Filed pursuant to Rule 424(b)(4)
Reg. No. 333-63766
8,000,000 Shares
[LOGO]
Common Stock
---------
We are selling 2,000,000 shares of common stock and the selling
stockholders are selling 6,000,000 shares of common stock.
Our common stock is listed on The New York Stock Exchange under the
symbol "CRL". The last reported sale price on July 19, 2001, was
$30.28 per share.
The underwriters have an option to purchase a maximum of 1,200,000
additional shares from the selling shareholders to cover over-allotments
of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Charles River Stockholders
------------------- ------------------- ------------------- -------------------
Per Share............ $29.00 $1.392 $27.608 $27.608
Total................ $232,000,000 $11,136,000 $55,216,000 $165,648,000
Delivery of the shares will be made on or about July 25, 2001.
Neither the Securities and Exchange Commission nor any state
securities commission has determined whether this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
Joint Lead Managers
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
SG COWEN U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is July 19, 2001.
--------------
TABLE OF CONTENTS
PAGE
--------
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 8
FORWARD-LOOKING STATEMENTS............ 14
INDUSTRY AND MARKET DATA.............. 14
USE OF PROCEEDS....................... 15
COMMON STOCK PRICE RANGES AND
DIVIDENDS........................... 15
CAPITALIZATION........................ 16
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 18
BUSINESS.............................. 32
MANAGEMENT............................ 43
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT;
SELLING STOCKHOLDERS................ 46
PAGE
--------
RELATIONSHIPS AND TRANSACTIONS WITH
RELATED PARTIES..................... 48
DESCRIPTION OF CAPITAL STOCK.......... 50
SHARES ELIGIBLE FOR FUTURE SALE....... 53
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES
HOLDERS OF COMMON STOCK............. 55
UNDERWRITING.......................... 58
LEGAL MATTERS......................... 60
EXPERTS............................... 61
WHERE YOU CAN FIND MORE INFORMATION... 61
INCORPORATION OF DOCUMENTS BY
REFERENCE........................... 61
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA......... P-1
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
Charles River is a registered trademark of Charles River Laboratories, Inc. This
prospectus also includes trademarks and trade names of other parties.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. EXCEPT AS OTHERWISE NOTED,
ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND GIVES EFFECT TO THE EXCHANGE OF EACH EXISTING SHARE OF
OUR COMMON STOCK FOR 1.927 NEW SHARES EFFECTIVE JUNE 21, 2000.
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
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 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. For the three months
ended March 31, 2001, our net sales were $99.0 million and our operating income
was $19.4 million.
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 and 50.0% of
our net sales for the three months ended March 31, 2001. 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.
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 50.0% of our net
sales for the three months ended March 31, 2001. We have experienced strong
growth in biomedical products and services as demonstrated by the 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
leading drug candidates from the enormous number of new compounds being
generated.
1
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.
VACCINE SUPPORT PRODUCTS. We produce pathogen-free fertilized chicken eggs,
a critical element of 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;
- Long-standing reputation for scientific excellence;
- Extensive global infrastructure and customer relationships;
- Biosecurity technology expertise;
- Platform-acquisition and internal-development capabilities; and
- Experienced and incentivized management team.
OUR STRATEGY
Our business strategy is to build upon our core research models business and
to invest actively 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;
- Acquire new technologies in research models;
- Expand our pre-clinical outsourcing services;
- Expand our non-animal technologies; and
- Pursue strategic acquisitions and alliances.
------------------------
We are organized as a Delaware corporation. Our headquarters are located at
251 Ballardvale Street, Wilmington, Massachusetts 01887. Our telephone number is
(978) 658-6000. Our website address is www.criver.com. The information on our
website is not incorporated as a part of this prospectus.
2
RECENT DEVELOPMENTS
Since January 2001, we have completed six strategic transactions:
- On July 12, 2001, we entered into an agreement with The Jackson
Laboratory, or Jackson, to act as their exclusive partner for the
breeding, distributing and servicing of their proprietary mouse models in
Europe and Asia;
- On July 11, 2001, we entered into an agreement with Sangamo BioSciences
Inc., or Sangamo, to develop and commercialize its proprietary gene
regulation technology for certain research model applications;
- On July 2, 2001, we signed an agreement to acquire Genetic Models, Inc.,
or GMi, a provider of proprietary rat research models;
- On June 29, 2001, we entered into an agreement with Advanced Cell
Technology Inc., or ACT, to further develop and commercialize its
proprietary cloning technologies for research model applications;
- On February 27, 2001, we acquired Primedica Corporation, or Primedica; and
- On January 8, 2001, we acquired Pathology Associates International
Corporation, or PAI.
JACKSON. We entered into a five-year, renewable agreement with Jackson to
market, breed, import for distribution and service their proprietary mouse
models outside the United States. Jackson is a leading genetics research
institution, and their specialty mouse models used to study human disease are
known for their unique genetic profiles. We will market and sell certain of
Jackson's mouse models on an exclusive basis in Europe and Asia, as well as
breed certain strains locally. We will also provide services to researchers
using Jackson mice for the maintenance, cryopreservation, genotyping,
phenotyping and other support functions essential to the use of these models.
SANGAMO. We entered into an agreement with Sangamo to further develop and
apply transcription factors known as zinc finger DNA-binding proteins, or ZFPs,
to the creation of unique rat research models. The applied ZFP technology is
expected to allow the creation of proprietary transgenic rat models that will be
targeted to particular disease conditions such as cancer. Under this technology
partnership, we will market and sell or license to our customers newly developed
transgenic rat models that result from our sponsored research. This agreement is
also intended to allow for the development of custom transgenic rat models which
may be required by the research community.
GMI. GMi, headquartered in Indianapolis, IN, provides proprietary rat
research models to researchers studying diabetes, cardiovascular and related
diseases. The acquisition of GMi expands our product offerings to include
additional disease models that enable customers to conduct more effective
research within target diseases. We plan to leverage our worldwide
infrastructure to make GMi's proprietary rat models more widely available within
the United States, as well as in Europe and Japan.
For the year ended December 31, 2000, GMi recorded revenues of approximately
$2.5 million. We will acquire GMi for $4.0 million in cash. We expect to close
the acquisition in July, subject to customary closing conditions.
ACT. We entered into an agreement with ACT to further develop and
commercialize its proprietary cloning technologies for research models,
principally rats used in diabetes research. This agreement complements our
December 2000 research agreement with Tufts University School of Veterinary
Medicine, pursuant to which we are further developing and commercializing its
proprietary cloning technology to develop a highly efficient cloning process in
immunodeficient mouse models. Our technology partnerships represent our
strategic focus on bringing new research model technologies to market in
collaboration with leading scientists and research institutions. These
technologies and the
3
resulting new models are expected to differentiate our products from our
competitors while offering our customers a broader selection of research tools.
PRIMEDICA. Primedica, headquartered in Worcester, MA, is a leading provider
of preclinical drug discovery and development services to the biopharmaceutical
industry, including efficacy and safety testing, metabolism and
pharmacokinetics, bioanalytical chemistry, biopharmaceutical production and drug
formulation. We expect the acquisition of Primedica to allow us to provide a
more comprehensive offering of outsourcing services to our pharmaceutical,
biotechnology and medical device customers in the U.S., while expanding our
scientific capabilities. Primedica is particularly synergistic with the PAI
acquisition and our Sierra Biomedical and Tektagen operations, all of which fall
within our development services operations.
The demand for these services is driven by the growing outsourcing trend in
preclinical drug development. These services are critical to the successful
development of new drugs and devices, including obtaining FDA regulatory
approval. Primedica has over 300 customers, including many of the top
pharmaceutical and biotechnology companies, which significantly overlap with our
customer base. Primedica has nearly 700 employees, 45 of whom are doctoral level
professionals. For the year ended December 31, 2000, Primedica's revenues were
$72.3 million. We acquired Primedica from Genzyme Transgenics Corporation for
approximately $51.1 million, including $25.7 million in cash, $16.4 million in
restricted stock and $9.0 million in assumed debt.
PAI. PAI, headquartered in Frederick, MD, is the world's leading provider
of contract toxicology pathology services in research models. PAI provides
veterinary pathology services, contract staffing services, and regulatory
consulting. The acquisition of PAI expands the scope of our preclinical service
capabilities. In addition, we share a customer base and utilize complementary
technologies to provide a broad range of preclinical outsourcing services.
PAI has nearly two decades of experience and more than 500 employees,
including over 40 pathologists and doctoral level professionals. For the year
ended December 31, 2000, PAI recorded revenues of $32.7 million. We acquired PAI
from Science Applications International Corporation for approximately
$35.2 million, including $25.5 million in cash and a $12.0 million convertible
note, recorded net of a discount of $2.3 million.
THE RECAPITALIZATION, THE INITIAL PUBLIC OFFERING AND THE FOLLOW ON OFFERING
On September 29, 1999, CRL Acquisition LLC, a limited liability company
owned by affiliates of DLJ Merchant Banking Partners, II, L.P., our management
and other investors, together with our former parent company, Bausch & Lomb
Incorporated, completed a recapitalization transaction.
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 an 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 March 21, 2001, we consummated a public offering of 8,050,000 shares of
common stock, including the underwriters' overallotment option, at a price of
$19.00 per share, of which 4,550,000 shares of common stock were sold by
existing shareholders. We received net proceeds of approximately $62.2 million,
which we used to repay $12.0 million of our bank debt. The remaining proceeds
will be used to further repay existing bank debt.
4
THE OFFERING
Common stock offered by us................... 2,000,000 shares
Common stock offered by the selling 6,000,000 shares
stockholders...............................
Common stock outstanding after this 42,127,642 shares
offering...................................
Use of proceeds.............................. We plan to use the net proceeds from this
offering to repay a portion of our debt, to
retire obligations incurred in connection
with recent acquisitions and for general
corporate purposes.
NYSE symbol.................................. CRL
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 2001. This number
does not include the following:
- 1,716,697 shares of common stock reserved for issuance upon the exercise
of outstanding options granted under our 1999 management incentive plan,
of which 662,451 are currently exercisable;
- 516,125 shares of common stock reserved for issuance upon the exercise of
outstanding options granted under our 2000 management incentive plan and
our 2000 directors stock plan, of which none were exercisable;
- 3,438,292 shares of common stock available for future grants under our
1999 management incentive plan, 2000 incentive plan and 2000 directors
stock plan;
- 2,921,987 shares of common stock issuable upon the exercise of outstanding
warrants;
- 513,259 shares of common stock issuable upon conversion of the
$12 million convertible note we issued in connection with our acquisition
of PAI;(1) and
- 79,691 shares of common stock issued between March 31, 2001 and June 18,
2001 upon the exercise of employee stock options.
Affiliates of Credit Suisse First Boston Corporation, one of the managing
underwriters for this offering, are selling shares in this offering. See
"Security Ownership of Certain Beneficial Owners and Management; Selling
Shareholders."
- ------------------------
(1) As of June 18, 2001, as a result of the Company's $9.0 million repayment of
the note, 128,315 shares of common stock are issuable upon conversion of
the note.
5
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The table below presents our summary historical and unaudited pro forma
consolidated financial and other data. We derived the summary consolidated
financial data for the fiscal years ended December 26, 1998, December 25, 1999
and December 30, 2000 from our audited consolidated financial statements and the
related notes included elsewhere in this prospectus. We derived the summary
consolidated financial data for the three months ended March 25, 2000 and
March 31, 2001 from our unaudited condensed consolidated financial statements
and the notes thereto included elsewhere in this prospectus. In the opinion of
management, our unaudited condensed consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial condition and results of operations for
these periods. The summary unaudited pro forma consolidated financial data is
based upon the consolidated financial statements for the year ended
December 30, 2000 and the unaudited condensed consolidated financial statements
for the three months ended March 31, 2001, adjusted as appropriate, to give
effect to the sale of 16,100,000 shares of our common stock in the initial
public offering at $16.00 per share, the net proceeds of which have been used to
repay outstanding debt, and the sale of 3,500,000 shares of our common stock on
March 21, 2001 at a price of $19.00 per share, a portion of the net proceeds of
which has been used to repay outstanding debt. The summary unaudited pro forma
consolidated financial data may not be indicative of what our results would have
been if the transactions presented on a pro forma basis were completed as of
December 26, 1999 and December 31, 2000 for annual and quarterly income
statement data, respectively. In addition, they are not projections of our
consolidated future results of operations or financial position. You should read
the information contained in this table in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Condensed
Consolidated Financial Data" and our consolidated financial statements and the
related notes contained elsewhere in this prospectus.
PRO FORMA
THREE
THREE MONTHS ENDED MONTHS
FISCAL YEAR(1) PRO FORMA ------------------------- ENDED
--------------------------------------- FISCAL YEAR MARCH 25, MARCH 31, MARCH 31,
1998 1999 2000 2000 2000 2001 2001
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total net sales................. $ 205,061 $ 231,413 $ 306,585 $ 306,585 $ 72,502 $ 99,031 $ 99,031
Cost of products sold and
services provided............. 134,307 146,729 186,654 186,654 44,592 62,369 62,369
Selling, general and
administrative expenses....... 34,142 39,765 51,204 51,204 11,813 15,460 15,460
Amortization of goodwill and
intangibles................... 1,287 1,956 3,666 3,666 865 1,828 1,828
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income................ 35,325 42,963 65,061 65,061 15,232 19,374 19,374
Interest expense................ (421) (12,789) (40,691) (22,290) (12,664) (6,958) (6,674)
=========== =========== =========== =========== =========== =========== ===========
Income before income taxes,
minority interest, earnings
from equity investments and
extraordinary item............ 35,832 30,663 26,085 44,486 2,680 13,224 13,508
=========== =========== =========== =========== =========== =========== ===========
Provision for income taxes...... 14,123 15,561 7,837(2) 14,957(2) 2,468 5,555 5,665
=========== =========== =========== =========== =========== =========== ===========
Income before extraordinary
item.......................... 23,378 17,124 17,877 29,158 636 7,188 7,362
Extraordinary loss, net of
tax........................... -- -- (29,101) -- -- (237) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 23,378 $ 17,124 $ (11,224) $ 29,158 $ 636 $ 6,951 $ 7,362
----------- ----------- ----------- ----------- ----------- ----------- -----------
6
PRO FORMA
THREE
THREE MONTHS ENDED MONTHS
FISCAL YEAR(1) PRO FORMA ------------------------- ENDED
--------------------------------------- FISCAL YEAR MARCH 25, MARCH 31, MARCH 31,
1998 1999 2000 2000 2000 2001 2001
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Earnings per common share before
extraordinary item
Basic....................... $ 1.18 $ 0.86 $ 0.64 $ 0.74 $ 0.03 $ 0.20 $ 0.19
Diluted..................... 1.18 0.86 0.56 0.67 0.03 0.18 0.17
Earnings per common share after
extraordinary item(3)
Basic....................... $ 1.18 $ 0.86 $ (0.40) $ 0.74 $ 0.03 $ 0.19 $ 0.19
Diluted..................... 1.18 0.86 (0.35) 0.67 0.03 0.17 0.17
Weighted average number of
common shares outstanding(3)
Basic....................... 19,820,369 19,820,369 27,737,677 39,420,369 19,820,369 36,582,532 39,659,455
Diluted..................... 19,820,369 19,820,369 31,734,354 43,417,046 23,571,555 40,287,045 43,363,968
OTHER DATA:
EBITDA, as defined(4)........... $ 46,220 $ 55,281 $ 81,827 $ 81,827 $ 18,996 $ 24,813 $ 24,813
EBITDA margin................... 22.5% 23.9% 26.7% 26.7% 26.2% 25.1% 25.1%
Depreciation and amortization... $ 10,895 $ 12,318 $ 16,766 $ 16,766 $ 3,764 $ 5,439 $ 5,439
Cash flows from operating
activities(5)................. $ 37,380 $ 37,568 $ 33,768 -- 1,861 7,828 --
Cash flows used in investing
activities(5)................. (23,030) (34,168) (14,576) -- (1,797) (55,768) --
Cash flows used in financing
activities(5)................. (8,018) (11,504) 782 -- 3,721 88,662 --
AS OF
MARCH 31,
2001
-----------
HISTORICAL
-----------
(DOLLARS IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 72,399
Working capital................. 95,902
Total assets.................... 555,385
Total debt...................... 248,491
Total shareholders' equity...... 199,141
- ------------------------------
(1) Our fiscal year consists of 12 months ending on the last Saturday on or
prior to December 31.
