INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
Report of Independent Accountants........................... F-2
Consolidated Statements of Income 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
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 SHAREHOLDER'S 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 14)
Minority interests........................................ 304 13,330
Redeemable common stock................................... 13,198 --
Shareholder's 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 shareholder's equity............................ (110,142) 116,927
--------- ---------
Total liabilities and shareholder's 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
RETAINED COMPREHENSIVE COMMON IN EXCESS LOANS TO
TOTAL EARNINGS INCOME STOCK OF PAR OFFICERS
--------- --------- -------------- -------- --------- --------
BALANCE AT DECEMBER 27, 1997........................ $ 149,364 $ 139,652 ($ 8,125) $ 1 $ 17,836 $ 0
Components of comprehensive income (net of tax):
Net income...................................... 23,378 23,378 -- -- -- --
Foreign currency translation.................... 2,839 -- 2,839 -- -- --
Minimum pension liability adjustment............ (400) -- (400) -- -- --
---------
Total comprehensive income.................... 25,817 -- -- -- -- --
---------
Net activity with Bausch & Lomb............... (6,922) (6,922) -- -- -- --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 26, 1998........................ $ 168,259 $ 156,108 $ (5,686) $ 1 $ 17,836 $ 0
========= ========= ======== ==== ======== =====
Components of comprehensive income (net of tax):
Net income...................................... 17,124 17,124 -- -- -- --
Foreign currency translation.................... (3,437) -- (3,437) -- -- --
Minimum pension liability adjustment............ 114 -- 114 -- -- --
---------
Total comprehensive income.................... 13,801 -- -- -- -- --
---------
Net activity with Bausch & Lomb................... (29,415) (29,415) -- -- -- --
Loans to officers................................. (920) -- -- -- -- (920)
Transaction costs................................. (8,168) (8,168) -- -- -- --
Deferred tax asset................................ 99,506 -- -- -- 99,506 --
Issuance of common stock.......................... 92,387 -- -- 102 92,285 --
Recapitalization consideration.................... (443,000) (443,000) -- -- -- --
Redeemable common stock classified outside of
equity.......................................... (13,198) -- -- -- (13,198) --
Warrants.......................................... 10,606 -- -- -- 10,606 --
Exchange of stock................................. -- -- -- 95 (95) --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 25, 1999........................ ($110,142) ($307,351) ($ 9,009) $198 $206,940 ($920)
========= ========= ======== ==== ======== =====
Components of Comprehensive Income (net of tax):
Net loss........................................ (11,224) (11,224) -- -- -- --
Foreign currency translation.................... (5,299) -- (5,299) -- -- --
Minimum Pension Liability Adjustment............ (1,033) -- (1,033) -- -- --
---------
Total comprehensive income........................ (17,556) -- -- -- -- --
---------
Deferred tax asset................................ (4,537) -- -- -- (4,537) --
Issuance of common stock.......................... 235,964 -- -- 161 235,803 --
Redeemable common stock classified outside of
equity.......................................... 13,198 -- -- -- 13,198 --
--------- --------- -------- ---- -------- -----
BALANCE AT DECEMBER 30, 2000........................ $ 116,927 ($318,575) ($15,341) $359 $451,404 ($920)
========= ========= ======== ==== ======== =====
See Notes to Consolidated Financial Statements.
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" (FAS131), 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;
- an equity investment of $92.4 million;
F-11
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
- issuance of $37.6 million senior discount debentures with warrants; and
- issuance of a $43.0 million subordinated discount note to B&L.
The Company incurred approximately $14,442 in debt issuance costs related to
these transactions. As further described in Note 2, $5,226 of these costs were
written off in 2000 as a result of the repayment of debt in connection with the
Offering. These costs have been capitalized as long-term assets and are being
amortized over the terms of the indebtedness. Amortization expense of $426 and
$1,503 was recorded in the accompanying combined financial statements for the
years ended December 25, 1999 and December 30, 2000, respectively. In addition,
the Company also incurred transaction costs of $8,168, which were recorded as an
adjustment to retained earnings in 1999.
