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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-92383
CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1397316
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
251 BALLARDVALE STREET 01887
WILMINGTON, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
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(978) 658-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 23, 2001, the aggregate market value of the Registrant's voting
common stock held by non-affiliates of the Registrant was approximately
$497,976,527. As of that date, there were outstanding 40,127,642 shares of the
Registrant's common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders scheduled to be held on May 8, 2001 (the "2001 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 30, 2000, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2001 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Form 10-K.
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CHARLES RIVER LABORATORIES INTERNATIONAL, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
ITEM PAGE
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PART I
1 Business.................................................... 1
2 Properties.................................................. 16
3 Legal Proceedings........................................... 16
4 Submission of Matters to a Vote of Security Holders......... 17
PART II
5 Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 17
6 Selected Consolidated Financial Data........................ 18
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 29
8 Financial Statements and Supplementary Data................. 30
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 69
PART III
10 Directors and Executive Officers of the Registrant.......... 69
11 Executive Compensation...................................... 69
12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 69
13 Certain Relationships and Related Transactions.............. 69
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 69
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of critical research tools and integrated support
services that enable innovative and efficient drug discovery and development. We
are the global leader in providing the animal research models required in
research and development for new drugs, devices and therapies and have been in
this business for more than 50 years. Since 1992, we have built upon our
research model technologies to develop a broad and growing portfolio of
biomedical products and services. Our wide array of services enables our
customers to reduce costs, increase speed and enhance their productivity and
effectiveness in drug discovery and development. Our customer base, spanning
over 50 countries, includes all of the major pharmaceutical and biotechnology
companies, as well as many leading hospitals and academic institutions. We
currently operate 76 facilities in 15 countries worldwide. Our differentiated
products and services, supported by our global infrastructure and scientific
expertise, enable our customers to meet many of the challenges of early-stage
life sciences research, a large and growing market. In 2000, our net sales were
$306.6 million and our operating income was $65.1 million.
SIGNIFICANT TRANSACTIONS
- On September 29, 1999, CRL Acquisition LLC, a limited liability company
owned by affiliates of DLJ Merchant Banking Partners, II, L.P. ("DLJ"),
our management and other investors, together with our former parent
company, Bausch & Lomb Incorporated, completed a recapitalization
transaction. Concurrent with the recapitalization on September 29, 1999,
we acquired SBI Holdings Inc., ("Sierra") for $23.3 million in cash.
- On February 28, 2000, we acquired an additional 16% of the equity (340,840
common shares) of our 50% equity joint venture company, Charles River
Japan, for $9.1 million in cash and a $3.7 million balloon promissory
note.
- On June 28, 2000, we consummated an initial public offering of 14,000,000
shares of our common stock at a price of $16.00 per share. We issued an
additional 2,100,000 shares of our common stock on July 6, 2000 upon the
exercise of the over-allotment option by the underwriters. Proceeds from
the offering were used to repay a portion of the debt we incurred in
connection with our recapitalization. Our common stock is listed on the
New York Stock Exchange under the symbol "CRL".
- On December 4, 2000, we entered into an agreement with Tufts University
School of Veterinary Medicine to commercialize its proprietary cloning
technology.
- On January 8, 2001, we acquired Pathology Associates International ("PAI")
Corporation for $25.0 million in cash and a $12.0 million convertible note
(redeemable by us through March 31, 2001).
- On February 27, 2001, we acquired Primedica Corporation ("Primedica") for
$26.0 million in cash, $16.5 million in restricted stock (subject to
repurchase by us through July 1, 2001) and $9.5 million in assumed debt.
- On March 21, 2001, we consummated a public offering of 3,500,000 shares of
our common stock, at a price of $19.00 per share. In the offering,
4,550,000 shares of common stock, which included the exercise of the
underwriters' over-allotment option of 1,050,000 shares, were also sold by
existing shareholders. We received proceeds of approximately
$62.5 million, which we intend to use to repay a portion of our
indebtedness, retire obligations incurred in connection with recent
acquisitions and for general corporate purposes.
1
Our product line segments are research models and biomedical products and
services. Financial information with respect to these segments is contained in
Note 15 of the consolidated financial statements included at Item 8 and is
incorporated herein by reference. Financial information about geographic areas
is also contained in Note 15 of the consolidated financial statements and is
incorporated herein by reference.