(2) Valuation Allowance
As a result of the repayment of debt with proceeds from our initial public
offering, we reassessed the need for a valuation allowance relating to state
income tax benefits associated with the deferred tax asset recorded
following our recapitalization transaction. As a result of this
reassessment, $4,762 of the valuation allowance was released in the second
quarter of 2000 and recorded as a tax benefit. This tax benefit is included
in both the December 30, 2000 and pro forma December 30, 2000 statement of
operations and is a non-recurring item.
(3) As more fully described in Note 5 to the consolidated financial statements,
historical earnings per share have been computed assuming that the shares
outstanding after the recapitalization had been outstanding for all periods
prior to the recapitalization.
(4) EBITDA, as defined, represents operating income plus depreciation and
amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to analyze
and compare companies on the basis of operating performance.
EBITDA, as defined, is not intended to represent cash flows for the period,
nor is it presented as an alternative to operating income or as an indicator
of operating performance. It should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP in
the United States and is not indicative of operating income or cash flow
from operations as determined under GAAP. Our method of computation may or
may not be comparable to other similarly titled measures of other companies.
(5) Cash flow information is not presented with respect to the unaudited pro
forma data because a statement of cash flows is not required by Article 11
of SEC Regulation S-X.
7
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY CONSIDER
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. ANY OF THESE RISKS COULD
HAVE A MATERIAL AND NEGATIVE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE
TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
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 acquisitions of PAI and
Primedica 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.
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.
8
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 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 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,
9
mice and birds, including chickens. Congress, however, has suspended the USDA's
rulemaking authority in this area. 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.
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,
10
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 "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 recently became our Chairman. 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.
DLJ MERCHANT BANKING PARTNERS, II, L.P. AND ITS AFFILIATES HAVE CONTROL OVER OUR
COMPANY AND MAY HAVE DIFFERENT INTERESTS THAN THOSE OF OTHER HOLDERS OF OUR
COMMON STOCK.
Prior to this offering DLJ Merchant Banking Partners II, L.P. and affiliated
funds, which we refer to as the DLJMB Funds, beneficially owned over 30% of our
outstanding common stock and after this offering these entities will
beneficially own 20.7% of our outstanding common stock. As a result of their
stock ownership and contractual rights they received in the recapitalization,
these entities have 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.
11
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.
The general partners of each of the DLJMB Funds are affiliates or employees
of Credit Suisse First Boston Corporation, a managing underwriter of this
offering.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information in this prospectus 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. We made some adjustments and
allocations to the historical financial statements for the periods prior to the
recapitalization included in this prospectus because B&L did not account for us
as a single stand-alone business in those periods. 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.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND COULD DECLINE SUBSTANTIALLY.
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Many factors may cause the market price for our common
stock to decline following this offering, including:
- our operating results failing to meet the expectations of securities
analysts or investors in any quarter;
- downward revisions in securities analysts' estimates;
- material announcements by us or our competitors;
- governmental regulatory action;
- technological innovations by competitors or competing technologies;
- investor perceptions of our industry or prospects or those of our
customers; and
- changes in general market conditions or economic trends.
12
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. If
we become involved in a securities class action litigation in the future, it
could result in substantial costs and diversion of management attention and
resources, harming our business.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders after this offering or the perception that these sales
could occur. These sales also might make it difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. In
addition, some existing stockholders have the ability to require us to register
their shares.
13
FORWARD-LOOKING STATEMENTS
This prospectus 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 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.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in the "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections and elsewhere in this prospectus 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 contained throughout this prospectus.
We are under no duty to update any of the forward-looking statements after the
date of this prospectus or to conform these statements to actual results.
INDUSTRY AND MARKET DATA
In this prospectus, 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.
14
USE OF PROCEEDS
We will receive proceeds from this offering of approximately $55,216,000,
which are net of underwriting discounts and commissions and estimated offering
expenses payable by us. We intend to use the net proceeds of this offering to
repay a portion of our indebtedness, to retire obligations incurred in
connection with recent acquisitions and for general corporate purposes.
Indebtedness under the credit facility was incurred in connection with our
recapitalization and our acquisitions of SBI Holdings Inc., which we refer to as
"Sierra", and Primedica. Interest on term loan A and term loan C accrues at
either a base rate plus 2.00% or LIBOR plus 1.75%, at our option. Interest on
term loan B accrues at either a base rate plus 2.50% or LIBOR plus 3.75%. As of
March 31, 2001, the interest rate on term loan A was 6.84%, the interest rate on
term loan B was 8.84% and the interest rate on term loan C was 8.46%. An
affiliate of Credit Suisse First Boston Corporation was the arranger under the
credit facility. Credit Suisse First Boston, New York branch, has assumed such
commitment and may receive a portion of the net proceeds from this offering.
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The 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.
HIGH LOW
-------- --------
2000
- ---------------------------------------------------------
Second Quarter (from June 23, 2000)...................... $ 22.00 $ 22.00
Third Quarter............................................ 33.06 21.19
Fourth Quarter........................................... 34.00 20.50
2001
- ---------------------------------------------------------
First Quarter............................................ $ 28.20 $ 18.00
Second Quarter........................................... 34.00 21.55
Third Quarter (through July 19).......................... 34.22 29.80
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.
15
CAPITALIZATION
The following table presents our consolidated capitalization as of
March 31, 2001 on a historical basis. This table should be read in conjunction
with "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our consolidated financial statements
and the notes thereto included elsewhere in this prospectus.
AS OF
MARCH 31, 2001
----------------------
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS $ 72,399
========
DEBT:
Credit facility:
Revolving credit facility(1)............................ $ 15,000
Term loans(2)........................................... 114,100
Senior subordinated notes(3).............................. 96,325
Capital lease obligations and other long-term debt........ 23,066
--------
Total debt................................................ $248,491
--------
SHAREHOLDERS' EQUITY:
Common stock.............................................. 401
Additional paid-in capital................................ 529,959
Accumulated deficit....................................... (311,624)
Loans to officers......................................... (620)
Accumulated other comprehensive loss...................... (18,975)
--------
Total shareholders' equity................................ 199,141
--------
Total capitalization...................................... $447,632
========
- ------------------------
(1) At March 31, 2001, we had $15.0 million available under our revolving credit
facility, subject to customary borrowing conditions.
(2) Includes a senior secured term loan A facility of $22.5 million, a senior
secured term loan B facility of $66.6 million and a senior secured term loan
C facility of $25.0 million.
(3) Represents proceeds of $97.5 million related to the units, which were
allocated between the senior subordinated notes ($96.3 million) and warrants
($1.2 million) plus amortization of the discount on the senior subordinated
notes.
16
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 and as of and
for the three months ended March 25, 2000 and March 31, 2001. We derived the
selected consolidated statement of operations and other data for the three
fiscal years ended December 30, 2000 and the consolidated balance sheet data as
of December 25, 1999 and December 30, 2000 from our audited consolidated
financial statements and the notes thereto contained elsewhere in this
prospectus. We derived the selected consolidated financial data as of and for
the fiscal years ended December 28, 1996 and December 27, 1997 from our audited
consolidated financial statements and the notes thereto, which are not contained
in this prospectus. We derived the selected consolidated data as of and for the
three months ended March 25, 2000 and March 31, 2001 from our unaudited
condensed consolidated financial statements and the notes thereto which are
contained elsewhere in this prospectus. In the opinion of management, our
unaudited condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of operations for these
periods. You should read the information contained in this table in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
contained elsewhere in this prospectus.
FISCAL YEAR(1) THREE MONTHS ENDED
---------------------------------------------------- ---------------------
MARCH 25, MARCH 31,
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total net sales............................ $165,563 $181,227 $205,061 $231,413 $306,585 $ 72,502 $99,031
Cost of products sold and services
provided................................. 107,736 121,974 134,307 146,729 186,654 44,592 62,369
Selling, general and administrative
expenses................................. 28,327 30,451 34,142 39,765 51,204 11,813 15,460
Amortization of goodwill and intangibles... 610 834 1,287 1,956 3,666 865 1,828
Restructuring charges...................... 4,748 5,892 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Operating income........................... 24,142 22,076 35,325 42,963 65,061 15,232 19,374
Interest income............................ 654 865 986 536 1,644 142 253
Other income............................... -- -- -- 89 390 -- 525
Interest expense........................... (491) (501) (421) (12,789) (40,691) (12,664) (6,958)
Gain (loss) from foreign currency, net..... 84 (221) (58) (136) (319) (30) 30
-------- -------- -------- -------- -------- -------- -------
Income before income taxes, minority
interests, earnings from equity
investments and extraordinary item....... 24,389 22,219 35,832 30,663 26,085 2,680 13,224
Provision for income taxes................. 10,889 8,499 14,123 15,561 7,837 2,468 5,555
-------- -------- -------- -------- -------- -------- -------
Income before minority interests, earnings
from equity investments and extraordinary
item..................................... 13,500 13,720 21,709 15,102 18,248 212 7,669
Minority interests......................... (5) (10) (10) (22) (1,396) (217) (564)
Earnings from equity investments........... 1,750 1,630 1,679 2,044 1,025 641 83
-------- -------- -------- -------- -------- -------- -------
Income before extraordinary item........... 15,245 15,340 23,378 17,124 17,877 636 7,188
Extraordinary loss, net of tax............. -- -- -- -- (29,101) -- (237)
-------- -------- -------- -------- -------- -------- -------
Net income (loss).......................... $ 15,245 $ 15,340 $ 23,378 $ 17,124 $(11,224) $ 636 $ 6,951
======== ======== ======== ======== ======== ======== =======
OTHER DATA:
Depreciation and amortization.............. $ 9,528 $ 9,703 $ 10,895 $ 12,318 $ 16,766 $ 3,764 $ 5,439
Capital expenditures....................... 11,572 11,872 11,909 12,951 15,565 2,786 4,253
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $ 19,657 $ 17,915 $ 24,811 $ 15,010 $ 33,129 $ 18,458 $72,399
Working capital............................ 48,955 46,153 42,574 27,574 55,417 27,854 95,902
Total assets............................... 196,981 196,211 234,254 359,096 410,608 401,600 555,385
Total debt................................. 1,645 1,363 1,582 386,044 202,912 398,142 248,491
Total shareholders' equity (deficit)....... 153,818 149,364 168,259 (110,142) 116,927 (111,173) 199,141
- ------------------------------
(1) Our fiscal year consists of 12 months ending on the last Saturday on or
prior to December 31.
17
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 AND OUR UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA, INCLUDING THE RELATED NOTES, CONTAINED ELSEWHERE IN THIS
PROSPECTUS.
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 and the three months
ended March 25, 2000 and March 31, 2001. 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.
FOR THE THREE
FISCAL YEAR MONTHS ENDED
------------------------------------ ---------------------
MARCH 25, MARCH 31,
1998 1999 2000 2000 2001
---------- ---------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales:
Research models...................... $144.9 $152.5 $187.7 $41.1 $49.5
Biomedical products and services..... 60.2 78.9 118.9 31.4 49.5
Costs of products sold and services
provided:
Research models...................... $ 96.1 $ 96.5 $113.3 $24.3 $28.9
Biomedical products and services..... 38.2 50.2 73.4 20.3 33.4
Selling, general and administrative
expenses:
Research models...................... $ 18.1 $ 22.2 $ 30.9 $ 4.8 $ 7.1
Biomedical products and services..... 9.7 12.5 18.2 4.3 6.0
Operating income:
Research models...................... $ 30.5 $ 33.7 $ 43.1 $12.0 $13.3
Biomedical products and services..... 11.1 14.4 24.1 5.9 8.5
18
FOR THE THREE
FISCAL YEAR MONTHS ENDED
------------------------------------ ---------------------
MARCH 25, MARCH 31,
1998 1999 2000 2000 2001
---------- ---------- ---------- --------- ---------
(AS A PERCENT OF NET SALES)
Net sales:
Research models...................... 70.6% 65.9% 61.2% 56.7% 50.0%
Biomedical products and services..... 29.4 34.1 38.8 43.3 50.0
Costs of products sold and services
provided:
Research models...................... 66.3% 63.3% 60.4% 59.1% 58.4%
Biomedical products and services..... 63.5 63.6 61.7 64.6 67.5
Selling, general and administrative
expenses:
Research models...................... 12.5% 14.6% 16.5% 11.7% 14.3%
Biomedical products and services..... 16.1 15.8 15.3 13.7 12.1
Operating income:
Research models...................... 21.0% 22.1% 23.0% 29.2% 26.9%
Biomedical products and services..... 18.4 18.3 20.3 18.8 17.2
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 significant customers. 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
19
procedures for isolation rooms and poultry houses designed to further minimize
the risks of 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 six companies. Acquired businesses contributed $47.4 million in sales
in 2000 and $28.2 million in sales for the three months ended March 31, 2001,
representing 15.5% and 28.5% of total sales, respectively. On September 29,
1999, we acquired SBI Holdings, Inc. ("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 have paid $2.0 million in additional
purchase price due to specified financial objectives having been reached by
December 30, 2000. The additional consideration was recorded as additional
goodwill in the year ended December 30, 2000. We have also (a) agreed to pay 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) paid
$2.75 million in retention and non-competition payments as of 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 $35.2 million with respect to this acquisition, consisting
of $25.5 million in cash and a $12.0 million callable convertible note, recorded
net of a discount of $2.3 million.