Subsidiaries of B&L retained 12.5% of their equity investment in the Company
in the recapitalization. The Company estimated the fair value attributable to
this equity to be $13,198 which was reclassified in 1999 from additional paid in
capital to the mezzanine section of the balance sheet due to the existence of a
put option held by subsidiaries of B&L. As a result of the Offering on June 28,
2000, the put option expired. Accordingly, this amount has been reclassified as
permanent equity in additional paid in capital in the December 30, 2000 balance
sheet.
RECONCILIATION OF RECAPITALIZATION TRANSACTION
The funding to consummate the 1999 recapitalization transaction was as
follows:
Funding:
Available cash.............................................. $ 4,886
Senior subordinated notes with Warrants..................... 150,000
Senior secured credit facility.............................. 162,000
Senior discount debentures with warrants.................... 37,600
DLJMB funds, management and other investor equity........... 92,387
--------
Total cash funding...................................... 446,873
Subordinated discount note.................................. 43,000
Equity retained by subsidiaries of B&L...................... 13,198
--------
Total funding........................................... $503,071
--------
Uses of funds:
Recapitalization consideration.............................. $443,000
Equity retained by subsidiaries of B&L...................... 13,198
Cash consideration for Sierra acquisition (Note 4).......... 23,343
Debt issuance costs......................................... 14,442
Transaction costs........................................... 8,168
Loans to officers........................................... 920
--------
Total uses of funds..................................... $503,071
--------
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 950,240 DLJMB
warrants will entitle the holders thereof to purchase one share of common stock
of the Company at an exercise price of not less than $0.01 per share subject to
customary antidilution provisions and other customary terms. The DLJMB Warrants
are exercisable at any time through April 1, 2010.
The $43,000 subordinated discount note issued by the Company in connection
with the recapitalization transaction was repaid in full during the third
quarter of 2000 (Note 2).
MINIMUM FUTURE PRINCIPAL REPAYMENTS
Minimum future principal payments of long-term debt at December 30, 2000 are
as follows:
FISCAL YEAR
- -----------
2001........................................................ $ 231
2002........................................................ 210
2003........................................................ 3,821
2004........................................................ 3,710
2005........................................................ 10,326
Thereafter.................................................. 183,890
--------
Total................................................... $202,188
========
F-14
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. RECAPITALIZATION AND RELATED FINANCING (CONTINUED)
The estimated fair values of the senior subordinated notes and the senior
secured credit facility at December 30, 2000 approximate recorded book value.
4. BUSINESS ACQUISITIONS AND DISPOSALS
ACQUISITIONS
The Company acquired several businesses during the three-year period ended
December 30, 2000. All acquisitions have been accounted for under the purchase
method of accounting. The results of operations of the acquired business are
included in the combined 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.
F-15
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
In conjunction with the Sierra acquisition, the Company is obligated to pay
additional consideration as of December 30, 2000 of $2,000 to the former
shareholders, as Sierra achieved specified financial targets in the year ended
December 30, 2000. The additional consideration of $2000 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 date. 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 year 1999 relating to the first payment which was
made on December 31, 1999 and $963 in fiscal year 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.
F-16
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
The following selected unaudited pro forma consolidated results of
operations are presented as if each of the acquisitions had occurred as of the
beginning of the period immediately preceding the period of acquisition after
giving effect to certain adjustments for the amortization of goodwill and
related income tax effects. The pro forma data is for informational purposes
only and does not necessarily reflect the results of operations had the
companies operated as one during the period. No effect has been given for
synergies, if any, that may have been realized through the acquisitions.
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 27, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
Net sales............................... $228,613 $247,447 $313,987
Operating income........................ 37,917 43,852 67,056
Income before extraordinary items....... 24,094 19,652 18,005
Net income/(loss)....................... 24,094 19,652 (11,096)
Earnings per common share before
extraordinary item
Basic................................. $ 1.22 $ 0.99 $ 0.65
Diluted............................... $ 1.22 $ 0.99 $ 0.57
Earnings/(loss) per common share after
extraordinary item
Basic................................. $ 1.22 $ 0.99 $ (0.40)
Diluted............................... $ 1.22 $ 0.99 $ (0.35)
Refer to Note 5 for further discussion of the method of computation of
earnings per share.
DISPOSALS
The Company had the following disposals during the fiscal year 2000:
During December of 2000 the Board of Directors approved and announced its
plans 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.