RESEARCH MODELS. We are the global leader in the production and sale of
research models, principally genetically and virally defined purpose-bred rats
and mice. These products represented 61.2% of our 2000 net sales. We offer over
130 research models, one of the largest selections of small animal models of any
provider worldwide. Our higher-growth models include genetically defined models
and models with compromised immune systems, which are increasingly in demand as
early-stage research tools. The FDA and foreign regulatory bodies typically
require the safety and efficacy of new drug candidates and many medical devices
to be tested on research models like ours prior to testing in humans. As a
result, our research models are an essential part of the drug-discovery and
development process. Our research models are produced in a biosecure environment
designed to ensure that the animals are free of viral and bacterial agents and
other contaminants that can disrupt research operations and distort results.
With our biosecure production capabilities and our ability to deliver
consistent, high quality research models worldwide, we are well positioned to
benefit from the rapid growth in research and development spending by
pharmaceutical and biotechnology companies and the NIH.
BIOMEDICAL PRODUCTS AND SERVICES. We have focused significant resources on
developing a diverse portfolio of biomedical products and services directed at
high-growth areas of drug discovery and development. Our biomedical products and
services business represented 38.8% of our 2000 net sales, and has experienced
strong growth as demonstrated by our 33.7% compound annual growth rate in our
net sales over the past five fiscal years. We expect the drug-discovery and
development markets that we serve will continue to experience strong growth,
particularly as new drug development based on advances in genetics continues to
evolve. There are four areas within this segment of our business:
DISCOVERY SERVICES. Our discovery services are designed to assist our
customers in screening drug candidates faster by providing genetically
defined research models for in-house research and by implementing efficacy
screening protocols to improve the customer's drug-evaluation process. The
market for discovery services is growing rapidly as pharmaceutical and
biotechnology research and development increasingly focuses on selecting
lead drug candidates from the enormous number of new compounds being
generated. We currently offer four major categories of discovery services:
transgenic services, research support services, infectious disease and
genetic testing and contract site management. Transgenic services is our
highest growth area and includes model development, genetic
characterizations, embryo cryopreservation, and rederivation and colony
scale-up.
DEVELOPMENT SERVICES. We currently offer FDA-compliant development services
in three main areas: drug safety assessment, biotech safety testing and
medical device testing. Biotech safety testing services include a broad
range of services specifically focused on supporting biotech or
protein-based drug development, including such areas as protein
characterization, cell banking, methods development and release testing. Our
rapidly growing development services offerings enable our customers to
outsource their high-end, non-core drug development activities.
IN VITRO DETECTION SYSTEMS. We have diversified our product offerings to
include non-animal, or IN VITRO, methods for testing the safety of drugs and
devices. We are strategically committed to being the leader in providing our
customers with IN VITRO alternatives as these methods become scientifically
validated and commercially feasible. Our current products include endotoxin
detection systems that ensure that injectable drugs and devices are free
from harmful contaminants as well as bioactivity software.
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VACCINE SUPPORT PRODUCTS. We provide vaccine manufacturers with
pathogen-free fertilized chicken eggs, a critical ingredient for poultry
vaccine production. We believe there is significant potential for growth in
this area in support of novel human vaccines, such as a nasal spray flu
vaccine currently in development.
COMPETITIVE STRENGTHS
Our leading research models business has provided us with steadily growing
revenues and strong cash flow, while our biomedical products and services
business provides significant opportunities for profitable growth. Our products
and services are critical to both traditional pharmaceutical research and the
rapidly growing fields of genomic, recombinant protein and humanized antibody
research. We believe we are well positioned to compete effectively in all of
these sectors as a result of a diverse set of competitive strengths, which
include:
CRITICAL PRODUCTS AND SERVICES. We provide critical, proven and enabling
products and services that our customers rely upon to advance their early-stage
research efforts and accelerate product development. We offer a wide array of
complementary research tools and discovery and development services that
differentiate us from our competition and have created a sustained competitive
advantage in our markets.
LONG-STANDING REPUTATION FOR SCIENTIFIC EXCELLENCE. We have earned our
long-standing reputation for scientific excellence by consistently delivering
high-quality research models supported by exceptional technical service and
support for over 50 years. As a result, the Charles River brand name is
synonymous with premium quality products and services and scientific excellence
in the life sciences. We have approximately 200 science professionals on staff
with D.V.M.s, Ph.D.s and M.D.s, in areas including laboratory animal medicine,
molecular biology, pathology, immunology, toxicology and pharmacology.