On February 27, 2001 we acquired Primedica for consideration of
approximately $51.1 million. The consideration was comprised of $25.7 million in
cash, $16.4 million in restricted common stock and $9.0 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 16.0% equity
interest in one of the joint ventures, Charles River Japan, increasing our
ownership interest to 66.0%. The purchase price for the 16.0% 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 3.0% 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 and $11.1 million in sales for the three months
ended March 31, 2001. 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.
20
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 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 "Risk Factors--Tax benefits we expect to be available
in the future may be subject to challenge."
INITIAL PUBLIC OFFERING AND FOLLOW ON 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. As of March 31, 2001, the net proceeds of our follow on offering on
March 21, 2001, were used to repay approximately $12.0 million in outstanding
indebtedness.
21
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net sales for the periods shown:
FISCAL YEAR THREE MONTHS ENDED
------------------------------------ ---------------------
MARCH 25, MARCH 30,
1998 1999 2000 2000 2001
-------- -------- -------- --------- ---------
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of products sold and services provided....... 65.5 63.4 60.9 61.5 63.0
Selling, general and administrative expenses....... 16.6 17.2 16.7 16.3 15.6
Amortization of goodwill and other intangibles..... 0.6 0.8 1.2 1.2 1.8
Interest income.................................... 0.5 0.2 0.5 0.2 0.3
Interest expense................................... 0.2 5.5 13.3 17.5 7.0
Provision for income taxes......................... 6.9 6.7 2.6 3.4 5.6
Earnings from equity investment.................... 0.8 0.9 0.3 0.9 0.1
Minority interests................................. -- -- 0.5 0.3 0.6
----- ----- ----- ----- -----
Net income......................................... 11.4% 7.4% 5.8% 0.9% 7.0%
===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 25, 2000
NET SALES. Net sales for the three months ended March 31, 2001 were
$99.0 million, an increase of $26.5 million, or 36.6%, from $72.5 million for
the three months ended March 25, 2000.
RESEARCH MODELS. Net sales of research models for the three months ended
March 31, 2001 were $49.5 million, an increase of $8.4 million, or 20.4%, from
$41.1 million for the three months ended March 25, 2000. Small animal research
model sales increased in North America by 13.5% due to improved pricing, a shift
to higher priced specialty units and an increase in unit volume. Excluding
negative currency translation of $1.1 million, small animal research model sales
in Europe increased by 13.7%. Small animal research sales in Japan, which we
began consolidating during the first quarter of 2000, were $11.1 million for the
three months ended March 31, 2001. Our large animal breeding and import
conditioning business sales decreased by $2.0 million due to the closure of our
conditioning facility in the U.K. during the second quarter of 2000 and the sale
of our Florida breeding colony, which was sold in the first quarter of 2000.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services for the three months ended March 31, 2001 were $49.5 million, an
increase of $18.1 million, or 57.6%, from $31.4 million for the three months
ended March 25, 2000. We acquired two businesses during the first quarter of
2001, PAI on January 8 and Primedica on February 27, which contributed
$16.1 million of sales in the quarter. On a pro forma basis, giving effect to
the acquisitions, sales of biomedical products and services increased 15.0% over
last year, before the effects of unfavorable currency.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided for the three months ended March 31, 2001 was $62.4 million,
an increase of $17.8 million, or 39.9%, from $44.6 million for the three months
ended March 25, 2000. Cost of products sold and services provided for the three
months ended March 31, 2001 were 63.0% of net sales compared to 61.5% for the
three months ended March 25, 2000.
RESEARCH MODELS. Cost of products sold and services provided for research
models for the three months ended March 31, 2001 was $28.9 million, an increase
of $4.6 million, or 18.9%, compared to $24.3 million for the three months ended
March 25, 2000. Cost of products sold and services provided for the first three
months of 2001 improved to 58.4% of net sales compared to 59.1% of net sales for
the three months ended March 25, 2000. Cost of products sold and services
provided increased at a
22
lower rate than net sales due to a more favorable product mix, improved pricing
and improved capacity utilization.
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services for the three months ended
March 31, 2001 was $33.4 million, an increase of $13.1 million, or 64.5%,
compared to $20.3 million for the three months ended March 25, 2000. Cost of
products sold and services provided as a percentage of net sales increased to
67.5% for the three months ended March 31, 2001 from 64.6% for the three months
ended March 25, 2000. Cost of products sold and services provided increased as a
percentage of sales for the three months ended March 31, 2001 due to the
addition of PAI and Primedica which currently operate at lower gross margins
than the remainder of our biomedical products and services businesses.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2001 were
$15.5 million, an increase of $3.7 million, or 31.4%, from $11.8 million for the
three months ended March 25, 2000. Selling, general and administrative expenses
for the three months ended March 31, 2001 were 15.7% of net sales compared to
16.3% of net sales for the three months ended March 25, 2000.
RESEARCH MODELS. Selling, general and administrative expenses for research
models for the three months ended March 31, 2001 were $7.1 million, an increase
of $2.3 million, or 47.9%, compared to $4.8 million for the three months ended
March 25, 2000. Selling, general and administrative expenses for the three
months ended March 31, 2001 were 14.3% of net sales, compared to 11.7% for the
three months ended March 25, 2000 principally due to a $0.8 million
restructuring charge in France.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services for the three months ended
March 31, 2001 were $6.0 million, an increase of $1.7 million, or 39.5%,
compared to $4.3 million for the three months ended March 25, 2000. Selling,
general and administrative expenses for the three months ended March 31, 2001
decreased to 12.1% of net sales, compared to 13.7% of net sales for the three
months ended March 25, 2000, due to greater economies of scale realized through
our acquisitions of PAI and Primedica.
UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $2.4 million of expense for the
three months ended March 31, 2001 compared to $2.7 million for the three months
ended March 25, 2000 due to pension income from favorable investment returns.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles for the three months ended March 31, 2001 was
$1.8 million, an increase of $0.9 million from $0.9 million for the three months
ended March 25, 2000. The increase was due to the effect of additional
amortization of intangibles resulting from our PAI and Primedica acquisitions.
OPERATING INCOME. Operating income for the three months ended March 31,
2001 was $19.4 million, an increase of $4.2 million, or 27.6%, from
$15.2 million for the three months ended March 25, 2000. Operating income for
the three months ended March 31, 2001 was 19.6% of net sales, compared to 21.0%
of net sales for the three months March 25, 2000. Operating income as a
percentage of net sales decreased due to the additional amortization expense
incurred as a result of our acquisitions and the restructuring charge in France.
RESEARCH MODELS. Operating income from sales of research models for the
three months ended March 31, 2001 was $13.3 million, an increase of
$1.3 million, or 10.8%, from $12.0 million for the three months ended March 25,
2000. Operating income from sales of research models for the three months ended
March 31, 2001 was 26.9% of net sales, compared to 29.2% for the three months
ended March 25, 2000, principally due to the restructuring charge in France.
23
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services for the three months ended March 31, 2001 was
$8.5 million, an increase of $2.6 million, or 44.1%, from $5.9 million for the
three months ended March 25, 2000. Operating income from sales of biomedical
products and services for the three months ended March 31, 2001 decreased to
17.2% of net sales, compared to 18.8% of net sales for the three months ended
March 25, 2000, due to the additional amortization expense resulting from the
acquisitions of PAI and Primedica.
INTEREST EXPENSE. Interest expense for three months ended March 31, 2001
was $7.0 million, compared to $12.7 million for the three months ended
March 25, 2000. The $5.7 million decrease is primarily due to the reduction of
debt in the third quarter of 2000, which was repaid with proceeds from our
June 2000 initial public offering.
OTHER INCOME. During the three months ended March 31, 2001, we received
insurance proceeds relating to damaged production facilities, which resulted in
a net gain of $0.5 million.
INCOME TAXES. The effective tax rate for the three months ended March 31,
2001 of 42.0% compares favorably to the effective tax rate of 92.1% for the
three months ended March 25, 2000. The impact of leverage for the three months
ended March 25, 2000 had an unfavorable effect on our effective tax rate by
lowering our pretax income and increasing the impact of the permanent
differences on the effective tax rate.
INCOME BEFORE THE EXTRAORDINARY LOSS. Income before the extraordinary loss
for the three months ended March 31, 2001 was $7.2 million, an increase of
$6.6 million from $0.6 million for the three months ended March 25, 2000. The
increase is driven by the increase in operating income, the decrease in interest
expense and the decrease in our effective tax rate.
EXTRAORDINARY LOSS. We recorded an extraordinary loss of $0.2 million
during the first quarter of 2001. The pre-tax loss of $0.4 million is the result
of the write off of deferred financing costs associated with the debt
repayments, net of tax benefits of $0.2 million.
NET INCOME. The loss for the three months ended March 31, 2001 was
$7.0 million, an increase of $6.4 million from net income of $0.6 million for
the three months ended March 25, 2000. The increase is attributable to the
factors listed above.
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
24
$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.
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
25
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.
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 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 operating
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
26
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.
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.
27
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.
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.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal sources of liquidity were cash flow from
operations, borrowings under our credit facility and proceeds from equity
offerings.
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 March 31, 2001,
the interest rate on the term A loan facility was 6.84%, the interest rate on
the term B loan facility was 8.84%, the interest rate on the term C loan
facility was 8.46% and there was an aggregate of $129.1 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 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 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.
In the first quarter of 2001, we consummated a public offering of 8,050,000
shares of our common stock, including the underwriters' overallotment option, at
a price of $19.00 per share, of which 4,550,000 shares of common stock were sold
by existing shareholders. We received net proceeds of approximately
$62.2 million, which we used to repay $12.0 million of our bank debt. The
remaining proceeds will be used to repay existing indebtedness.
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.
29
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 25, 2000
Cash and cash equivalents totaled $72.4 million at March 31, 2001 compared
with $33.1 million at December 30, 2000.
Net cash provided by operating activities for the three months ended
March 31, 2001 and March 25, 2000 was $7.8 million and $1.9 million,
respectively. The increase in cash provided by operations is primarily a result
of our improved performance during the first three months of 2001.
Net cash used in investing activities during the three months ended
March 31, 2001 and March 25, 2000 was $55.8 million and $1.8 million,
respectively. The increase in cash used is a result of our business
acquisitions. During the first quarter of 2001, we used net cash of
$51.3 million to acquire PAI and Primedica. In the first quarter of 2000, we
used net cash of $6.0 million to acquire an additional 16% of equity in Charles
River Japan. Also, in order to grow our existing businesses, we have incurred
capital expenditures for the three month periods ended March 31, 2001 and
March 30, 2000 of $4.3 million and $2.8 million, respectively.
Net cash provided by/used in financing activities during the three months
ended March 31, 2001 and March 25, 2000 were $88.7 provided by and $3.7 million
used in, respectively. During March 2001, we consummated a public offering which
netted $62.2 million in proceeds. We used $12.0 million of the proceeds to repay
part of our bank financing. We plan to use the remaining proceeds to repay
portions of our existing debt. Also, we received $40.0 million from our bank
financing which was used to purchase PAI and Primedica.
We anticipate that our operating cash flow, along 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 2000 COMPARED TO FISCAL 1999
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 16.0% 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
30
$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 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.
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.
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 50.0% 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 $1.5 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.
31
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. For the three months
ended March 31, 2001, our net sales were $99.0 million, and our operating income
was $19.4 million.
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 and 50.0% of
our net sales for the three months ended March 31, 2001. 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 50.0% of our net
sales for the three months ended March 31, 2001. We have experienced strong
growth in biomedical products and services 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.
32
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.
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 more than 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.
33
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. Our management team owns or has options to acquire securities
representing approximately 4.6% of our equity on a fully diluted basis before
giving effect to this offering.
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
34
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.
RESEARCH MODELS
Research models is our historical core business and accounted for 61.2% of
our 2000 net sales and 50.0% of our net sales for the three months ended
March 31, 2001. 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
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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.
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
- --------------------------- --------------------------- --------------------------- ---------------------------
- - 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.
36
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 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
37
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 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. 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.
38
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.
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 30.0% of our 2000 net sales, and approximately 24.0% of our net sales for
the three months ended March 31, 2001, with no individual customer accounting
for more than 3.0% of net sales.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell our products and services principally through our direct sales
force. As of March 31, 2001, we had approximately 74 employees engaged in field
sales, of which 41 were in the United States, 21 were in Europe and 12 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 prospectus.
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, $0.9 million in 2000
and $0.2 million for the three months ended March 31, 2001. 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
39
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 March 31, 2001, we had more than 4,000 employees, including more than
200 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.
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.
ENVIRONMENTAL MATTERS; 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.
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.
40
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 USDA, which
enforces the AWA, is presently considering changing the regulations issued under
the AWA, in light of judicial action, to include rats, mice and chickens within
its coverage. 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.
41
PROPERTIES
The following charts provide summary information on our properties. The
first chart lists the sites we own, and the second chart lists 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, Laboratory
Spain................................ 1 3,228 Office, Production
Sweden............................... 1 8,072 Sales Office
United States........................ 23 586,345 Office, Production, Laboratory
-- ---------
Total................................ 37 700,291
== =========
42
MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
NAME AGE POSITION
- ---- -------- ------------------------------------------
James C. Foster........................... 50 Chairman, Chief Executive Officer,
President and Director
Thomas F. Ackerman........................ 46 Senior Vice President and Chief Financial
Officer
David P. Johst............................ 39 Senior Vice President, Human Resources and
Administration
Real H. Renaud............................ 54 Senior Vice President and General Manager,
European and North American Animal
Operations
Dennis R. Shaughnessy..................... 43 Senior Vice President, Corporate
Development, General Counsel and Secretary
Julia D. Palm............................. 53 Senior Vice President and General Manager,
Biomedical Products and Services
Robert Cawthorn........................... 65 Director
Stephen D. Chubb.......................... 57 Director
Thompson Dean............................. 43 Director
Stephen C. McCluski....................... 48 Director
Reid S. Perper............................ 41 Director
Douglas E. Rogers......................... 46 Director
Samuel O. Thier........................... 63 Director
William Waltrip........................... 63 Director
Henry Wendt III........................... 67 Director
JAMES C. FOSTER joined us in 1976 as General Counsel. Over the past
25 years, Mr. Foster has held various staff and managerial positions, with
Mr. Foster being named our President in 1991, our Chief Executive Officer in
1992 and our Chairman in 2000. Mr. Foster also serves on the Board of Directors
of BioTransplant, Inc. Mr. Foster received a B.A. from Lake Forest College, a
M.S. from the Sloan School of Management at the Massachusetts Institute of
Technology, and a J.D. from Boston University School of Law.