F-17
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS AND DISPOSALS (CONTINUED)
On March 10, 2000 the Company announced the closure of its Shamrock primate
import and conditioning business in Small Dole, England. This closure was
completed during the second quarter of 2000. The Company does not expect that
the animal sales previously made by Shamrock will be significantly affected by
the closure. A charge of $751 related to the closure was recorded in selling,
general and administrative expenses in the first quarter of 2000. This reserve
was fully utilized in the second quarter of 2000.
During January 2000, the Company sold a product line within its research
model business segment. The selling price of $7,000 approximated the net book
value of the underlying assets at the time of the sales. In addition, the
Company had approximately $900 of deferred revenue which related to cash
payments received in advance of shipping the research models. Under the terms of
the sale agreement, the Company is no longer obligated to ship research models
and, accordingly, recorded this amount as income in the first quarter of 2000.
Fiscal 1999 sales associated with this product line approximated $2,800.
5. EARNINGS (LOSS) PER SHARE
As more fully described in Note 3, pursuant to the recapitalization
agreement effective September 29, 1999, all of the assets, liabilities,
operations and cash flows relating to Charles River Laboratories, Inc., were
contributed to an existing dormant subsidiary which was subsequently renamed
Charles River Laboratories, Inc. Under the terms of the recapitalization,
Charles River Laboratories, Inc., became a wholly owned subsidiary of Charles
River Laboratories International, Inc. The capital structure in place for
periods prior to September 29, 1999 was significantly different than the capital
structure of the Company after the recapitalization. The consolidated statement
of operations for years ended December 26, 1998 and December 25, 1999 also
include operations of certain B&L entities which were not historically supported
by the combined capital structure of Charles River Laboratories
International, Inc. and Charles River Laboratories, Inc. As a result, the
presentation of historical earnings per share data determined using the combined
historical capital structure for the years ended December 26, 1998 and
December 25, 1999, would not be meaningful and has not been included in these
consolidated financial statements. Rather, earnings per share for the years
ended December 26, 1998 and December 25, 1999 have been computed assuming that
the shares outstanding after the recapitalization had been outstanding for these
periods.
As a result of the recapitalization DLJ Merchant Banking Partners II, L.P.
and affiliated funds, management and other investors indirectly owned 87.5% of
the capital stock of the Company, and subsidiaries of B&L owned the remaining
12.5% as of September 25, 1999. Based upon the amounts invested, shares
outstanding of common stock in Charles River Laboratories International, Inc. at
the date of the recapitalization totaled 19,820,369. Basic earnings per share
for the year ended December 26, 1998 and December 25, 1999 were computed by
dividing earnings available to common shareholders for these periods, by the
weighted average number of common shares outstanding in the period subsequent to
the recapitalization. Basic earnings (loss) per share for the year ended
December 30, 2000 was computed by dividing earnings available to common
shareholders for these periods by the weighted average number of common shares
outstanding in the respective periods.
For purposes of calculating diluted earnings per share for the years ended
December 26, 1998 and December 25, 1999, the weighted average number of common
shares used in the basic earnings per
F-18
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EARNINGS (LOSS) PER SHARE (CONTINUED)
share computation described above has not been adjusted to include common stock
equivalents, as these common stock equivalents were issued in connection with
the recapitalization financing and are not assumed to be outstanding for
purposes of computing earnings per share in these periods. The weighted average
number of common shares outstanding for the year ended December 30, 2000 has
been adjusted to include common stock equivalents for the purpose of calculating
diluted earnings per share before and after the extraordinary item for this
period.
The following table illustrates the reconciliation of the numerator and
denominator of the basic and diluted earnings per share before and after the
extraordinary item computations:
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
Numerator--basic and diluted earnings per share:
Income before extraordinary item...................... $ 23,378 $ 17,124 $ 17,877
Extraordinary loss.................................... -- -- (29,101)
Income (loss) after extraordinary item................ 23,378 17,124 (11,224)
Denominator:
Basic earnings per share--weighted
average shares outstanding.......................... 19,820,369 19,820,369 27,737,677
Effect of dilutive securities--stock options and
warrants............................................ -- -- 3,996,677
----------- ----------- -----------
Diluted earnings per share--weighted
average shares outstanding.......................... 19,820,369 19,820,369 31,734,354
=========== =========== ===========
Basic earnings per share before extraordinary item.... $ 1.18 $ 0.86 $ 0.64
Diluted earnings per share before extraordinary
item................................................ $ 1.18 $ 0.86 $ 0.56
Basic loss per share on extraordinary item............ -- -- $ (1.04)
Diluted loss per share on extraordinary item.......... -- -- $ (0.91)
Basic earnings/(loss) per share after extraordinary
item................................................ $ 1.18 $ 0.86 $ (0.40)
Diluted earnings/(loss) per share after extraordinary
item................................................ $ 1.18 $ 0.86 $ (0.35)
In the computation of the diluted loss per share on the extraordinary loss
and net loss, the common stock equivalents have an antidilutive impact. They
have been included in the computation as they are dilutive with respect to
income from continuing operations.
