created as a result of the recapitalization transaction more fully described in
Note 3 to the accompanying consolidated financial statements. There were no cash
dividends paid to the Parent Company by Charles River Laboratories Inc. during
the fiscal year ended December 30, 2000 or the three-month period ended
December 25, 1999.
On June 5, 2000, a 1.927 for 1 exchange of stock was approved by the Board
of Directors of the Parent Company. This exchange of stock was effective
June 21, 2000. All references to common stock and shareholders' equity amounts
have been restated in these condensed parent company financial statements as if
the exchange of stock had occurred as of the earliest period presented.
On June 28, 2000, the Company consummated an initial public offering ("the
Offering") of 16,100,000 shares of its common stock at a price of $16.00 per
share. The number of shares includes the exercise of an over-allotment option by
the underwriters. The Company received proceeds of $235,964, net of
underwriter's commissions and offering costs. As described below, proceeds from
the Offering were used to pay down a portion of the Company's existing debt and
to increase the Company's investment in an equity accounted subsidiary.
The Company used the proceeds from the Offering to repay $89,221 of its
existing debt, including issuance discounts. Premiums totaling $24,444 were paid
as a result of the early repayment of the senior discount debentures.
The sources and used of cash from the Offering are as follows:
SOURCES OF FUNDS:
Proceeds from offering...................................... $257,600
USES OF FUNDS:
Repayment of subordinated discount note..................... (46,873)
Repayment of senior discount debentures..................... (42,348)*
Premium of early extinguishment of senior discount
debentures................................................ (24,444)
Additional investment in equity accounted subsidiary........ (122,299)
Transaction fees and expenses............................... (21,636)
--------
Net adjustment to cash.................................... $ --
- ------------------------
* Includes issuance discount.
An extraordinary loss before tax of $31,778 was recorded due to the payment
of premiums relating to the early extinguishment of debt, ($24,444); the
write-off of issuance discounts ($7,858); offset by a book gain of $524 on the
subordinated discount note. This extraordinary loss has been recorded net of a
tax benefit of $11,122.
66
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
INCOME TAX VALUATION ALLOWANCE
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DESCRIPTION DEDUCTIONS DESCRIPTION PERIOD
---------- -------- -------- ----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 30,
2000
Income Tax Valuation Allowance..... $7,137 $3,007 Provisions $(5,620) Releases $4,524
FOR THE YEAR ENDED DECEMBER 25,
1999
Income Tax Valuation Allowance..... $1,766 $5,371 Provisions $-- $7,137
FOR THE YEAR ENDED DECEMBER 26,
1998
Income Tax Valuation Allowance..... $1,766 $-- Provisions $-- $1,766
ALLOWANCE FOR DOUBTFUL ACCOUNTS
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DESCRIPTION DEDUCTIONS DESCRIPTION PERIOD
---------- -------- -------- ----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 30,
2000 Recoveries/
Allowance for Doubtful Accounts.... $978 $535 Provisions $(477) Write-offs $1,036
FOR THE YEAR ENDED DECEMBER 25,
1999 Recoveries/
Allowance for Doubtful Accounts.... $898 $324 Provisions $(244) Write-offs $978
FOR THE YEAR ENDED DECEMBER 26,
1998 Recoveries/
Allowance for Doubtful Accounts.... $688 $265 Provisions $(55) Write-offs $898
67
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Year ended December 30, 2000
Net Sales............................................... $72,504 $77,430 $75,593 $81,058
Gross Profit............................................ 27,910 31,577 29,906 30,538
Income before extraordinary items....................... 636 7,974 4,839 4,428
Extraordinary item...................................... -- -- (29,101) --
Net Income.............................................. 636 7,974 (24,262) 4,428
Net Income/(Loss) per share before extraordinary item
Basic................................................... $ 0.03 0.40 $ 0.14 $ 0.12
Diluted................................................. $ 0.03 0.34 $ 0.12 $ 0.11
Net Income/(Loss) per share after extraordinary item
Basic................................................... $ 0.03 0.40 $ (0.69) $ 0.12
Diluted................................................. $ 0.03 0.34 $ (0.61) $ 0.11
Year ended December 25, 1999
Net Sales............................................... $58,408 $58,993 $55,914 $58,098
Gross Profit............................................ 20,120 23,724 20,022 20,818
Income before extraordinary items....................... 7,073 7,235 5,644 (2,828)
Extraordinary item...................................... -- -- -- --
Net Income.............................................. 7,073 7,235 5,644 (2,828)
Net Income/(Loss) per share before extraordinary item
Basic................................................... $ 0.36 $ 0.37 $ 0.28 $ (0.14)
Diluted................................................. $ 0.36 $ 0.37 $ 0.28 $ (0.14)
Net Income/(Loss) per share after extraordinary item
Basic................................................... $ 0.36 $ 0.37 $ 0.28 $ (0.14)
Diluted................................................. $ 0.36 $ 0.37 $ 0.28 $ (0.14)
The net sales amounts shown above for the first, second and third quarters
differ to the net sales amounts reported in the condensed consolidated financial
statements included in the Form 10-Qs for each of these quarters by $3,202
(2000), $3,064 (1999); $3,333 (2000), $3,017 (1999); and $3,220 (2000), $2,984
(1999), respectively. These amounts have been reclassified from cost of sales to
revenues in accordance with Emerging Issues Task Force final consensus Issue
00-10 "Accounting for Shipping and Handling Revenues and Costs". Shipping and
handling costs are recorded as cost of sales in the statement of operations."