THOMAS F. ACKERMAN joined us in 1988 with over 11 years of combined public
accounting and international finance experience. He was named Controller, North
America in 1992 and became our Vice President and Chief Financial Officer in
1996. In 1999, he was named a Senior Vice President. He is currently responsible
for overseeing our Accounting and Finance Department, as well as our Information
Technology Group. Prior to joining us, Mr. Ackerman was an accountant at Arthur
Anderson & Co. Mr. Ackerman received a B.S. in Accounting from the University of
Massachusetts and is a certified public accountant.
DAVID P. JOHST joined us in 1991 as Corporate Counsel and was named Vice
President, Human Resources in 1995. He became Vice President, Human Resources
Administration in 1996, and a Senior Vice President in 1999. He is responsible
for overseeing our Human Resources Department, as well as several other
corporate staff departments. He also serves as our counsel on labor relations
matters. Prior to joining us, Mr. Johst was a corporate associate at Boston's
Hale and Dorr. Mr. Johst is a graduate of Dartmouth College, holds an M.B.A.
from Northeastern University and received his J.D. from Harvard University Law
School.
43
REAL H. RENAUD joined us in 1964 and has 35 years of small animal production
and related management experience. In 1986, Mr. Renaud became our Vice President
of Production, with responsibility for overseeing our North American small
animal operations, and was named Vice President, Worldwide Production in 1990.
Mr. Renaud became Vice President and General Manager, European and North
American Animal Operations in 1996, following a two-year European assignment
during which he provided direct oversight to our European operations. In 1999 he
became a Senior Vice President. Mr. Renaud attended Columbia University's
executive education program, and has also studied at the Lyon Veterinary School
and the Montreal Business School.
DENNIS R. SHAUGHNESSY joined us in 1988 as Corporate Counsel and was named
Vice President, Business Affairs in 1991. He became Vice President, Corporate
Development and General Counsel in 1994 and is responsible for overseeing our
business development initiatives on a worldwide basis, as well as handling our
overall legal affairs. He became a Senior Vice President in 1999.
Mr. Shaughnessy also serves as our Corporate Secretary. Prior to joining us,
Mr. Shaughnessy was a corporate associate at Boston's Testa, Hurwitz & Thibeault
and previously served in government policy positions. Mr. Shaughnessy has a B.A.
from The Pennsylvania State University, an M.S. from The University of Michigan,
an M.B.A. from Northeastern University, and a J.D. from The University of
Maryland School of Law.
JULIA D. PALM joined us in 1995 with nearly 20 years of management and
marketing experience in the medical device and biotechnology industries. She
became a Senior Vice President in 2001. Prior to joining us, she held various
marketing positions with Becton Dickinson, National Medical Care and W.R. Grace,
and served as President of W.R. Grace's Amicon Division immediately prior to
joining us. Ms. Palm has responsibility for overseeing a portfolio of most of
our biomedical products and services companies on a worldwide basis. Ms. Palm
holds a B.A. in Biology from Denison University, and an M.B.A. from Fairleigh
Dickinson University.
ROBERT CAWTHORN retired on June 30, 2001 as an independent consultant to
Global Health Care Partners, a group at DLJ Merchant Banking, Inc., having been
a Managing Director from 1997 to 1999. Mr. Cawthorn was Chief Executive Officer
and Chairman of Rhone-Poulenc Rorer Inc. until May 1996. Further, he previously
served as an executive officer of Pfizer International and was the first
President of Biogen Inc. Mr. Cawthorn serves as Chairman of Actelion Ltd. and
NextPharma Technologies S.A. and also serves as a director of H(2)O
Technologies, Inc, PharmaNet Inc. and PharmaMarketing Ltd.
STEPHEN D. CHUBB has been Chairman, Director and Chief Executive Officer of
Matritech, Inc. since its inception in 1987. Previously, Mr. Chubb served as
President and Chief Executive Officer of T Cell Sciences, Inc. and as President
and Chief Executive Officer of Cytogen Company. Mr. Chubb serves as a director
of i-Stat Corporation and CompuCyte Corp.
THOMPSON DEAN has been a Managing Partner of DLJ Merchant Banking, Inc.
since November 1996. Previously, Mr. Dean was a Managing Director of DLJ
Merchant Banking, Inc. and its predecessor since January 1992. Mr. Dean serves
as a director of Von Hoffmann Press, Inc., Manufacturer's Services Limited,
Phase Metrics, Inc., AKI Holdings Corp., Amatek Ltd., DeCrane Aircraft
Holdings Inc., Insilco Holding Corporation, Formica Corporation and Mueller
Group, Inc.
STEPHEN C. MCCLUSKI has been Senior Vice President and the Chief Financial
Officer of Bausch & Lomb Incorporated since 1995. Previously, Mr. McCluski had
served as Vice President and Controller of Bausch & Lomb Incorporated and
President of Outlook Eyewear Company. Since 2000, Mr. McCluski has been a
director of Control Delivery Systems, Inc.
REID S. PERPER has been a Managing Director of DLJ Merchant Banking, Inc.
since January 2000. Mr. Perper was a Principal of DLJ Merchant Banking, Inc.
from 1996 to January 2000 and a Vice President from 1993 to 1996. Mr. Perper was
formerly a director of IVAC Holdings, Inc. and Fiberite Holdings, Inc.
44
DOUGLAS E. ROGERS has been a Managing Director of Global Health Care
Partners since 1996. Previously, Mr. Rogers was a Vice President at Kidder
Peabody & Co., Senior Vice President at Lehman Brothers, and head of U.S.
Investment Banking at Baring Brothers. Mr. Rogers serves as a director of
Computerized Medical Systems, Inc. and Wilson Greatbatch Ltd.
SAMUEL O. THIER has been Chief Executive Officer of Partners HealthCare
System, Inc. since July 1996 and President of Partners HealthCare System since
1994. Previously, he served as President of The Massachusetts General Hospital
from 1994 through 1997. He has served as President of the Institute of Medicine
of the National Academy of Sciences and Chairman of the American Board of
Internal Medicine, and he is a Fellow of the American Academy of Arts and
Sciences. He is a director of Merck & Co., Inc. and Pranalytica, Inc.
WILLIAM WALTRIP has been a director of Bausch & Lomb Incorporated since
1985, and Chairman of the Board of Directors of Technology Solutions Company
since 1993. Previously, Mr. Waltrip served as Chairman and Chief Executive
Officer of Bausch & Lomb Incorporated, as Chief Executive Officer of Technology
Solutions Company, as Chairman and Chief Executive Officer of Biggers
Brothers, Inc., and as Chief Operating Officer of IU International Corporation.
He was also previously President and Chief Executive Officer and a director of
Purolator Courier Corporation. He is a director of Teachers Insurance and
Annuity Association and Thomas & Betts Corporation and Technology Solutions
Company.
HENRY WENDT III served as Chairman of Global Health Care Partners from 1996
until January 2001. Previously, Mr. Wendt was Chairman of SmithKline Beecham
Corporation and President and Chief Executive Officer of SmithKline Beckman
Corp. prior to its merger with Beecham and served as founder and First Chairman
of Pharmaceutical Partners for Better Health Care. Mr. Wendt serves as a
director of Computerized Medical Systems, The Egypt Investment Company, Focus
Technologies, West Marine Products and Wilson Greatbatch Ltd.
Each of our directors serves until the next annual meeting of stockholders
and until a successor is duly elected and qualified or until his earlier death,
resignation or removal. All members of our board of directors, other than
Mr. Thier, were elected at the time of the recapitalization pursuant to the
investors' agreement that was entered into in connection with that transaction.
See "Relationships and Transactions with Related Parties--Investors' Agreement."
Mr. Thier was elected as a director in April 2000. There are no family
relationships between any of our directors or executive officers. Our executive
officers are elected by, and serve at the discretion of, the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and a compensation committee.
The board may also establish other committees to assist in the discharge of its
responsibilities.
The audit committee makes recommendations to the board of directors
regarding the independent accountants to be nominated for election by the
stockholders and reviews the independence of such accountants, approves the
scope of the annual audit activities of the independent accountants, approves
the audit fee payable to the independent accountants and reviews such audit
results with the independent accountants. The audit committee is currently
comprised of Messrs. Chubb, Thier and Waltrip. PricewaterhouseCoopers LLP
presently serves as our independent accountants.
The duties of the compensation committee are to provide a general review of
our compensation and benefit plans to ensure that they meet corporate
objectives. In addition, the compensation committee reviews the chief executive
officer's recommendations on compensation of all of our officers and adopting
and changing major compensation policies and practices, and reports its
recommendations to the entire board of directors for approval and authorization.
The compensation committee also administers our stock plans. The compensation
committee is currently comprised of Messrs. Cawthorn, Dean, Waltrip and Wendt.
45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
SELLING STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
our common stock as of June 18, 2001 and as adjusted to reflect the sale of the
shares offered by us and the selling stockholders in this offering:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
- each director and named executive officer; and
- all directors and executive officers as a group.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of June 18, 2001, to be outstanding, but we have not deemed these
shares to be outstanding for computing the percentage ownership of any other
person. To our knowledge, except as set forth in the footnotes below, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by that
stockholder. Beneficial ownership percentage is based on 40,207,333 shares of
our common stock outstanding as of June 18, 2001 and 42,207,333 shares of our
common stock outstanding after completion of this offering. The following table
assumes no exercise of the underwriters' over-allotment option to purchase up to
an additional 1,200,000 shares of common stock from the selling stockholders on
a pro rata basis.
The address for each listed director and officer is c/o Charles River
Laboratories International, Inc., 251 Ballardvale Street, Wilmington, MA 01887.
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF SHARES ----------------------------
NUMBER OF SHARES NUMBER OF SHARES BENEFICIALLY OWNED BEFORE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEING OFFERED AFTER OFFERING OFFERING AFTER OFFERING
- ------------------------ ------------------ ---------------- ------------------ -------- --------------
DLJMB Related Entities(1)
DLJ Merchant Banking Partners
II, L.P.................... 5,669,354 1,848,801 3,820,553 14.1% 9.1%
DLJ Merchant Banking Partners
II-A, L.P.................. 225,772 73,625 152,147 * *
DLJ Offshore Partners II,
C.V........................ 278,777 90,910 187,867 * *
DLJ Diversified Partners
L.P........................ 331,451 108,088 223,363 * *
DLJ Diversified Partners-A,
L.P........................ 123,085 40,139 82,946 * *
DLJMB Funding II, Inc........ 1,130,771 368,749 762,022 2.8 1.8
DLJ Millennium Partners,
L.P........................ 91,663 29,892 61,771 * *
DLJ Millennium
Partners-A,L.P............. 17,879 5,830 12,049 * *
DLJ EAB Partners, L.P........ 25,471 8,306 17,165 * *
DLJ Investment Partners,
L.P........................ 1,425,065 464,720 960,345 3.5 2.3
DLJ Investment Funding,
Inc........................ 203,071 66,222 136,849 * *
DLJ First ESC L.P............ 991,335 22,944 968,391 2.5 2.3
DLJ ESC II, L.P.............. 1,285,869 386,814 899,055 3.2 2.1
DLJ Capital Corporation...... 2,131 695 1,436 * *
Sprout Capital VIII L.P...... 638,759 208,302 430,457 1.6 1.0
Sprout Venture Capital
L.P........................ 38,325 12,498 25,827 * *
---------- ---------- ---------- ----- -----
12,478,778(1)(2) 3,736,535(1) 8,742,243(1) 31.0%(1)(2) 20.7%
(CONTINUE ON NEXT PAGE)
46
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF SHARES ----------------------------
NUMBER OF SHARES NUMBER OF SHARES BENEFICIALLY OWNED BEFORE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEING OFFERED AFTER OFFERING OFFERING AFTER OFFERING
- ------------------------ ------------------ ---------------- ------------------ -------- --------------
Bausch & Lomb
Incorporated(4).............. 1,939,586 632,507 1,307,079 4.8% 3.1%
Brown Brothers Harriman &
Co.(5)....................... 587,839 191,697 396,142 1.5 *
Carlyle High Yield Partners,
L.P.(5)(3)................... 223,183 72,781 150,402 * *
TSI Corporation................ 658,945 658,945 -- 1.6 --
TCW Related Entities...........
TCW/Crescent Mezzaine Trust
II......................... 111,849 88,427 23,422 * *
TCW/Crescent Mezzaine
Partners II, L.P........... 461,428 364,799 96,629 1.1 *
TCW Leveraged Income Trust,
L.P........................ 53,745 42,490 11,255 * *
TCW Leveraged Income Trust
II, L.P.................... 53,745 42,490 11,255 * *
Crescent/Mach I Partners,
L.P........................ 35,831 28,327 7,504 * *
---------- ---------- ---------- ----- -----
716,598 566,533 150,065 1.8 *
James C. Foster(8)............. 567,839 50,000 517,839 1.4 1.2
Real H. Renaud(8).............. 145,172 25,000 120,172 * *
Dennis R. Shaughnessy(8)....... 128,251 20,000 108,251 * *
David P. Johst(8).............. 147,831 5,000 142,831 * *
Thomas F. Ackerman(8).......... 117,753 20,000 97,753 * *
Julia Palm(8).................. 68,876 3,000 65,876 * *
Robert Cawthorn................ -- -- -- -- --
Stephen D. Chubb(8)............ 38,773 -- 38,773 * --
Thompson Dean(6)............... -- -- -- --
Stephen C. McCluski(4)......... 1,939,586 632,507 1,307,079 4.8 3.1
Reid S. Perper(6).............. -- -- -- -- --
Douglas E. Rogers(6)........... -- -- -- -- --
Samuel O. Thier(8)............. 21,300 -- 21,300 * *
William Waltrip(8)............. 38,773 -- 38,773 * *
Henry Wendt III(6)............. -- -- -- -- --
Christophe Berthoux(7)(8)...... 59,043 5,000 54,043 * *
Jorg H. Geller(8).............. 56,156 8,000 48,156 * *
Charn Lee(8)................... 26,341 5,000 21,341 * *
Officers and directors as a
group........................ 3,355,694 773,507 2,582,187 8.3% 6.1%
========== ========== ========== ===== =====
- ------------------------------
* Less than 1%.