6. SHAREHOLDERS' EQUITY
As more fully described in Note 1, the capital structure of the Company is
presented on a consolidated basis at December 25, 1999 and December 30, 2000.
Capital stock information at each date is as follows:
DECEMBER 25, 1999
- -----------------
Common stock $0.01 par value, 77,079,207 shares authorized,
19,820,369 shares issued and outstanding.................. $198
====
F-19
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. SHAREHOLDERS' EQUITY (CONTINUED)
The Company had 250,000 shares of $0.01 par value Series A Redeemable
Preferred Stock and 10,000,000 shares of $0.01 par value preferred stock
authorized. At December 25, 1999 no shares were issued and outstanding.
DECEMBER 30, 2000
- -----------------
Common stock $0.01 par value, 120,000,000 shares authorized,
35,920,369 shares issued and outstanding.................. $359
====
The Company had 20,000,000 shares of $0.01 par value preferred stock
authorized. At December 30, 2000 no shares were issued and outstanding.
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
The composition of inventories is as follows:
DECEMBER 25, DECEMBER 30,
1999 2000
------------- -------------
Raw materials and supplies.......................... $ 4,196 $ 4,052
Work in process..................................... 1,608 910
Finished products................................... 24,730 28,928
------- -------
Inventories..................................... $30,534 $33,890
======= =======
The composition of property, plant and equipment is as follows:
DECEMBER 25, DECEMBER 30,
1999 2000
------------- -------------
Land................................................ $ 7,022 $ 9,367
Buildings........................................... 90,730 142,569
Machinery and equipment............................. 82,131 95,407
Leasehold improvements.............................. 4,668 5,747
Furniture and fixtures.............................. 1,826 1,992
Vehicles............................................ 2,689 2,378
Construction in progress............................ 4,679 5,102
--------- ---------
193,745 262,562
Less accumulated depreciation....................... (108,332) (145,561)
--------- ---------
Net property, plant and equipment............... $ 85,413 $ 117,001
========= =========
Depreciation and amortization expense for the years ended 1998, 1999, and
2000 was $9,168, $10,062, and $13,099, respectively.
F-20
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. LEASES
CAPITAL LEASES
The Company has one capital lease for a building and numerous capital leases
for equipment. These leases are capitalized using interest rates considered
appropriate at the inception of each lease. Assets under capital lease are not
significant.
Capital lease obligations amounted to $1,048 and $724 at December 25, 1999
and December 30, 2000, respectively, with maturities through 2005 at interest
rates ranging from 9.5% to 14.6%. Future minimum lease payments under capital
lease obligations at December 30, 2000 are as follows:
2001........................................................ $ 289
2002........................................................ 282
2003........................................................ 442
2004........................................................ 12
------
Total minimum lease payments................................ 1,025
Less amount representing interest........................... (301)
------
Present value of net minimum lease payments................. $ 724
======
OPERATING LEASES
The Company has various operating leases for machinery and equipment,
automobiles, office equipment, land and office space. Rent expense for all
operating leases was $5,926 in 2000, $4,453 in 1999, and $3,273 in 1998. Future
minimum payments by year and in the aggregate, under noncancellable operating
leases with initial or remaining terms of one year or more consist of the
following at December 30, 2000:
2001........................................................ $ 5,894
2002........................................................ 4,740
2003........................................................ 3,192
2004........................................................ 2,310
2005........................................................ 1,812
Thereafter.................................................. 5,373
-------
$23,321
=======
9. INCOME TAXES
In the year ended December 26, 1998 and for the nine-month period ended
September 29, 1999, the Company was not a separate taxable entity for federal
and state income tax purposes and its income for these periods was included in
the consolidated B&L income tax returns. The Company accounted for income taxes
for these periods under the separate return method in accordance with FAS 109.