EXTENSIVE GLOBAL INFRASTRUCTURE AND CUSTOMER RELATIONSHIPS. Our operations
are globally integrated throughout North America, Europe and Asia. Our extensive
investment in worldwide infrastructure allows us to standardize our products and
services across borders when required by our multinational customers, while also
offering a customized local presence when needed. We currently operate 76
facilities in 15 countries worldwide, serving a customer base spanning over 50
countries.
BIOSECURITY TECHNOLOGY EXPERTISE. In our research models business, our
commitment to and expert knowledge of biosecurity technology distinguishes us
from our competition. We maintain rigorous biosecurity standards in all of our
facilities to maintain the health profile and consistency of our research
models. These qualities are crucial to the integrity and timeliness of our
customers' research.
PLATFORM ACQUISITION AND INTERNAL DEVELOPMENT CAPABILITIES. We have a
proven track record of successfully identifying, acquiring and developing
complementary businesses and new technologies. With this experience, we have
developed internal expertise in sourcing acquisitions and further developing new
technologies. We believe this expertise will continue to differentiate us from
our competitors as we seek to further expand our business.
EXPERIENCED AND INCENTIVIZED MANAGEMENT TEAM. Our senior management team
has an average of 18 years of experience with our company, and has evidenced a
strong commitment and capability to deliver reliable performance and steady
growth. Our Chairman and Chief Executive Officer, James C. Foster, has been with
us for 25 years.
3
OUR STRATEGY
Our business strategy is to build upon our core research model business and
to actively invest in higher-growth opportunities where our proven capabilities
and strong relationships allow us to achieve and maintain a leadership position.
Our growth strategies include:
BROADEN THE SCOPE OF OUR DISCOVERY AND DEVELOPMENT SERVICES. Primarily
through acquisitions and alliances, we have improved our ability to offer new
services that complement our existing drug-discovery and development services.
We have targeted services that support transgenic research activities as a
high-growth area. We intend to provide the additional critical support services
needed to create, define, characterize and scientifically validate new genetic
models expected to arise out of the Human Genome and Mouse Genome Projects. In
addition, we plan to broaden our international presence in genetic services,
specialized pathology and drug efficacy analysis. We also continue to add new
capabilities in the biotech safety testing area.
ACQUIRE NEW TECHNOLOGIES IN RESEARCH MODELS. We intend to acquire novel
technologies in transgenics and cloning to increase sales in our research models
business and related transgenic services operations. We also expect to offer
additional genetically modified models for research of specific disease
conditions. These higher-value research models are often highly specialized and
are priced to reflect their greater intrinsic value. In particular, we intend to
acquire and develop transgenic rat technology, where development has been slow
compared to mice. We believe there is a growing need for genetically engineered
rats, which are larger and more accessible research models than mice.
EXPAND OUR PRECLINICAL OUTSOURCING SERVICES. Many of our pharmaceutical and
biotechnology customers outsource a wide variety of research activities that are
not directly associated with their scientific innovation process. We believe the
trend of outsourcing preclinical or early-stage research will continue to
increase rapidly. We are well positioned to exploit both existing and new
outsourcing opportunities, principally through our discovery and development
services offerings. We believe our early successes in the transgenic services
area have increased customer demand for outsourcing and have created significant
opportunities. Our research support services provide pharmaceutical and
biotechnology companies with significant cost and resource allocation advantages
over their existing internal operations. We intend to focus our marketing
efforts on stimulating demand for further outsourcing of preclinical research.
We also intend to expand our opportunities by increasing our international
presence.
EXPAND OUR NON-ANIMAL TECHNOLOGIES. IN VITRO testing technologies are in
their early stages of development, but we plan to continue to acquire and
introduce new IN VITRO products and services as they become scientifically
validated and commercially viable. We are particularly focused on acquiring new
technologies that allow for high through-put screening and testing of new drug
candidates in early stages of development, using such materials and techniques
as human cells and tissues and predictive database software.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Over the past decade, we have
successfully completed 14 acquisitions and alliances. Several of our operations
began as platform acquisitions, which we were able to grow rapidly by developing
and marketing the acquired products or services to our extensive global customer
base. We intend to further pursue strategic platform acquisitions and alliances
to drive our long-term growth.
BUSINESS DIVISIONS
Our business is divided into two segments: research models and biomedical
products and services.