(1) See "Relationships and Transactions with Related Parties." The address of
each of these investors is 11 Madison Avenue, 16th Floor, New York, New York
10010, except the address of Offshore Partners is John B. Gorsiraweg 14
Willemstad, Curacao, Netherlands Antilles and the address of DLJ Capital
Corp., Sprout Capital VIII L.P. and Sprout Venture Capital LP. is 277 Park
Avenue, New York, New York 10172.
(2) Includes 1,685,050 shares of common stock underlying currently exercisable
warrants owned by DLJMB Funds and affiliates.
(3) Includes 97,363 shares of common stock underlying currently exercisable
warrants owned by Carlyle High Yield Partners.
(4) Represents shares beneficially owned by B&L through a wholly owned
subsidiary. Mr. McCluski is Senior Vice President and Chief Financial
Officer of Bausch & Lomb Incorporated.
(5) Represents shares beneficially owned through wholly owned subsidiaries.
(6) Messrs. Dean, Perper, Rogers and Wendt are officers of DLJ Merchant
Banking, Inc., an affiliate of the DLJMB Funds. Messrs. Dean, Perper, Rogers
and Wendt disclaim beneficial ownership with respect to the shares held by
the DLJMB Funds. The address of each of these investors is 11 Madison
Avenue, New York, New York 10010.
(7) Vice President, Charles River Europe.
(8) Includes shares of common stock subject to options that are exercisable
within 60 days from June 18, 2001.
47
RELATIONSHIPS AND TRANSACTIONS WITH RELATED PARTIES
FINANCIAL ADVISORY FEES AND AGREEMENTS
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of each of
the DLJMB Funds and Credit Suisse First Boston Corporation, received customary
fees and expense reimbursement for its services as financial advisor for the
recapitalization and as the initial purchaser of the units. DLJ Capital Funding,
an affiliate of each of the DLJMB Funds and Credit Suisse First Boston
Corporation, received customary fees and reimbursement of expenses in connection
with the arrangement and syndication of our credit facility and as a lender
under the facility. The aggregate amount of all fees paid to the DLJ entities in
connection with the recapitalization and the related financing was approximately
$13.2 million plus out-of-pocket expenses. We paid a fee to the lenders under
our existing credit facility, including DLJ Capital Funding, in connection with
amendments to that facility and to DLJ Capital Funding for an irrevocable
commitment to provide us with a new credit facility. Credit Suisse First Boston,
New York branch, is an affiliate of DLJ Capital Funding and has assumed such
commitment to provide us with a new credit facility. The aggregate fees payable
to DLJ Capital Funding in connection with such consent and commitment were
approximately $1.1 million. DLJ Securities Corporation, whose corporate parent
was recently acquired by Credit Suisse Group, of which Credit Suisse First
Boston Corporation is an indirect subsidiary, was an underwriter in our initial
public offering and the follow on offering in March, 2001 and received customary
fees of approximately $7.8 million, and DLJDIRECT, Inc., an affiliate of DLJ
Securities Corporation and Credit Suisse First Boston Corporation, was an
underwriter and received fees of approximately $0.11 million. We also paid a
premium of approximately $24.5 million to DLJMB and other investors for early
repayment of our senior discount debentures due 2010. Credit Suisse First Boston
Corporation is acting as a managing underwriter in this offering and will
receive the fees and expense reimbursement described under "Underwriting" for
its services.
Under the investors' agreement described below, for a period of five years
from the date of the investors' agreement, we have agreed to engage Credit
Suisse First Boston Corporation or its affiliates as our exclusive financial and
investment banking advisor. We expect that Credit Suisse First Boston
Corporation or such affiliate will receive customary fees for such services
rendered and will be entitled to reimbursement for all reasonable disbursements
and out-of-pocket expenses incurred in connection with any such engagement. We
expect that any such arrangement will include provisions for the indemnification
of Credit Suisse First Boston Corporation against some liabilities, including
liabilities under the federal securities laws.
CRL ACQUISITION LLC
Effective June 21, 2000, our current stockholders, including CRL Acquisition
LLC, transferred all of their shares to us in exchange for newly issued shares
of our common stock. Each old share was exchanged for 1.927 new shares.
Immediately thereafter as part of that transaction and prior to our initial
public offering, CRL Acquisition LLC terminated its existence as a corporation
for tax purposes and distributed a substantial portion of these shares to its
limited liability company unit holders. As of July 2, 2001 all of its remaining
shares were distributed to the limited liability company unit holders.
INVESTORS' AGREEMENT
Our company, CRL Acquisition LLC, CRL Holdings, Inc. (a subsidiary of B&L),
management and other of our investors are parties to an investors' agreement
entered into in connection with the recapitalization and amended on June 20,
2000. The investors' agreement provides, among other things, that any person
acquiring shares of our common stock who is required by the investors' agreement
or by any other agreement or plan of our company to become a party to the
investors' agreement will execute an agreement to be bound by the investors'
agreement.
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The terms of the investors' agreement restrict transfers of the shares of
our common stock by CRL Holdings Inc., management and some other investors and
some future shareholders. The agreement provides for, among other things:
- the ability of some shareholders to participate in particular sales of our
shares;
- the ability of DLJMB Funds or CRL Acquisition LLC to require the other
shareholders to sell shares of our common stock held by them in particular
circumstances if the DLJMB Funds or CRL Acquisition LLC choose to sell
shares owned by them;
- some registration rights with respect to shares of our common stock,
including rights to indemnification against some liabilities, including
liabilities under the Securities Act; and
- pre-emptive rights of all the parties, other than CRL Acquisition LLC and
its permitted transferees, to acquire its pre-emptive portion of our
common stock in particular instances when we propose to issue common
stock.
The investors' agreement also provides that our Board of Directors will
consist of at least nine but no more than 12 members, seven of whom (including
the chairman) will be appointed by DLJ Merchant Banking Partners II, L.P. for so
long as the aggregate number of shares of our common stock held by the DLJMB
Funds is at least 10% of the initial aggregate number of shares purchased by the
DLJMB Funds in the recapitalization. The investors' agreement also provides that
B&L CRL, Inc. has the right to appoint one director and that the chief executive
officer appointed by the board will serve as a director.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
In connection with the recapitalization, some of our officers purchased
units of CRL Acquisition LLC, some of whom also borrowed funds up to a maximum
aggregate amount of $1.3 million from DLJ Inc. secured by their units. James C.
Foster borrowed $300,000 and each of Real H. Renaud, Thomas F. Ackerman and
Dennis R. Shaughnessy borrowed $200,000. Two weeks after the consummation of the
recapitalization, the loans matured and were repaid. Following the repayment,
the officers borrowed from us and the following amounts are currently
outstanding: Mr. Renaud ($81,943), Mr. Shaughnessy ($95,600) and Mr. Ackerman
($95,600). The loans mature in 10 years and interest accrues at 6.75%, the
applicable federal rate. Each loan is fully recourse to the officer. Each note
accelerates upon the termination of the borrower's employment with us for any
reason.
REPAYMENT OF NOTES AND DEBENTURES
In the third quarter of 2000 we repaid to Bausch & Lomb $46,884,000 in
subordinated discount notes which were issued in connection with the
recapitalization transaction. In addition, also in the third quarter of 2000, we
repaid a total of $66,792,000 (including a $24,444,000 premium for early
extinguishment) to the DLJMB funds to extinguish senior discount debentures
issued in connection with the recapitalization.
49
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 120,000,000 shares of common stock, $.01 par value per
share, and 20,000,000 shares of preferred stock to be issued from time to time
in one or more series, with such designations, powers, preferences, rights,
qualifications, limitations and restrictions as our board of directors may
determine. As of March 31, 2001, we had outstanding 40,127,642 shares of common
stock and no shares of preferred stock.
After giving effect to this offering, we will have 42,207,333 shares of
common stock outstanding and no other shares of any series of preferred stock
outstanding. As of March 31, 2001, we had outstanding options to purchase
2,232,822 shares of our common stock, of which 662,451 were currently
exercisable. The following summary of provisions of our capital stock describes
all material provisions of, but does not purport to be complete and is subject
to, and qualified in its entirety by, our restated certificate of incorporation
and our amended and restated by-laws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our common stock are entitled
to share equally, share for share, if dividends are declared on our common
stock, whether payable in cash, property or our securities. The shares of common
stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to share equally, share for share, in our assets which are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of any holders of any series of preferred stock then
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative voting.
Except as otherwise required by law or the restated certificate, the holders of
common stock vote together as a single class on all matters submitted to a vote
of stockholders.
Our common stock is listed on the New York Stock Exchange under the symbol
"CRL."
PREFERRED STOCK
Our board of directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of preferred stock in series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment of
dividends on shares of common stock. Holders of shares of preferred stock may be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding-up of our company before any payment is made to the
holders of shares of common stock. In some circumstances, the issuance of shares
of preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in office,
our board of directors, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock.
We have no current intention to issue any of our unissued, authorized shares
of preferred stock. However, the issuance of any shares of preferred stock in
the future could adversely affect the rights of the holders of common stock.
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WARRANTS
As of March 31, 2001, we had outstanding warrants to purchase 1,139,551
shares of common stock at an exercise price of $5.19 per share, subject to
customary antidilution adjustment. The warrants are exercisable at any time on
or after October 21, 2001. Unless exercised, the warrants will automatically
expire at 5:00 p.m., New York City time, on October 1, 2009. The warrant
agreement related to these warrants contains an error in that it fails to
provide that the warrants cannot be exercised prior to October 21, 2001. We have
notified the warrant agent of this error and instructed it not to permit
exercises prior to October 21, 2001. Nonetheless, we cannot assure you that a
holder of these warrants could not successfully exercise these warrants prior to
October 21, 2001.
As of March 31, 2001, we also had outstanding warrants to purchase 1,782,436
shares of common stock at an exercise price of not less than $0.01 per share
subject to customary antidilution provisions (which differ in some respects from
those contained in the above warrants) and other customary terms. These warrants
are exercisable at any time prior to 5:00 p.m., New York City time, on April 1,
2010.
REGISTRATION RIGHTS
Pursuant to the Investors' Agreement, we granted holders of approximately
17,000,000 shares of our common stock demand registration rights to cause us to
file a registration statement under the Securities Act covering resales of their
shares. In addition, in connection with our acquisition of PAI and our
acquisition of Primedica, we have granted the sellers registration rights with
respect to shares of common stock issuable in connection with such acquisitions.
We also have granted holders of approximately 23,600,000 shares of our common
stock "piggyback" registration rights to include their shares in a registration
of securities by us, subject to the right of the managing underwriter of the
offering to exclude some or all of the shares if and to the extent their
inclusion would adversely affect the marketing of the shares being offered by
us. The DLJMB Funds are entitled to particular registration rights related to
their warrants. We have agreed to indemnify all holders whose shares are
registered pursuant to exercise of these rights against specified liabilities,
including liabilities under the Securities Act, and to pay their expenses in
connection with these registrations.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who,
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together with affiliates and associates, owns 15% or more of a corporation's
voting stock or within three years did own 15% or more of a corporation's voting
stock. The statute could prohibit or delay mergers or other takeover or change
in control attempts.
CHARTER AND BYLAW PROVISIONS RELATING TO CHANGES IN CONTROL
Our Certificate of Incorporation and Bylaws contain provisions that could
have the effect of delaying, deterring, or preventing the acquisition of control
of us by means of tender offer, open market purchases, proxy contest or
otherwise. Set forth below is a description of those provisions.
SPECIAL MEETINGS OF STOCKHOLDERS. Our Certificate of Incorporation provides
that special meetings of stockholders may be called only by (1) the Chairman of
the Board of Directors, (2) the Chief Executive Officer (or, if there is no
Chief Executive Officer, the President) or (3) by the Board of Directors,
pursuant to a written resolution passed by a majority of the total number of
directors then in office. Stockholders are not permitted to call a special
meeting or to require that the Board of Directors call a special meeting. The
business permitted to be conducted at any special meeting of stockholders is
limited to matters relating to the purposes stated in the notice of meeting.
Accordingly, a stockholder could not force stockholder consideration of a
proposal over the opposition of the Board of Directors by calling a special
meeting of stockholders prior to the next annual meeting or prior to such time
that the Board of Directors believes such consideration to be appropriate. This
change limits a potential acquirer's ability to choose an advantageous time to
launch a takeover bid.
NO ACTION BY STOCKHOLDER CONSENT. Our bylaws provide that actions required
or permitted to be taken at any annual or special meeting of the stockholders
may not be taken by written consent of the stockholders. This provision prevents
the holders of the requisite voting power of our common stock from using the
written consent procedure to take stockholder action without a meeting. This
provision may effectively deter or delay certain actions by a person or a group
acquiring a substantial percentage of our stock, even though such actions might
be desired by, or be beneficial to, the holders of a majority of our common
stock.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, our restated certificate of incorporation provides that we will
indemnify our directors and officers to the fullest extent permitted by such
law. We are entering into indemnification agreements with our current directors
and executive officers prior to the completion of the offering and expect to
enter into a similar agreement with any new directors or executive officers. We
expect to obtain directors' and officers' insurance prior to the completion of
this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market
after this offering could adversely affect the prevailing market price of our
common stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
42,207,333 shares of our common stock, assuming no exercise of outstanding
options and warrants. Of these shares, all shares previously sold in registered
offerings, including the 16,100,000 shares sold in our initial public offering,
8,050,000 in the follow on offering, and all of the shares sold in this
offering, will be freely tradable without restriction or further registration
under the Securities Act, unless the shares are purchased by "affiliates" as
that term is defined in Rule 144 under the Securities Act. Any shares purchased
by an affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144 of the Securities Act. The remaining shares of common stock held
by existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. These restricted securities may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities Act.
These rules are summarized below.
In connection with this offering, persons owning an aggregate of
11,808,409 shares of our common stock after this offering have agreed with the
underwriters that, subject to exceptions, they will not sell or dispose of any
of their shares for 90 days after the date of this prospectus. Credit Suisse
First Boston Corporation may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to such restrictions.
The shares of common stock outstanding upon closing of this offering will be
available for sale in the public market as follows:
APPROXIMATE
NUMBER OF SHARES DESCRIPTION
---------------- -----------
30,398,924 After the date of this prospectus, including 8,000,000
freely tradable shares sold in this offering.