Under the terms of the recapitalization agreement, B&L has assumed all income
tax consequences associated with the periods through September 29, 1999.
Accordingly, all current and deferred income tax attributes reflected in the
Company's consolidated financial statements on the effective date of the
recapitalization will ultimately be settled by B&L. In line with this the
domestic
F-21
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
income tax attributes have been included in the net activity with B&L and have
been charged off against retained earnings. Foreign subsidiaries are responsible
for remitting taxes in their local jurisdictions. Payments associated with
periods prior to September 29, 1999 will ultimately be reimbursed by B&L, and
this reimbursement will be recorded as an adjustment to retained earnings at the
time of such reimbursement.
In addition, in connection with the recapitalization transaction, the
Company elected under Internal Revenue Code Section 338(h)(10) to treat the
transaction as a purchase resulting in a step-up in the tax basis of the
underlying assets. The election resulted in the recording of a deferred tax
asset in 1999, net of valuation allowance, of approximately $99,506,
representing the estimated future tax benefits associated with the increased tax
basis of its assets. The Company expects to realize the net benefit of the
deferred tax asset over a 15 year period. For financial reporting purposes the
benefit was treated as a contribution to capital in 1999.
During the second quarter of 2000, the tax purchase price allocation
pertaining to the Section 338(h)(10) election described above was finalized. An
adjustment was recorded to reduce the deferred tax asset balance by $5,395 and
the related valuation allowance by $858, with the offset of $4,537 being
recorded to capital in excess of par in the second quarter of 2000.
An analysis of the components of income before income taxes and minority
interests and the related provision for income taxes is presented below:
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------- ------------- -------------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS, EARNINGS
FROM EQUITY INVESTMENTS AND EXTRAORDINARY ITEM
U.S................................................... $22,364 $14,608 $14,407
Non-U.S............................................... 13,468 16,055 11,678
------- ------- -------
$35,832 $30,663 $26,085
======= ======= =======
INCOME TAX PROVISION
Current:
Federal............................................. $ 7,730 $ 9,522 $ --
Foreign............................................. 6,171 6,035 5,646
State and local..................................... 1,833 1,895 --
------- ------- -------
Total current..................................... 15,734 17,452 5,646
------- ------- -------
Deferred:
Federal............................................. $ (597) $(2,000) $ 6,688
Foreign............................................. (887) 53 (447)
State............................................... (127) 56 (4,050)
------- ------- -------
Total deferred.................................... (1,611) (1,891) 2,191
------- ------- -------
$14,123 $15,561 $ 7,837
======= ======= =======
F-22
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
The Company recorded an extraordinary loss before tax of $44,771 on the
consummation of the Offering (Note 2). The tax benefit associated with this loss
(recorded in the third quarter of 2000) was $15,670.
Deferred taxes, detailed below, recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for financial
statement purposes and such amounts measured in accordance with tax laws.
DECEMBER 25, 1999 DECEMBER 30, 2000
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Current:
Accruals........................................... 632 -- 2,055 --
-------- ------ -------- ---------
632 -- 2,055 --
-------- ------ -------- ---------
Non-current:
Goodwill and other intangibles..................... 100,657 -- 88,531 --
Net operating loss and credit carryforwards........ 2,220 -- 22,756 --
Depreciation and amortization...................... 162 -- 626 --
Accrued Interest................................... 854 -- -- --
Other.............................................. 844 1,030 (2,362) --
-------- ------ -------- ---------
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-23
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.
F-24
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFITS (CONTINUED)
Under another defined benefit plan, the Company provides some executives
with supplemental retirement benefits. This plan, the Executive Supplemental
Life Insurance Retirement Plan or ESLIRP, is generally unfunded and
non-qualified under the provisions of the Employee Retirement Income Securities
Act of 1974. The Company has, however, taken out several key person life
insurance policies with the intention of using its cash surrender value to fund
the ESLIRP Plan. At December 30, 2000, the cash surrender value of these
policies was $8,595.