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RESEARCH MODELS
Research models is our historical core business and accounted for 61.2% of
our 2000 net sales and 65.9% of our 1999 net sales. The business is comprised of
the commercial production and sale of animal research models, principally
purpose-bred rats, mice and other rodents for use by researchers. We are the
commercial leader in the small animal research model area, supplying rodents for
research since 1947. Our research models include:
- outbred animals, which have genetic characteristics of a random
population;
- inbred animals, which have essentially identical genes;
- hybrid animals, which are the offspring of two different inbred parents;
- spontaneous mutant animals, which contain a naturally occurring genetic
mutation (such as immune deficiency); and
- transgenic animals, which contain genetic material transferred from
another source.
With over 130 research models, we offer one of the largest selections of
small animal models and provide our customers with high volume and high quality
production. Our rats, mice and other rodent species such as guinea pigs and
hamsters have been and continue to be some of the most extensively used research
models in the world, largely as a result of our continuous commitment to
innovation and quality in the breeding process. We provide our small animal
models to numerous customers around the world, including all major
pharmaceutical and biotechnology companies as well as hospitals and academic
institutions.
The use of animal models is critical to both the discovery and development
of a new drug. The FDA requires safe and effective testing on two species of
animal models, one small and one large, before moving into the clinic for
testing on humans. Animal testing is used in order to identify, define,
characterize and assess the safety of new drug candidates. Increasingly,
genetically defined rats and mice are the model of choice in early discovery and
development work as a more specifically targeted research tool. Outbred rats are
frequently used in safety assessment studies. Our models are also used in life
science research within universities, hospitals and other research institutions.
Unlike drug discovery, these uses are generally not specifically mandated by
regulatory agencies such as the FDA, but instead are governed by the terms of
government grants, institutional protocols as well as the scientific inquiry and
peer review publication processes. We also provide larger animal models,
including miniature swine and primates, to the research community, principally
for use in drug development and testing studies.
We believe that over the next several years, many new research models will
be developed and used in biomedical research, such as transgenic models, cloned
models with identical genes, knock-out models with one or more disabled genes
and models that incorporate or exclude a particular mouse, rat or human gene.
These more highly defined and characterized models will allow researchers to
further focus their investigations into disease conditions and potential new
therapies or interventions. We intend to build upon our position as the leader
in transgenic services to expand our presence in this market for higher value
models, through internal development, licensing, partnerships and alliances, and
acquisitions.
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BIOMEDICAL PRODUCTS AND SERVICES
Our biomedical products and services business consists of our newer,
higher-growth operations, which we organize as follows:
DISCOVERY SERVICES DEVELOPMENT SERVICES IN VITRO DETECTION SYSTEMS VACCINE SUPPORT PRODUCTS
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- - Transgenic Services - Drug Safety Assessment - Endotoxin Detection - Animal Health
- - Research Support Services - Biotech Safety Testing Systems - Human Health
- - Infectious Disease and - Medical Device Testing - BioActivity Software
Genetic Testing
- - Contract Site Management
DISCOVERY SERVICES
Discovery represents the earliest stages of research and development in the
life sciences directed to the identification and selection of a lead compound
for future drug development. Discovery is followed by development activities,
which are directed at validation of the selected drug candidates. Discovery and
development represent most of the preclinical activities in drug development.
Initiated in 1995, the discovery services area of our business addresses the
growing need among pharmaceutical and biotechnology companies to outsource the
non-core aspects of their drug-discovery activities. These discovery services
capitalize on the technologies and relationships developed through our research
model business. We currently offer four major categories of discovery services:
transgenic services, research support services, infectious disease and genetic
testing and contract site management.
TRANSGENIC SERVICES. In this rapidly growing area of our business, we
assist our customers in validating, maintaining, improving, breeding and testing
models purchased or created by them for biomedical research activities. While
the creation of a transgenic, knock-out or cloned model can be a critical
scientific event, it is only the first step in the discovery process. Productive
utilization of research models requires significant additional technical
expertise. We provide transgenic breeding expertise, model characterization and
colony development, genetic characterization, quarantine, embryo
cryopreservation, embryo transfer, rederivation, and health and genetic
monitoring. We provide these services to more than 150 laboratories around the
world from pharmaceutical and biotechnology companies to hospitals and
universities. We maintain nearly 500 different types of research models for our
customers. We expect that the demand for our services will grow as the use of
transgenic, knock-out and cloned animal models continues to grow within the
research community.