11,808,409 After 90 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144 (subject, in some cases, to volume limitations).
In addition, after the offering there will be outstanding options to
purchase 2,147,896 shares of common stock and outstanding warrants to purchase
an aggregate of 2,921,987 shares of common stock. In addition, in connection
with our acquisition of PAI we issued a note convertible into 128,315 common
shares.
LOCK-UP AGREEMENTS
We, our executive officers, directors, and certain of our existing
stockholders and optionholders have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of our common stock for a period of 90 days
after the date of this prospectus without the prior written consent of Credit
Suisse First Boston Corporation, except, in the case of the company, for the
shares of common stock to be issued in connection with the offering or pursuant
to employee benefit plans existing on the date of this prospectus or sales or
dispositions to our company, permitted transfers to related parties that agree
to be bound by the foregoing restrictions, and permitted sales of shares
acquired in the open market following the completion of the offering. During
this period we may grant stock awards under the 1999 management incentive plan,
2000 incentive plan and 2000 directors stock plan and we may also issue shares
of common stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and in connection with acquisitions.
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RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year from the
later of the date those shares of common stock were acquired from us or from an
affiliate of ours would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 402,073 shares prior to this offering and
422,073 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the NYSE during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of the date
such shares of common stock were acquired from us or from an affiliate of ours,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell those shares in reliance on Rule 144, but without compliance with some
of the restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market pursuant
to Rule 144 or Rule 701 because this will depend on the market price of our
common stock, the personal circumstances of the sellers and other factors.
Nevertheless, sales of significant amounts of our common stock in the public
market could adversely affect the market price of our common stock.
STOCK PLANS
We have filed a registration statement under the Securities Act covering
5,673,384 shares of common stock reserved for issuance under our 2000 incentive
plan, 1999 management incentive plan and 2000 directors stock plan.
As of March 31, 2001, there were options to purchase 1,716,697 shares
outstanding under our 1999 management incentive plan, 456,125 options
outstanding under our 2000 management incentive plan and 60,000 options under
our 2000 directors stock plan. All of these shares will be eligible for sale in
the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and, in the case of some of the
options, the expiration of lock-up agreements and the investors' agreement.
54
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a non-U.S. holder. In general, a non-U.S. holder is:
- an individual who is a nonresident alien of the U.S.;
- a corporation or other entity taxed as a corporation organized or created
under non-U.S. law;
- an estate that is not taxable in the U.S. on its worldwide income; or
- a trust that is either not subject to primary supervision over its
administration by a U.S. court or not subject to the control of a U.S.
person with respect to substantial trust decisions.
If a partnership holds common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.
If you are an individual, you may, in many cases, be deemed to be a resident
alien, as opposed to a nonresident alien, by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar year
(counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal income tax as if they were U.S. citizens.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "CODE") and administrative interpretations of the Code as of the date of
this prospectus, all of which are subject to change, including changes with
retroactive effect.
This discussion does not address all aspects of U.S. federal taxation, and
in particular is limited in the ways that follow:
- the discussion assumes that you hold your common stock as a capital asset
and that you do not have a special tax status.
- the discussion does not consider tax consequences that depend upon your
particular tax situation in addition to your ownership of the common
stock.
- the discussion does not consider special tax provisions that may be
applicable to you if you have relinquished U.S. citizenship or residence.
- the discussion does not cover state, local or foreign law, and
- we have not requested a ruling from the Internal Revenue Service ("IRS")
on the tax consequences of owning the common stock. As a result, the IRS
could disagree with portions of this discussion.
Each prospective purchaser of common stock is advised to consult a tax
advisor with respect to current and possible future tax consequences of
purchasing, owning and disposing of our common stock as well as any tax
consequences that may arise under the laws of any United States state,
municipality or other taxing jurisdiction.
DISTRIBUTIONS
Distributions paid on the shares of common stock generally will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. To the extent that the amount of any
55
distributions exceeds our current and accumulated earnings and profits for a
taxable year, the distribution first will be treated as a tax-free return of
your basis in the shares of common stock, causing a reduction in the adjusted
basis of the common stock, and the balance in excess of adjusted basis will be
taxed as capital gain recognized on a disposition of the common stock (as
discussed below).
As discussed under "Common Stock Price Ranges and Dividends," we do not
currently expect to pay dividends. In the event that we do pay dividends,
subject to the discussion below, dividends paid to a non-U.S. holder of common
stock generally will be subject to withholding tax at a 30% rate or a reduced
rate specified by an applicable income tax treaty. A non-U.S. holder generally
must file IRS Form W-8BEN to certify its entitlement to the benefit of a reduced
rate of withholding under an income tax treaty. If common stock is held through
a foreign partnership or a foreign intermediary, the partnership or
intermediary, as well as the partners or beneficial owners, may need to meet
certification requirements.
The withholding tax does not apply to dividends paid to a non-U.S. holder
that provides a Form W-8ECI certifying that the dividends are effectively
connected with the non-U.S. holder's conduct of a trade or business within the
United States. Instead, the effectively connected dividends generally will be
subject to regular U.S. income tax as if the non-U.S. holders were a U.S.
resident. If the non-U.S. holder is eligible for the benefits of a tax treaty
between the U.S. and the holder's country of residence, any effectively
connected income will be subject to U.S. federal income tax only if it is
attributable to a permanent establishment in the U.S. maintained by the holder
and such treaty-based tax position is disclosed to the IRS. A non-U.S.
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" imposed at a rate of 30% (or a lower treaty
rate) on an earnings amount that is net of the regular tax.
You may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
on gain realized on a sale or other disposition of common stock unless:
- the gain is effectively connected with the trade or business of the
non-U.S. holder in the United States and, if certain tax treaties apply,
is attributable to a permanent establishment in the U.S. maintained by
such holder;
- in the case of certain non-U.S. holders who are non-resident alien
individuals and hold the common stock as a capital asset, the individuals
are present in the United States for 183 or more days in the taxable year
of the disposition and certain conditions are met; or
- we are or have been a U.S. real property holding corporation at any time
within the five-year period preceding the disposition or during the
non-U.S. holder's holding period, whichever period is shorter.
The tax relating to stock in a U.S. real property holding corporation does
not apply to a non-U.S. holder whose holdings, actual and constructive, at all
times during the applicable period, amount to 5% or less of the common stock of
a U.S. real property holding corporation, provided that the common stock is
regularly traded on an established securities market. Generally, a corporation
is a U.S. real property holding corporation if the fair market value of its U.S.
real property interests, as defined in the code and applicable regulations,
equals or exceeds 50% of the aggregate fair market value of its worldwide real
property interests and its other assets used or held for use in a trade or
business. We may be, or may prior to a non-U.S. holder's disposition of common
stock become, a U.S. real property holding corporation.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
We must report annually to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount of any tax withheld. A similar
report is sent to the non-U.S. holder. Under tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence. A non-U.S. holder will generally be required to certify
its non-U.S. status in order to avoid backup withholding on dividends.
U.S. information reporting and backup withholding generally will not apply
to a payment of proceeds of a disposition of common stock where the transaction
is effected outside the United States through a non-U.S. office of a non-U.S.
broker. However, information reporting requirements, but not backup withholding,
generally will apply to such a payment if the broker is:
- a U.S. person;
- a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the U.S.;
- a controlled foreign corporation as defined in the Code; or
- a foreign partnership with certain U.S. connections.
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.
A non-U.S. holder will be required to certify its non-U.S. status, in order
to avoid information reporting and backup withholding on disposition proceeds,
where the transaction is effected by or through a U.S. office of a broker.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a refund may be
obtained if the required information is furnished to the IRS.
FEDERAL ESTATE TAX
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be required
to include the value of the stock in his gross estate for U.S. federal estate
tax purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL INCOME
AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF
COMMON STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND
DISPOSITION OF COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAX LAWS, AND ANY APPLICABLE INCOME OR ESTATE TAX TREATIES.
57
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated July 19, 2001, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Lehman Brothers Inc., SG Cowen Securities Corporation and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, the following
respective numbers of shares of common stock:
UNDERWRITERS: NUMBER OF SHARES
- ------------- ----------------
Credit Suisse First Boston Corporation...................... 2,700,000
Lehman Brothers Inc. ....................................... 2,340,000
SG Cowen Securities Corporation............................. 1,080,000
U.S. Bancorp Piper Jaffray Inc. ............................ 1,080,000
Dain Rauscher Incorporated.................................. 100,000
Gerard Klauer Mattison & Co., Inc........................... 50,000
Invemed Associates LLC...................................... 100,000
Jefferies & Company, Inc.................................... 100,000
Parker/Hunter Incorporated.................................. 50,000
PMG Capital................................................. 100,000
Prudential Securities Incorporated.......................... 100,000
Sanders Morris Harris....................................... 50,000
Sands Brothers & Co., Ltd................................... 50,000
Thomas Weisel Partners LLC.................................. 100,000
---------
Total..................................................... 8,000,000
=========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
The selling stockholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to 1,200,000 additional shares from the selling
stockholders at the initial public offering price less the underwriting
discounts and commissions. The option may be exercised only to cover any
over-allotments of common stock and the shares to be sold pursuant to the
overallotment option will be allocated pro rata among the selling stockholders.
The underwriters propose to offer the shares of common stock at the public
offering price on the cover page of this prospectus and to selling group members
at that price less a selling concession of $0.84 per share. The underwriters and
selling group members may allow a discount of $0.10 per share on sales to other
broker/dealers. After the public offering, the representatives may change the
public offering price and concession and discount to broker/dealers.
58
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay:
PER SHARE TOTAL
-------------------------- ---------------------------
WITHOUT OVER- WITH OVER- WITHOUT OVER- WITH OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
------------- ---------- ------------- -----------
Underwriting discounts and commissions paid by
us............................................. $ 1.392 $ 1.392 $2,784,000 $ 2,784,000
Expenses payable by us........................... $ 0.268 $ 0.268 $ 535,409 $ 535,409
Underwriting discounts and commissions paid by
selling stockholders........................... $ 1.392 $ 1.392 $8,352,000 $10,022,400
Expenses payable by the selling stockholders..... $ -- $ -- $ -- $ --
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Credit Suisse First Boston Corporation, one of the underwriters, may be
deemed to be our affiliate. The offering, therefore, is being conducted in
accordance with the applicable provisions of Rule 2720 of the National
Association of Securities Dealers, Inc.--Conduct Rules. Credit Suisse First
Boston Corporation and certain of its affiliates have the right to designate
certain members of our Board of Directors. See "Relationships and Transactions
with Related Parties--Investors' Agreement."
We have agreed that we will not offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 (the
"Securities Act") relating to any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, or publicly disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 90 days after the date of this prospectus.
However, during this period we may grant stock awards under the 1999 management
incentive plan, 2000 incentive plan and 2000 directors stock plan and we may
also issue shares of common stock upon the exercise of an option or warrant or
the conversion of a security outstanding on the date hereof and in connection
with acquisitions.
Our officers and directors and certain of our existing stockholders and
option holders have agreed, subject to certain limited exceptions, that they
will not offer, sell, contract to sell or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other securities, in cash
or otherwise, or publicly disclose the intention to make any offer, sale, pledge
or disposition, or to enter into any transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 90 days after the date of this
prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or to contribute to payments that
the underwriters may be required to make in that respect.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
59
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who
purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Credit Suisse First Boston Corporation is an affiliate of the DLJMB Funds,
which will beneficially own approximately 20.7% of our outstanding common stock
after this offering and has the right to appoint seven members to the board of
directors. Credit Suisse First Boston Corporation is also an affiliate of DLJ
Capital Funding, which served as the manager and syndication agent under our
existing credit facility. Credit Suisse First Boston, New York branch, now
serves in that capacity in lieu of DLJ Capital Funding. In connection with the
offering, a portion of the proceeds may be used to repay indebtedness under the
credit facility of which approximately $5.5 million of the currently outstanding
amount is held by Credit Suisse First Boston, New York branch. A portion of the
proceeds may also be used to repurchase other indebtedness in open market
transactions initiated by holders of our other indebtedness. In accordance with
NASD Rule 2720(d)(2), this offering is being made by affiliates of Credit Suisse
First Boston Corporation. See "Relationships and Transactions with Related
Parties."
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate CSFBDIRECT Inc., an on-line broker
dealer, as a selling group member.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Davis Polk & Wardwell, New York, New York. Certain legal matters
will be passed upon for the underwriters by Latham & Watkins, New York, New
York.
60
EXPERTS
The consolidated financial statements of Charles River Laboratories
International, Inc. as of December 30, 2000 and December 25, 1999 and for each
of the three years in the period ended December 30, 2000 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on authority of said
firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http: // www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you directly to those documents. The information incorporated by reference is
considered to be part of this prospectus. In addition, information we file with
the SEC in the future will automatically update and supersede information
contained in this prospectus and any accompanying prospectus supplement. We
incorporate by reference the documents listed below, each of which is filed
under SEC File No. 001-15943, and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
we sell all of the securities we are offering:
- Our annual report on Form 10-K for the year ended December 30, 2000;
- Our quarterly report on Form 10-Q for the fiscal quarter ended March 31,
2001;
- Our current reports on Form 8-K dated January 9, 2001, February 15, 2001,
February 28, 2001, as amended by Form 8-K/As, dated March 12, 2001;
- Our annual proxy statement on Schedule 14A filed April 6, 2001.
We will provide free copies of any of those documents, if you write or
telephone us at: 251 Ballardvale Street, Wilmington, Massachusetts, 01887,
(978) 658-6000.
61
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
PAGE
--------
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Data............................................ P-2
CHARLES RIVER LABORATORIES INTERNATIONAL, INC. AND
SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the Year Ended December 30, 2000............... P-3
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Income for the Year Ended December 30,
2000...................................................... P-4
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the Three Months Ended March 31, 2000.......... P-5
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Income for the Three Months Ended March 31,
2001...................................................... P-6
P-1
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
On June 28, 2000 we consummated an initial public offering (the "IPO") 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 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 the
recapitalization. Our common stock is listed on the New York Stock exchange
under the symbol "CRL".
On March 21, 2001, we consummated a public offering (the "follow on
offering") of 8,050,000 shares of common stock, at a price of $19.00 per share,
of which 4,550,000 shares of common stock, which included the exercise of the
underwriters' over-allotment option of 1,050,000, were sold by existing
shareholders. We received net proceeds of approximately $62.2 million which, as
of March 31, 2001, we had used to repay $12.0 million of our bank debt. The
remaining proceeds will be used to further repay existing indebtedness.