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is expected to be included in its
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 2001 Annual Meeting of Stockholders under the section captioned
"Management" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is expected to be included in its
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 2001 Annual Meeting of Stockholders under the sections captioned
"Compensation of Directors," "Executive Compensation" and Report of Compensation
Committee and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is expected to be included in the
Company's Proxy Statement to be filed pursuant to Schedule 14A in connection
with the Company's 2001 Annual Meeting of Stockholders under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is expected to be included in the
Company's Proxy Statement to be filed pursuant to Schedule 14A in connection
with the Company's 2001 Annual Meeting of Stockholders under the sections
captioned "Certain Relationships and Related Transactions" and is incorporated
herein by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
ITEM 14(A).
The following documents are filed as part of this annual report on
Form 10-K.
ITEM 14(A)(1) AND (2).
See "Index to Consolidated Financial Statements and Financial Statement
Schedules" at Item 8 to this Annual Report on Form 10-K. Other financial
statement schedules have not been included because they are not applicable or
the information is included in the financial statements or notes thereto.
69
ITEM 14(A)(3) EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
2.1 Recapitalization Agreement, dated as of July 25, 1999, among
Charles River Laboratories, Inc., Charles River
Laboratories International, Inc. (formerly known as
Endosafe, Inc.), Bausch & Lomb Incorporated, and other
parties listed therein (Filed as Exhibit 2.1). (3)
2.2 Amendment No. 1 to Recapitalization Agreement, dated as of
September 29, 1999 by
Bausch & Lomb Incorporated and CRL Acquisition LLC (Filed
as Exhibit 2.2). (3)
2.3 Agreement and Plan of Reorganization, dated as of June 6,
2000, among Charles River Laboratories International,
Inc., CRL Acquisition LLC and B&L CRL, Inc. (Filed as
Exhibit 2.3). (2)
2.4 Stock Purchase Agreement by and among Pathology Associates
International Corporation, Science Applications
International Corp., and Charles River Laboratories, Inc.
dated December 21, 2000 (Filed as Exhibit 2.4). (1)
2.5 Stock Purchase Agreement by and among Charles River
Laboratories, Inc., Primedica Corporation, TSI Corporation
and Genzyme Transgenics Corporation (Filed as
Exhibit 2.5). (1)
3.1 Amended and Restated Certificate of Incorporation of Charles
River Laboratories International, Inc. (Filed as Exhibit
3.1). (2)
3.2 By-laws of Charles River Laboratories International, Inc.
(Filed as Exhibit 3.2). (2)
4.1 Form of certificate representing shares of common stock,
$0.01 per value per share (Filed as Exhibit 4.1). (2)
4.2 Amended and Restated Investors' Agreement, dated as of June
20, 2000, among Charles River Laboratories International,
Inc. and the shareholders named therein (Filed as
Exhibit 4.2). (2)
10.1 Amended and Restated Credit Agreement, dated as of February
2, 2001, among Charles River Laboratories, Inc., the
various financial institutions, Union Bank of California,
N.A., Credit Suisse First Boston, and National City Bank
(Filed as Exhibit 10.1). (1)
10.2 Indenture, dated as of September 29, 1999 between Charles
River Laboratories, Inc. and the Trustee (Filed as Exhibit
10.4). (3)
10.4 Joint Venture Agreement between Ajinomoto Co., Inc. and
Charles River Breeding Laboratories, Inc. dated June 24,
1981, and ancillary agreements, amendments and addendums
(Filed as Exhibit 10.6). (4)
10.5 Supply Agreement between Merck & Co., Inc. and Charles River
Laboratories, Inc. dated September 30, 1994 (Filed as
Exhibit 10.7). (3)
10.6 Amended and Restated Stock Purchase Agreement among Charles
River Laboratories, Inc. and SBI Holdings, Inc. and its
stockholders dated September 4, 1999 (Filed as
Exhibit 10.8). (3)
10.7 Ground Lease between HIC Associates (Lessor) and Charles
River Laboratories, Inc. (Lessee) dated June 5, 1992; Real
Estate Lease between Charles River Laboratories, Inc.