RESEARCH SUPPORT SERVICES. Our research support services provide advanced
or specialized research model studies for our customers. These projects
capitalize on our strong research model capabilities and also exploit more
recently developed capabilities in protocol development, animal micro-surgery,
dosing techniques, drug effectiveness testing and data management and analysis.
We believe these services, particularly in oncology and cardiovascular studies,
offer added value to our research customers, who rely on our extensive
expertise, infrastructure and resources. We also manage under contract a
genetically defined, biosecure herd of miniature swine to provide organs for
human transplantation research, known as xenotransplantation.
INFECTIOUS DISEASE AND GENETIC TESTING. We assist our customers in
monitoring and analyzing the health and genetics of the research models used in
their research protocols. We developed this capability internally by building
upon the scientific foundation created by the diagnostic laboratory needs of our
research model business. Depending upon a customer's needs, we may serve as its
sole source testing laboratory, or as an alternative source supporting its
internal laboratory capabilities. We believe that the continued growth in
development and utilization of transgenic, knock-out and cloned
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models will drive our future growth as the reference laboratory of choice for
genetic testing of special models.
CONTRACT SITE MANAGEMENT. Building upon our core capabilities as a leading
provider of high quality research models, we manage animal care operations on
behalf of government, academic, pharmaceutical and biotechnology organizations.
Increasing demand for our services reflects the growing necessity of these large
institutions to outsource internal functions or activities that are not critical
to the core scientific innovation and discovery process. In addition, we believe
that our expertise in managing the laboratory animal environment enhances the
productivity and quality of our customers' research facilities. This area leads
to additional opportunities for us to provide other products and services to our
customers. Site management does not require us to make any incremental
investment, thereby generating a particularly strong return.
DEVELOPMENT SERVICES
Our development services enable our customers to outsource their non-core
drug development activities to us. These activities are typically required for
the identification of the lead compound in order to support the regulatory
filings necessary to obtain FDA approval. We currently offer development
services in three main areas: drug safety assessment, biotech safety testing and
medical device testing.
DRUG SAFETY ASSESSMENT. We offer drug safety assessment services to
pharmaceutical, medical device and biotechnology companies that are principally
focused on conducting regulatory compliance studies producing data to support
FDA submissions. These studies require highly specialized scientific
capabilities. We have expertise in conducting critical developmental studies on
new drug candidates and medical devices that use research models, including
long- and short-term evaluations of potential new treatments for human or animal
disease conditions. We have unique expertise in several areas of safety
assessment and are continuously evaluating and selecting new services areas to
add to our portfolio. We focus on high-end niches of this market where our
scientific capabilities are strongly valued by our customers.
BIOTECH SAFETY TESTING. We provide specialized non-clinical quality control
testing that is frequently outsourced by both pharmaceutical and biotechnology
companies. These services allow our customers to determine if the human protein
drug candidates, or the process for manufacturing those products, are
essentially free of residual biological materials. The bulk of this testing work
is required by the FDA for obtaining new drug approval, maintaining an
FDA-licensed manufacturing capability or releasing approved products for use on
patients. Our scientific staff consults with customers in the areas of process
development, validation, manufacturing scale-up and biological testing. As more
biotechnology drug candidates with stronger potential enter and exit the
development pipeline, we expect to continue to experience strong demand for
these testing services.
MEDICAL DEVICE TESTING. The FDA requires companies introducing medical
devices to test the biocompatibility of any new materials that have not
previously been approved for contact with human tissue. We provide a wide
variety of medical device testing services from prototype feasibility testing to
long-term GLP, or good laboratory practices, studies, primarily in large
research models. These services include cardiovascular surgery, biomaterial
reactivity studies, orthopedic studies and related laboratory services. We
maintain state-of-the-art surgical suites where our skilled professional staff
implement custom surgery protocols provided by our customers.
IN VITRO DETECTION SYSTEMS
While we do not foresee significant replacement of animal models from the
use of IN VITRO techniques, we believe that these techniques may offer a strong
refinement or complement to animal
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test systems after the extended period of scientific validation is successfully
completed. We intend to pursue this area to the extent alternatives become
commercially viable.
ENDOTOXIN DETECTION SYSTEMS. We are a market leader in endotoxin testing,
which is used to test quality control samples of injectable drugs and devices,
their components and the processes under which they are manufactured, for the
presence of endotoxins. Endotoxins are fever producing pathogens or compounds
that are highly toxic to humans when sufficient quantities are introduced into
the body. Quality control testing for endotoxin contamination by our customers
is an FDA requirement for injectable drugs and devices, and the manufacture of
the test kits and reagents is regulated by the FDA as a medical device.