The following table provides reconciliations of the changes in benefit
obligations, fair value of plan assets and funded status of the three defined
benefit plans. Note that due to Charles River Japan being consolidated with the
Company's financial results beginning February 28, 2000, the Charles River Japan
pension plan is incorporated into the fiscal year 2000 disclosures below and not
included in fiscal year 1999.
FISCAL YEAR
-------------------
1999 2000
-------- --------
RECONCILIATION OF BENEFIT OBLIGATION
Benefit/obligation at beginning of year................. $25,112 $31,045
Service cost............................................ 958 1,386
Interest cost........................................... 1,738 2,040
Benefit payments........................................ (738) (958)
Actuarial loss (gain)................................... (73) 3,060
Effect of foreign exchange.............................. -- (75)
------- -------
Benefit/obligation at end of year....................... $26,997 $36,498
======= =======
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year.......... $26,493 $53,600
Actual return on plan assets............................ 24,781 (5,820)
Employer contributions.................................. 259 665
Benefit payments........................................ (738) (958)
------- -------
Fair value of plan assets at end of year................ $50,795 $47,487
======= =======
FUNDED STATUS
Funded status........................................... $23,797 $10,989
Unrecognized transition obligation...................... 423 336
Unrecognized prior-service cost......................... (24) (29)
Unrecognized gain....................................... (29,108) (12,970)
------- -------
Accrued benefit (cost).................................. $(4,912) $(1,674)
======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET
Accrued benefit cost.................................... $(7,237) $(5,237)
Intangible asset........................................ 215 143
Accumulated other comprehensive income.................. 2,110 3,240
------- -------
Net amount recognized................................... $(4,912) $(1,674)
======= =======
F-25
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFITS (CONTINUED)
Key weighted-average assumptions used in the measurement of the Company's
benefit obligations are shown in the following table:
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Discount rate........................... 7% 7% 6.5%
Expected return on plan assets.......... 10% 10% 10%
Rate of compensation increase........... 4.75% 4.75% 4.75%
The following table provides the components of net periodic benefit cost for
the three defined benefit plans for 1998, 1999 and 2000:
DEFINED BENEFIT PLANS
------------------------------
1998 1999 2000
-------- -------- --------
Components of net periodic benefit cost/(income):
Service cost...................................... $ 795 $ 958 $ 1,386
Interest cost..................................... 1,588 1,738 2,040
Expected return on plan assets.................... (1,901) (2,623) (5,132)
Amortization of transition obligation............. 141 141 154
Amortization of prior-service cost................ (3) (4) (5)
Amortization of net gain.......................... (85) (301) (1,625)
------- ------- -------
Net periodic benefit cost/(income)................ $ 535 $ (91) $(3,182)
======= ======= =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $8,761, $8,315, and $0 at December 25, 1999 and
$14,493, $12,312 and $2,780, as of December 30, 2000.
The Company had an adjusted minimum pension liability of $2,110 $(1,266, net
of tax) and $3,420 $(2,299 net of tax) as of December 25, 1999 and December 30,
2000 respectively, which represented the excess of the minimum accumulated net
benefit obligation over previously recorded pension liabilities.
11. STOCK COMPENSATION PLANS
As part of the recapitalization, the equity investors agreed and committed
to establish a stock option plan for the Company, for the purpose of providing
significant equity incentives to management. The 1999 Management Incentive Plan
(the "1999 Plan") is administered by the Company's Compensation Committee of the
Board of Directors. A total of 1,784,384 shares were reserved for the exercise
of option grants under the Plan. Awards of 1,726,332 non-qualified stock
options, of which 75,958 are currently exercisable, were awarded in the year
ended December 25, 1999. Options to purchase shares of Charles River
Laboratories International, Inc. granted pursuant to the 1999 Plan are subject
to a vesting schedule based on three distinct measures. Certain options vest
solely with the passage of time (incrementally over five years so long as the
optionee continues to be employed by the Company). The remainder of the options
vest over time but contain clauses providing for the acceleration of vesting
upon the achievement of certain performance targets or the occurrence of
F-26
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
certain liquidity events. All options expire on September 29, 2009. The exercise
price of all of the options initially granted under the Plan is $5.33, the fair
value of the underlying common stock at the time of the grant.