(Landlord) and Charles River Partners L.P. (Tenant) dated
December 22, 1993; and Assignment and Assumption Agreement
between Charles River Partners, L.P. (Assignor) and
Wilmington Partners L.P. (Assignees) dated December 22,
1993 (Filed as Exhibit 10.9). (3)
70
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.8 Amended and Restated Distribution Agreement between Charles
River BRF, Inc., Charles River Laboratories, Inc.,
Bioculture Mauritius Ltd. and Marry Ann and Owen
Griffiths, dated December 23, 1997 (Filed as Exhibit
10.10). (3)
10.9 Supply Agreement between Sierra Biomedical, Inc. and
Scientific Resources International, Ltd., dated March 18,
1997 (Filed as Exhibit 10.11). (3)
10.10 Severance Agreement between Charles River Laboratories, Inc.
and Real H. Renaud dated January 20, 1992 (Filed as
Exhibit 10.10). (2)+
10.11 1999 Charles River Laboratories Officer Separation Plan
(Filed as Exhibit 10.11). (2)+
10.12 Form of Agreement and Release among Bausch & Lomb,
Incorporated, Charles River Laboratories, Inc. and the
named executive officers dated as of July 25, 1999 (Filed
as Exhibit 10.12). (2)+
10.13 1999 Management Incentive Plan (Filed as Exhibit 10.1). (5)+
10.14 2000 Incentive Plan (Filed as Exhibit 10.14). (2)+
10.15 2000 Directors Stock Plan (Filed as Exhibit 10.15). (2)+
10.16 Form of Indemnification Agreement (Filed as Exhibit 10.16).
(2)+
21.1 Subsidiaries of Charles River Laboratories International,
Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
- ------------------------
(1) Previously filed as an exhibit to, and incorporated herein by reference
from, the Company's Registration Statement on Form S-3 (File No. 333-55670),
as amended, filed February 15, 2001.
(2) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (File No. 333-35524), as amended, filed
June 23, 2000.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-92383), as amended, filed December 8, 1999.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-35524) filed April 25, 2000.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q filed May 9, 2000.
+ Management contract or compensatory plan, contract or arrangement.
Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.
ITEM 14(B) REPORTS ON FORM 8-K
The Company filed with the Securities and Exchange Commission on
December 22, 2000 a Current Report on Form 8-K for the purpose of furnishing a
press release announcing the signing of a definitive agreement to acquire
Pathology Associates International Corporation from Science Applications
International Corporation for $37 million.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
By: /s/ THOMAS F. ACKERMAN Date: March 30, 2001
----------------------------
Thomas F. Ackerman
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated below and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
By: /s/ JAMES C. FOSTER President, Chief Executive Officer March 30, 2001
-------------------------------- and Chairman
James C. Foster
By: /s/ THOMAS F. ACKERMAN Senior Vice President and March 30, 2001
-------------------------------- Chief Financial Officer
Thomas F. Ackerman
By: /s/ ROBERT CAWTHORNE Director March 30, 2001
--------------------------------
Robert Cawthorne
By: /s/ STEPHEN D. CHUBB Director March 30, 2001
--------------------------------
Stephen D. Chubb
By: /s/ THOMPSON DEAN Director March 30, 2001
--------------------------------
Thompson Dean
By: /s/ STEPHEN C. MCCLUSKI Director March 30, 2001
--------------------------------
Stephen C. McCluski
SIGNATURES TITLE DATE
- ---------- ----- ----
By: /s/ REID S. PERPER Director March 30, 2001
--------------------------------
Reid S. Perper
By: /s/ DOUGLAS E. ROGERS Director March 30, 2001
--------------------------------
Douglas E. Rogers
By: /s/ SAMUEL THIER Director March 30, 2001
--------------------------------
Samuel Thier
By: /s/ WILLIAM WALTRIP Director March 30, 2001
--------------------------------
William Waltrip
By: /s/ HENRY C. WENDT Director March 30, 2001
--------------------------------
Henry C. Wendt