The following unaudited pro forma condensed consolidated financial data of
the Company is based upon historical consolidated financial statements of the
Company as adjusted to give effect to the impact of the transactions described
above. The unaudited pro forma condensed consolidated statement of income for
the year ended December 30, 2000, gives effect to the IPO and follow on offering
and the associated use of proceeds, as if these offerings had occurred at the
beginning of the fiscal 2000 year. The unaudited pro forma condensed
consolidated statement of income for the three months ended March 31, 2001 gives
effect to the follow on offering and the associated use of proceeds as of
March 31, 2001, as if these transactions had occurred at the beginning of the
period presented.
The pro forma adjustments are based on estimates, available information and
assumptions and may be revised as additional information becomes available. The
unaudited pro forma condensed consolidated financial data do not purport to
represent what the Company's combined results of operations would actually have
been if the above transactions and the offering had occurred on the dates
indicated and are not necessarily representative of the Company's combined
results of operations for any future period. The unaudited pro forma condensed
consolidated statements of income should be read in conjunction with our
consolidated financial statements and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information incorporated by reference in this prospectus.
P-2
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 30, 2000
(DOLLARS IN THOUSANDS EXCEPT FOR EARNINGS PER SHARE AMOUNTS)
FOLLOW ON
COMPANY IPO OFFERING
HISTORICAL ADJUSTMENTS (A) ADJUSTMENTS (D) PRO FORMA
---------- --------------- --------------- ----------
Net sales related to products.......... $ 229,217 $ -- $ -- $ 229,217
Net sales related to services.......... 77,368 77,368
---------- ------- ------ ----------
Total net sales...................... 306,585 -- -- 306,585
Cost of products sold.................. 136,161 136,161
Cost of services provided.............. 50,493 50,493
Selling, general & administrative
expenses............................. 51,204 51,204
Amortization of goodwill
&intangibles......................... 3,666 3,666
---------- ------- ------ ----------
Operating Income..................... 65,061 -- -- 65,061
Interest income........................ 1,644 1,644
Other income and expense............... 390 390
Interest expense....................... (40,691) 17,368 (b) 1,033 (e) (22,290)
(Loss) from foreign currency, net...... (319) (319)
---------- ------- ------ ----------
Income before income taxes, minority
interests, earnings from equity
investments and extraordinary
item............................... 26,085 17,368 1,033 44,486
Provision for income taxes............. 7,837 6,720 (c) 400 (f) 14,957
---------- ------- ------ ----------
Income before minority interests,
earnings from equity investments
and extraordinary item............. 18,248 10,648 633 29,529
Minority interests..................... (1,396) (1,396)
Earnings from equity investments....... 1,025 1,025
---------- ------- ------ ----------
Earnings before extraordinary item... $ 17,877 $10,648 $ 633 $ 29,158
========== ======= ====== ==========
Earnings per common share before
extraordinary item
Basic................................ $ 0.64 $ 0.74
Diluted.............................. $ 0.56 $ 0.67
Shares outstanding
Basic................................ 27,737,677 39,420,369
Diluted.............................. 31,734,354 43,417,046
P-3
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 30, 2000
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
(a) This column gives effect to the Company's June 28, 2000 IPO as if it
occurred on December 26, 1999. The Company sold 16,100,000 shares of its
common stock including the exercise of the underwriter's over allotment
option of 2,100,000 shares at a price of $16.00 per share. The net
proceeds of $235,964 were used to repay a portion of the Company's
indebtedness as described in Note 2 to the consolidated financial
statements for the year ended December 30, 2000, contained elsewhere in
this prospectus.
(b) The reduction to interest expense reflects the benefit that will be
achieved as a result of the redemption of a portion of the senior
subordinated notes and repayment of debt, along with the associated
benefit related to the reduced amortization of the deferred financing
costs and the discounts on the redeemed senior subordinated notes and the
senior discount debentures.
(c) Reflects the tax effect of the reduction in interest expense as
described above.
(d) This column gives effect to the Company's March 21, 2001 follow on
offering and the associated use of proceeds as of March 31, 2001 as if
these transactions occurred on December 26, 1999. The Company sold
3,500,000 shares of its common stock at a price of $19.00 per share and
received net proceeds of $62,222. As of March 31, 2001, the Company had
used a portion of the net proceeds to repay $12,000 of term debt.
(e) The reduction of interest expense reflects the benefit that will be
achieved as a result of repaying $12,000 of term debt along with the
associated benefit related to the reduced amortization of deferred
financing costs.
(f) Reflects the tax effect of the reduction in interest expense as
described above.
EXTRAORDINARY ITEMS
The extraordinary loss of $30,051 computed as if the IPO had occurred on
December 26, 1999 results from:
(i) the estimated premiums related to the senior subordinated notes
redeemed ($7,088) and the early extinguishment of the senior discount
debentures ($24,444);
(ii) the $5,698 write off of deferred financing costs related to the senior
subordinated notes and senior discount debentures to be redeemed, and
the portions of the term loan A and term loan B to be repaid from the
proceeds of the offering;
(iii) the write off of the discounts related to the redeemed senior
subordinated notes ($726) and the senior discount debentures ($8,276);
and
(iv) the tax benefits associated with the above extraordinary loss which
are estimated to be $16,181.
The extraordinary loss of $248 computed as if the follow on offering had
occurred on December 26, 1999 results from a $381 write-off of deferred
financing costs related to the term debt repaid from the proceeds from the
follow on offering, and an associated tax benefit of $133.
P-4
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN THOUSANDS EXCEPT FOR EARNINGS PER-SHARE AMOUNTS)
FOLLOW ON
COMPANY OFFERING
HISTORICAL ADJUSTMENTS(A) PRO FORMA
----------- -------------- -----------
Net sales related to products...................... $ 62,078 $ -- $ 62,078
Net sales related to services...................... 36,953 36,953
----------- ----------- -----------
Total net sales.................................. 99,031 -- 99,031
Cost of products sold.............................. 36,418 36,418
Cost of services provided.......................... 25,951 25,951
Selling, general & administrative expenses......... 15,460 15,460
Amortization of goodwill & intangibles............. 1,828 1,828
----------- ----------- -----------
Operating income................................. 19,374 -- 19,374
Interest income.................................... 253 253
Other income and expense........................... 555 555
Interest expense................................... (6,958) 284 (b) (6,674)
----------- ----------- -----------
Income before income taxes, minority interests,
earnings from equity investments and
extraordinary item............................. 13,224 284 13,508
Provision for income taxes......................... 5,555 110 (c) 5,665
----------- ----------- -----------
Income before minority interests, earnings from
equity investments and extraordinary item...... 7,669 174 7,843
Minority interests................................. (564) (564)
Earnings from equity investments................... 83 83
----------- ----------- -----------
Earnings before extraordinary item............... $ 7,188 $ 174 $ 7,362
=========== =========== ===========
Earnings per common share before extraordinary item
Basic............................................ $ 0.20 $ 0.19
Diluted.......................................... $ 0.18 $ 0.17
Shares outstanding
Basic............................................ 36,582,532 39,659,455
Diluted.......................................... 40,287,045 43,363,968
P-5
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
(a) This column gives effect to the March 21, 2001 follow on offering and
the associated use of proceeds as of March 31, 2001, as if these
transactions had occurred on December 31, 2000.
(b) The reduction to interest expense reflects the benefit that will be
achieved as a result of repaying $12,000 of term debt, along with the
reduced amortization of deferred financing costs.
(c) Reflects the tax effect of the reduction in interest expense described
above.
EXTRAORDINARY ITEM
The extraordinary loss of $248 computed as if the follow on offering
occurred on December 31, 2000 results from the $381 write off of deferred
financing costs related to the term debt repaid from the proceeds of the follow
on offering, and an associated tax benefit of $133.
P-6
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Report of Independent Accountants........................... F-2
Consolidated Statements of Operations for the years ended
December 26, 1998, December 25, 1999 and December 30,
2000...................................................... F-3
Consolidated Balance Sheets as of December 25, 1999 and
December 30, 2000......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 26, 1998, December 25, 1999 and December 30,
2000...................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 27, 1997, December 26, 1998,
December 25, 1999, and December 30, 2000.................. F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Statements of Income (Unaudited) for
the three months ended March 25, 2000 and March 31,
2001...................................................... F-36
Condensed Consolidated Balance Sheets (Unaudited) as of
December 30, 2000 and March 31, 2001...................... F-37
Condensed Consolidated Statements of Cash Flows (Unaudited)
as of March 25, 2000 and March 31, 2001................... F-38
Notes to Unaudited Condensed Consolidated Interim Financial
Statements................................................ F-39
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Charles River Laboratories International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows 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. In addition, in our opinion, the financial statement
schedules appearing as Exhibit 99.1 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, 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
F-2
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.
F-3
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.
F-4
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.
F-5
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER CAPITAL IN
RETAINED COMPREHENSIVE COMMON EXCESS OF LOANS TO
TOTAL EARNINGS INCOME STOCK 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.
F-6
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.
F-7
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
F-8
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
F-9
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 Shareholder's 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.
F-10
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;
F-11
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
- an equity investment of $92.4 million;
- 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
========
F-12
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%
F-13
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).
F-14
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
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
========
The estimated fair values of the senior subordinated notes and the senior
secured credit facility at December 30, 2000 approximate recorded book value.
F-15
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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 $2000
F-16
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
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.
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)
F-17
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
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.
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
F-18
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EARNINGS (LOSS) PER SHARE (CONTINUED)
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 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.
F-19
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EARNINGS (LOSS) PER SHARE (CONTINUED)
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.
F-20
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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
====
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
======= =======
F-21
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
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.
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
F-22
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. LEASES (CONTINUED)
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 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.
F-23
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
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
======= ======= =======
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.
F-24
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
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.
F-25
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.
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,
F-26
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFITS (CONTINUED)
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)
======= =======
F-27
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.
F-28
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 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.
F-29
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 OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF OUTSTANDING AS OF CONTRACTUAL 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
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
F-30
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
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 investment 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 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.
F-31
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. JOINT VENTURES (CONTINUED)
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.
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
F-32
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
F-33
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
======= ======= =======
F-34
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
$62,222. The Company plans to use these proceeds to repay a portion of its
indebtedness.
F-35
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 25, 2000 AND MARCH 31, 2001
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
-----------------------
MARCH 25, MARCH 31,
2000 2001
---------- ----------
Net sales related to products............................... $ 54,016 $ 62,078
Net sales related to services............................... 18,486 36,953
---------- ----------
Total net sales............................................. $ 72,502 $ 99,031
Costs and Expenses
Cost of products sold..................................... 32,193 36,418
Cost of services provided................................. 12,399 25,951
Selling, general and administrative....................... 11,813 15,460
Amortization of goodwill and intangibles.................. 865 1,828
---------- ----------
Operating income............................................ 15,232 19,374
Other income (expense)
Interest income........................................... 142 253
Interest expense.......................................... (12,664) (6,958)
Other income (expense).................................... (30) 555
---------- ----------
Income before income taxes, minority interests, earnings
from equity investments and extraordinary item............ 2,680 13,224
Provision for income taxes.................................. 2,468 5,555
---------- ----------
Income before minority interests, earnings from equity
investments and extraordinary item........................ 212 7,669
Minority interests.......................................... (217) (564)
Earnings from equity investments, net of tax................ 641 83
---------- ----------
Income before extraordinary item............................ 636 7,188
Extraordinary loss, net of the tax benefit of $128.......... -- (237)
Net income.................................................. $ 636 $ 6,951
========== ==========
Earnings per common share before extraordinary item
Basic..................................................... $ 0.03 $ 0.20
Diluted................................................... $ 0.03 $ 0.18
Earnings per common share after extraordinary item
Basic..................................................... $ 0.03 $ 0.19
Diluted................................................... $ 0.03 $ 0.17
Weighted average number of common shares outstanding before
and after extraordinary item
Basic..................................................... 19,820,369 36,582,532
Diluted................................................... 23,571,555 40,287,045
See Notes to Consolidated Financial Statements
F-36
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 30, MARCH 31,
2000 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................... $ 33,129 $ 72,399
Trade receivables, less allowances of $1,036 and $1,012,
respectively............................................ 45,949 78,295
Inventories............................................... 33,890 34,287
Deferred income taxes..................................... 2,055 2,055
Due from affiliates....................................... 83 83
Other current assets...................................... 4,631 8,083
-------- --------
Total current assets.................................... 119,737 195,202
Property, plant and equipment, net.......................... 117,001 139,694
Goodwill and other intangibles, less accumulated
amortization of $10,810 and $12,624, respectively......... 41,893 91,529
Investments in affiliates................................... 2,442 2,514
Deferred tax asset.......................................... 105,027 101,078
Deferred financing costs.................................... 7,979 8,203
Other assets................................................ 16,529 17,165
-------- --------
Total assets............................................ $410,608 $555,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt......................... $ 231 $ 16,153
Current portion of capital lease obligations.............. 181 1,633
Accounts payable.......................................... 10,767 10,814
Accrued compensation...................................... 16,997 16,300
Deferred income........................................... 5,223 11,760
Accrued interest.......................................... 3,451 7,059
Accrued liabilities....................................... 24,187 33,078
Accrued income taxes...................................... 3,283 2,503
-------- --------
Total current liabilities............................... 64,320 99,300
Long-term debt.............................................. 201,957 228,302
Capital lease obligations................................... 543 2,403
Accrued ESLIRP.............................................. 10,116 10,391
Other long-term liabilities................................. 3,415 3,886
-------- --------
Total liabilities....................................... 280,351 344,282
Commitments and contingencies
Minority interests.......................................... 13,330 11,962
Shareholders' equity
Common stock $0.01 par value, 120,000,000 shares authorized,
35,920,369 and 40,127,642 shares issued and outstanding as
of December 30, 2000 and March 31, 2001, respectively..... 359 401
Capital in excess of par value............................ 451,404 529,959
Retained earnings......................................... (318,575) (311,624)
Loans to officers......................................... (920) (620)
Accumulated other comprehensive income.................... (15,341) (18,975)
-------- --------
Total shareholders' equity.............................. 116,927 199,141
-------- --------
Total liabilities and shareholders' equity.............. $410,608 $555,385
======== ========
See Notes to Consolidated Financial Statements
F-37
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
---------------------
MARCH 25, MARCH 31,
2000 2001
--------- ---------
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net income.................................................. $ 636 $ 6,951
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,764 5,439
Amortization of debt issuance costs and discounts......... 683 453
Accretion of debenture and discount note.................. 3,161 --
Provision for doubtful accounts........................... 82 199
Extraordinary loss, net of tax............................ -- 237
Earnings from equity investments.......................... (641) (83)
Minority interests........................................ 217 564
Deferred income taxes..................................... (42) 4,303
Property plant and equipment write-downs and disposals.... -- 195
Other non-cash items...................................... 12 --
Changes in assets and liabilities
Trade receivables......................................... (6,564) (5,559)
Inventories............................................... (104) (555)
Due from affiliates....................................... 128 --
Other current assets...................................... (583) (2,663)
Other assets.............................................. (102) (426)
Accounts payable.......................................... (2,585) (2,581)
Accrued compensation...................................... (413) (2,035)
Accrued ESLIRP............................................ 167 275
Deferred income........................................... (782) (208)
Accrued interest.......................................... 4,478 3,604
Accrued liabilities....................................... (740) 678
Accrued income taxes...................................... 1,243 (731)
Other long-term liabilities............................... (154) (229)
------- --------
Net cash provided by operating activities............... $ 1,861 $ 7,828
------- --------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Capital expenditures...................................... (2,786) (4,253)
Contingent payments for prior year acquisitions........... -- (250)
Acquisition of business, net of cash acquired............. (6,011) (51,265)
Proceeds from sale of animal colony....................... 7,000 --
------- --------
Net cash used in investing activities................... $(1,797) $(55,768)
------- --------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Proceeds from long-term debt.............................. 4,114 39,831
Payments on long-term debt and revolving credit
facility................................................ (300) (12,099)
Payment of deferred financing costs....................... -- (891)
Payments on capital lease obligations..................... (93) (701)
Proceeds from issuance of common stock.................... -- 62,222
Payments of officer loans................................. -- 300
------- --------
Net cash provided by financing activities............... $ 3,721 $ 88,662
------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (337) (1,452)
Net change in cash and cash equivalents..................... 3,448 39,270
------- --------
Cash and cash equivalents, beginning of period.............. 15,010 33,129
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $18,458 $ 72,399
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................... $ 4,317 $ 6,747
Cash paid for taxes....................................... 980 2,339
See Notes to Consolidated Financial Statements
F-38
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements are unaudited, and
certain information and footnote disclosure related thereto normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States, have been omitted in accordance with
Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements were prepared following
the same policies and procedures used in the preparation of the audited
financial statements and reflect all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the financial position of
Charles River Laboratories International, Inc. ("the Company"). The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year. These condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 30, 2000.