Effective June 5, 2000 the Board of Directors adopted and the Company's
shareholders approved the 2000 Incentive Plan (the "2000 Plan"), which provides
for the grant of incentive and nonstatutory stock options, stock appreciation
rights, restricted or unrestricted common stock and other equity awards. The
2000 Plan has a total of 1,189,000 shares available to be granted. Options to
purchase shares of Charles River Laboratories International, Inc. granted
pursuant to the 2000 Plan vest incrementally over three years so long as the
employee continues to be employed by the Company. All options granted expire on
or before December 31, 2010. The exercise price of all the options granted under
the 2000 Plan is the fair value of the underlying common stock at the time of
grant. A total of 476,300 stock option awards were made under the 2000 plan in
2000. No awards granted under the 2000 Plan are currently exercisable.
In conjunction with the 2000 Plan the Board of Directors adopted, and the
Company's shareholders approved, the 2000 Directors Stock Plan ("Directors
Plan"), which provides for the grant of both automatic and discretionary
nonstatutory stock options to our non-employee directors. Pursuant to the plan,
each independent director will be automatically granted an option to purchase
20,000 shares of our common stock on the date he or she is first elected or
named a director. On the day of each annual meeting of stockholders, each
independent director who served during the prior year will be awarded an option
to purchase 4,000 shares of our common stock (pro-rated if the director did not
serve for the entire preceding year). The Directors Plan has a total of 100,000
shares available to be granted. Awards of 60,000 stock options, none of which
are currently exercisable, were ratified and granted by the Compensation
Committee on June 5, 2000. Options to purchase shares of Charles River
Laboratories International, Inc. granted pursuant the Directors Plan cliff vest
upon the earlier of the first anniversary of the date of grant or the business
day prior to the date of the Company's next annual meeting. All options granted
expire on June 23, 2005. The exercise price of the options granted under the
Directors Plan is $16.00, the fair value of the underlying common stock at the
time of grant.
F-27
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes stock option activity under the 1999 Plan,
the 2000 Plan, and the Directors Plan:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- --------------- ----------------
Options outstanding as of December 26, 1998........ 0 -- --
Options Granted.................................... 1,726,332 $5.33 $ 5.33
Options Exercised.................................. 0
Options Canceled................................... 0
---------
Options outstanding as of December 25, 1999........ 1,726,332 $5.33 $ 5.33
Options Granted.................................... 536,300 $16.00-$27.38 $16.60
Options Exercised.................................. 0
Options Canceled................................... 16,500 $16.00 $16.00
---------
Options Outstanding as of December 30, 2000........ 2,246,132 $5.33-$27.38 $ 7.94
Options Exercisable as of December 30, 2000........ 75,958 $5.33 $ 5.33
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------------
RANGE OF OUTSTANDING AS OF CONTRACTURAL WEIGHTED AVERAGE EXERCISABLE AS OF WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 30, 2000 LIFE (YEARS) EXERCISE PRICE DECEMBER 30, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 5.00 - $10.00...... 1,726,332 8.7 $ 5.33 75,958 $5.33
$10.01 - $20.00...... 491,600 8.8 $16.00 0 $0.00
$20.01 - $30.00...... 28,200 10.0 $27.38 0 $0.00
--------- ------ -----
2,246,132 $ 7.94 $5.33
The company accounts for stock-based compensation plans under the provisions
of APB 25. Because the exercise price of the employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options under the fair value method of that Statement.
For purposes of this disclosure, the fair value of the fixed option grants
were estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants outstanding:
Risk-free interest rate..................................... 6.37%
Volatility factor........................................... 49.83%
Weighted average expected life (years)...................... 6
F-28
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. STOCK COMPENSATION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in 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 and began consolidating the operations of Charles River
Japan. The interests of the outside joint venture partners in these joint
ventures has been recorded as minority interests totaling $304 at December 25,
1999 and $13,330 at December 30, 2000.
Prior to the additional equity investment on February 28, 2000, Charles
River Japan was accounted for under the equity method. Charles River Japan is a
joint venture with Ajinomoto Co., Inc. and is an extension of the Company's
research model business in Japan. Dividends received from Charles River Japan
prior to the additional equity investmant amounted to $601 in 1998, $815 in
1999, and $0 in 2000. The Company also has another joint venture, Charles River
Mexico, which is accounted for under
F-29
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. JOINT VENTURES (CONTINUED)
the equity method. Charles River Mexico, an extension of the Company's avian (or
bird) business in Mexico, is not significant to the Company's operations.