2. PUBLIC OFFERINGS
On March 21, 2001, the Company consummated a public offering ("the
Offering") of 3,500,000 shares of its common stock at a price of $19.00 per
share. As part of the offering, existing shareholders sold 4,550,000 shares of
common stock, which included the exercise of the underwriters' over-allotment
option of 1,050,000 shares. The Company received proceeds of $62,222, net of
underwriter's commissions and offering costs. The Company has used a portion of
the proceeds to repay $3,000 and $9,000 of the Term Loan A and Term Loan B,
respectively. As a result of this debt repayment the Company has recorded an
extraordinary loss before tax of $365 due to the write-off of deferred financing
costs. This extraordinary loss has been recorded net of a tax benefit of $128.
The Company plans to use the remainder of the proceeds to repay a portion of its
remaining indebtedness.
On June 28, 2000, the Company consummated an initial public offering of
16,100,000 shares of its common stock at a price of $16.00 per share. The
Company used the net proceeds from the initial public offering of $235,964 plus
cash on hand of $300 to repay $204,732 of its existing debt, including issuance
discounts and premiums of $31,532.
3. ACQUISITIONS AND DISPOSALS
ACQUISITIONS
On January 8, 2001, the Company purchased 100% of the common stock of
Pathology Associates International Corporation ("PAI"). Consideration, including
acquisition expenses, of $35,238 was paid with respect to this acquisition
consisting of $25,557 in cash and a $12,000 callable convertible note. The
convertible note has a five year term and bears interest at 2% per annum. As the
stated interest rate attached to this $12,000 note is lower than the prevailing
borrowing rate available to the Company, a discount of $2,319, which is being
amortized over the life of the note, was recorded upon issuance. Consideration
of $9,681 was recorded with respect to the convertible note. 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. The
consideration also included $15,000 of cash paid upon drawdown from the
Company's revolving credit facility. This acquisition was recorded as a purchase
business combination and the Company is consolidating the operations of PAI.
F-39
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS AND DISPOSALS (CONTINUED)
Effective February 27, 2001 the Company acquired Primedica Corporation
("Primedica") for consideration, including acquisition expenses, of $51,107.
Consideration was comprised of $25,708 of cash, $16,375 of restricted common
stock and $9,024 in assumed debt. This acquisition was recorded as a purchase
business combination and the Company is consolidating the operations of
Primedica. The acquisition agreement requires the Company to file a registration
statement under the Securities Act covering the restricted common stock no later
than July 1, 2001. In addition, the Company has the right to repurchase, at any
time prior to July 1, 2001, the restricted common stock at a price equal to the
greater of $24.05 or fair market value. Furthermore, in connection with the
Primedica acquisition the Company amended its senior credit facility to add a
$25,000 term loan C and to increase the interest rate on the term loan A. The
interest rate on the term loan A, as amended, and the term loan C is based on
the LIBOR rate plus 1.75% and 3.25%, respectively.
As of March 31, 2001, the Company is in process of finalizing the purchase
price allocation associated with the PAI and Primedica acquisitions. The Company
believes the accounting for these acquisitions will be finalized during the
second quarter of 2001. The Company's preliminary allocation of purchase price
for these acquisitions, based on valuations which have not yet been finalized,
is as follows:
PAI PRIMEDICA
-------- ---------
Net current assets.......................................... $ 3,126 $ 6,415
Property, plant and equipment............................... 1,276 24,637
Non-current assets.......................................... 159 35
Non-current liabilities..................................... -- (859)
------- -------
Estimated fair value, net assets acquired................... 4,561 30,228
Intangible Assets........................................... 30,677 20,879
Consideration............................................... 35,238 51,107
Less: assumed debt.......................................... -- (9,024)
------- -------
$35,238 $42,083
======= =======
Net current assets in the above preliminary purchase price allocation
includes a $530 liability recorded in accordance with EITF 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination" ("EITF 95-3").
This liability relates to severance benefits to be provided to certain Primedica
employees. These benefits are expected to be paid during 2001.
Goodwill and other intangible assets recorded in the Condensed Consolidated
Interim Financial Statements associated with these acquisitions are being
amortized over their estimated useful lives ranging from 2 to 20 years.
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,
additional interest expense 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
F-40
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS AND DISPOSALS (CONTINUED)
one during the period. No effect has been given for synergies, if any, that may
have been realized through the acquisitions.
THREE MONTHS ENDED
---------------------
MARCH 25, MARCH 31,
2000 2001
--------- ---------
Net sales................................................... $94,849 $111,199
Income/(loss) before extraordinary item..................... (411) 6,981
Net income.................................................. (411) 6,744
Earnings/(loss) per common shares before extraordinary item
Basic....................................................... $ (0.02) $ 0.19
Diluted..................................................... $ (0.02) $ 0.17
Earnings/(loss) per common shares before extraordinary item
Basic....................................................... $ (0.02) $ 0.18
Diluted..................................................... $ (0.02) $ 0.17
Refer to Note 7 for further discussion of the method of computation of
earnings per share.
DISPOSALS
During the fourth quarter of 2000, the Company recorded a pre-tax
restructuring charge of $1,290 associated with the closing of a subsidiary in
France. As of December 31, 2000, $1,078 of this charge was unpaid and included
in the Consolidated Balance Sheet as an accrued liability. In the first quarter
of 2001 the Company recorded an additional charge of $799 relating to additional
severance payments negotiated with employees following labor disputes arising in
the first quarter. These charges have been recorded in selling, general and
administrative expenses in the Condensed Consolidated Interim Statements of
Income. A summary of the activity associated with these restructuring reserves
is as follows:
EMPLOYEE
SEPARATION OTHER TOTAL
---------- -------- --------
December 30, 2000.......................................... $ 993 $85 $1,078
Additional charges recorded-first quarter 2001............. 799 -- 799
Amounts paid-first quarter 2001............................ -- -- --
------ --- ------
March 31, 2001............................................. $1,792 $85 $1,877
====== === ======
F-41
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of inventories is as follows:
DECEMBER 30, MARCH 31,
2000 2001
------------ ---------
Raw materials and supplies.................................. $ 4,052 $ 4,283
Work in process............................................. 910 1,161
Finished products........................................... 28,928 28,843
------- -------
Inventories................................................. $33,890 $34,287
======= =======
Inventories are stated at the lower of cost or market. Cost is determined
principally on the average cost method. Costs for large animals are accumulated
in inventory until the large animals are sold.
The composition of property, plant and equipment is as follows:
DECEMBER 30, MARCH 31,
2000 2001
------------ ---------
Land........................................................ $ 9,367 $ 9,100
Buildings................................................... 142,569 146,331
Machinery and equipment..................................... 95,407 102,401
Leasehold improvements...................................... 5,747 15,706
Furniture and fixtures...................................... 1,992 2,587
Vehicles.................................................... 2,378 2,359
Construction in progress.................................... 5,102 6,231
-------- --------
262,562 284,715
Less accumulated depreciation............................... (145,561) (145,021)
-------- --------
Net property, plant and equipment........................... $117,001 $139,694
======== ========
5. INCOME TAXES
The provision for income taxes recorded for the three months ended
March 25, 2000 included certain unfavorable permanent timing differences
including nondeductable interest associated with debt recorded in the first half
of 2000, which was subsequently repaid in connection with the Company's initial
public offering on June 28, 2000.
6. 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 $3,461 and $3,421
on December 30, 2000 and March 31, 2001, respectively. Separately, the Company
has provided a letter of credit in favor of the insurance carriers in the amount
of $2,500.
F-42
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 condensed consolidated financial statements.
The Company is currently under a court order issued in June 1997 to remove
its large animal operations from two islands located in the Florida Keys and
refoliate the islands. The Company has removed its large animal operations from
the island in the first quarter of 2000. The Company continues to hold
discussions with the state of Florida and federal authorities regarding the
extent of refoliation required on the islands and believes the reserves recorded
in the accompanying condensed 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.
7. EARNINGS PER SHARE
Basic earnings per share for the three month periods ended March 31, 2001
and March 25, 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.
The weighted average number of common shares outstanding in the three month
period ended March 31, 2001 has been adjusted to include common stock
equivalents for the purpose of calculating diluted earnings per share before and
after the extraordinary item for these periods.
On June 5, 2000, a 1.927 for 1 exchange of stock was approved by the Board
of Directors of the Company. This exchange of stock was effective June 21, 2000.
All earnings per common share amounts, references to common stock and
shareholders' equity amounts have been restated as if the exchange of stock had
occurred as of the earliest period presented.
F-43
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. EARNINGS PER SHARE (CONTINUED)
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:
THREE MONTH PERIOD ENDED
-------------------------
MARCH 25, MARCH 31,
2000 2001
----------- -----------
Numerator-basic and diluted earnings per share
Income before the extraordinary item........................ $ 636 $ 7,188
Extraordinary loss.......................................... -- (237)
Income after the extraordinary item......................... 636 6,951
Denominator:
Basic earnings per share-weighted average shares
outstanding............................................... 19,820,369 36,582,532
Effect of dilutive securities-stock options and warrants.... 3,751,186 3,704,513
---------- ----------
Diluted earnings per share-weighted average shares
outstanding............................................... 23,571,555 40,287,045
========== ==========
Basic earnings per share before extraordinary item.......... $ 0.03 $ 0.20
Diluted earnings per share before extraordinary item........ $ 0.03 $ 0.18
Basic (loss) per share on extraordinary item................ $ -- $ (0.01)
Diluted (loss) per share on extraordinary item.............. $ -- $ (0.01)
Basic earnings per share after extraordinary item........... $ 0.03 $ 0.19
Diluted earnings per share after extraordinary item......... $ 0.03 $ 0.17
8. BUSINESS SEGMENT INFORMATION
The following table presents sales and other financial information by
product line segment for the three months ended and the three month period ended
March 25, 2000 and March 31, 2001. Sales to
F-44
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. BUSINESS SEGMENT INFORMATION (CONTINUED)
unaffiliated customers represent net sales originating in entities primarily
engaged in either animal services or biomedical products and services.
THREE MONTH PERIOD
ENDED
---------------------
MARCH 25, MARCH 31,
2000 2001
--------- ---------
Research Models
Net sales................................................... $41,104 $49,474
Gross margin................................................ 16,822 20,549
Operating income............................................ 11,999 13,271
Depreciation and amortization............................... 2,090 2,405
Capital expenditures........................................ 1,438 1,913
Biomedical Products and Services
Net sales................................................... 31,398 49,557
Gross margin................................................ 11,088 16,113
Operating income............................................ 5,940 8,480
Depreciation and amortization............................... 1,674 3,034
Capital expenditures........................................ 1,348 2,340
Total assets attributable to the research models segment as of December 30,
2000 and March 31, 2001 were $313,763 and $349,919 respectively. Total assets
attributable to the biomedical products and services segment as of December 30,
2000 and March 31, 2001 were $96,845 and $205,466, respectively.
A reconciliation of segment operating income to consolidated operating
income is as follows:
THREE MONTH PERIOD
ENDED
---------------------
MARCH 25, MARCH 31,
2000 2001
--------- ---------
Total segment operating income.............................. $17,939 $21,751
Unallocated corporate overhead.............................. (2,707) (2,377)
------- -------
Consolidated operating income............................... $15,232 $19,374
======= =======
F-45
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. COMPREHENSIVE INCOME/(LOSS)
The components of comprehensive income/(loss) for the three-month periods
ended March 25, 2000 and March 31, 2001 are set forth below:
THREE MONTH PERIOD
ENDED
---------------------
MARCH 25, MARCH 31,
2000 2001
--------- ---------
Net income.................................................. $ 636 $6,951
Foreign currency translation................................ (1,873) (3,634)
------- ------
Comprehensive income/(loss)................................. $(1,237) $3,317
======= ======
10. SUBSEQUENT EVENTS
On April 27, 2001, the Company's French subsidiaries obtained a favorable
legal judgement in a contract dispute, with a damages award of 26,500 French
Francs or approximately $3,500. The Company expects the defendant to appeal the
decision. No amounts have been recorded in the quarter ended March 31, 2001,
with respect to this judgement.
On July 2, 2001, we signed a definitive agreement to acquire 100% of the
common stock of Genetic Models, Inc. for cash consideration of approximately
$4,000. This acquisition will be recorded as a purchase business combination in
the third quarter of 2001.
F-46
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