Summarized financial statement information for the unconsolidated joint
ventures is as follows:
Note that the condensed income statement information for the year ended
December 30, 2000 includes only two months of Charles River Japan activity and
the balance sheet as of December 30, 2000 excludes Charles River Japan.
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
CONDENSED COMBINED STATEMENTS OF INCOME
Net sales............................. $39,798 $44,826 $13,541
Operating income...................... 6,756 7,658 2,922
Net income............................ 3,445 4,221 2,132
DECEMBER 25, DECEMBER 30,
1999 2000
------------ ------------
CONDENSED COMBINED BALANCE SHEETS
Current assets.................................... $20,486 $1,180
Non-current assets................................ 39,720 2,932
------- ------
$60,206 $4,112
======= ======
Current liabilities............................... $11,330 $ 333
Non-current liabilities........................... 6,163 42
Shareholders' equity.............................. 42,713 3,737
------- ------
$60,206 $4,112
======= ======
13. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company maintains insurance for workers' compensation, auto liability,
employee medical and general liability. The per claim loss limits are $250, with
annual aggregate loss limits of $1,500. Related accruals were $2,813 and $3,461
on December 25, 1999 and December 30, 2000, respectively. Separately, the
Company has provided a letter of credit in favor of the insurance carriers in
the amount of $350.
LITIGATION
Various lawsuits, claims and proceedings of a nature considered normal to
its business are pending against the Company. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements. The most potentially
significant claim is described below.
F-30
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently under a court order issued in June 1997 to remove
its primate operations from two islands located in the Florida Keys. The mandate
asserts that the Company's operations have contributed to the defoliation of
some protected plant life. The Company continues to hold discussions with the
state of Florida authorities regarding the extent of refoliation required on the
islands and believes the reserves recorded in the accompanying consolidated
financial statements are sufficient to provide for the estimated exposure in
connection with the refoliation. The Company has provided a letter of credit in
regards to the completion of the refoliation on the island for $350.
14. RELATED PARTY TRANSACTIONS
As more fully described in Note 3, the Company completed a recapitalization
in September 1999 and became a stand-alone entity. Until the recapitalization,
the Company historically had operated autonomously from B&L. Some costs and
expenses including insurance, information technology and other miscellaneous
expenses were charged by B&L to the Company on a direct basis, however,
management believes these charges were based upon assumptions that were
reasonable under the circumstances. These charges and estimates are not
necessarily indicative of the costs and expenses which would have resulted had
the Company incurred these costs as a separate entity. Charges of approximately
$250 and $88 for these items are included in costs of products sold and services
rendered and selling, general and administrative expense in the accompanying
consolidated financial statements for the years ended 1998 and for the nine
months ended 1999, respectively. The Company does not expect its stand-alone
costs to be significantly different from the historical costs allocated by B&L
due to the autonomy with which the Company operated.
As more fully described in Note 3, the accompanying consolidated financial
statements include a line item "net activity with Bausch and Lomb" which
comprises the above referenced intercompany allocations, net distributions made
by the Company to B&L, and settlements with B&L as a result of the
recapitalization.
On October 11, 1999 the Company loaned to certain officers $920 to purchase
stock in Charles River International, Inc. through CRL Acquisition LLC. These
loans are full recourse and bear interest at a rate of 6.75%. The year-end
balance of $920 is classified as a reduction from shareholders equity.
15. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company is organized into geographic regions for management reporting
with operating income being the primary measure of regional profitability. Some
general and administrative expenses, including some centralized services
provided by regional offices, are allocated based on business segment sales. The
accounting policies used to generate geographic results are the same as the
Company's overall accounting policies.
The following table presents sales and other financial information by
geography for the years 1998, 1999 and 2000. Included in the other non-U.S.
category below are the Company's operations located in Canada, China, Germany,
Italy, Netherlands, United Kingdom, Australia, Belgium, Czech Republic, Hungary,
Spain and Sweden. Sales to unaffiliated customers represent net sales
originating in entities
F-31
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-32
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.
We signed a definitive agreement to acquire Primedica Corporation for
consideration of approximately $52,000 on February 7, 2001. The consideration is
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.
F-33