Endotoxin testing uses a processed extract from the blood of the horseshoe crab,
known as limulus amebocyte lysate, or LAL. The LAL test is the first and only
major FDA-validated IN VITRO alternative to an animal model test for testing the
safety and efficiency of new drug candidates. The process of extracting blood is
not harmful to the crabs, which are subsequently returned to their natural ocean
environment. We produce and distribute test kits, reagents, software,
accessories, instruments and associated services to pharmaceutical and
biotechnology companies for medical devices and other products worldwide. We
have filed for a patent relating to our next generation of endotoxin testing
technology.
BIOACTIVITY SOFTWARE. In the life sciences, we have an exclusive strategic
alliance with Multicase, Inc. under which we offer their unique database
software program. This program allows researchers to evaluate the potential
toxicity and pharmacological activity of new chemical compounds. This program
uses a proprietary artificial intelligence capability and nearly twenty years of
data collected from public sources including the FDA. This IN SILICO, or
software, alternative to the use of research animals is in the early stages of
commercialization. We expect that bioactivity software that allows researchers
to more accurately predict defined outcomes for potential new drug candidates
will complement rather than replace the use of research models. We plan to
evaluate adding other software tools through licensing and partnerships that
allow researchers to improve the efficiency and effectiveness of drug discovery
and development.
VACCINE SUPPORT PRODUCTS
ANIMAL HEALTH. We are the global leader for the supply of specific
pathogen-free, or SPF, chickens and fertile chicken eggs. SPF chicken embryos
are used by animal health companies as self-contained "bioreactors" for the
manufacturing of live and killed viruses. These viruses are used as a raw
material in poultry and potential human vaccine applications. The production of
SPF eggs is done under biosecure conditions, similar to our research model
production. We have a worldwide presence that includes several SPF egg
production facilities in the United States, as well as facilities in Germany and
in Australia. We have a joint venture in Mexico and a franchise in India. We
also operate a specialized avian laboratory in the United States, which provides
in-house testing and support services to our customers.
HUMAN HEALTH. We are also applying our SPF egg technology to human vaccine
markets. We have entered into an agreement with a company that is in the late
stages of the FDA approval process for a nasal spray-delivered vaccine for human
flu. If FDA-approved and commercially successful, this human flu vaccine may
significantly increase demand for our SPF eggs.
CUSTOMERS
Our customers consist primarily of large pharmaceutical companies, including
the 10 largest pharmaceutical companies based on 2000 revenues, as well as
biotechnology, animal health, medical device and diagnostic companies and
hospitals, academic institutions and government agencies. We have many
long-term, stable relationships with our customers as evidenced by the fact that
all of our top 20 customers in 1990 remain our customers today.
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During 2000, in both our research models and our biomedical products and
services businesses, approximately two-thirds of our sales were to
pharmaceutical and biotechnology companies, and the balance were to hospitals,
universities and the government. Our top 20 global customers represent only
about 30% of our 2000 net sales, with no individual customer accounting for more
than 3% of net sales.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell our products and services principally through our direct sales
force. As of December 30, 2000, we had approximately 75 employees engaged in
field sales, of which 34 were in the United States, 12 were in Europe and nine
were with Charles River Japan. The direct sales force is supplemented by a
network of international distributors for some areas of our biomedical products
and services business.
Our internal marketing groups support the field sales staff while developing
and implementing programs to create close working relationships with customers
in the biomedical research industry. Our web site, www.criver.com, is an
effective marketing tool, and has become recognized as a valuable resource in
the laboratory animal field by a broad spectrum of industry leaders, recording
over 500,000 hits each month. Our website is not incorporated by reference in
this Annual Report on Form 10-K.
We maintain both customer service and technical assistance departments,
which service our customers' routine and more specialized needs. We frequently
assist our customers in solving problems related to animal husbandry, health and
genetics, biosecurity, protocol development and other areas in which our
expertise is recognized as a valuable customer resource.
RESEARCH AND DEVELOPMENT
We do not maintain a fully dedicated research and development staff. Rather,
this work is done on an individual project basis or through collaborations with
universities or other institutions. Our dedicated research and development
spending was $1.4 million in 1998, $0.5 million in 1999 and $0.9 million in
2000. Our approach to developing new products or services is to extend our base
technologies into new applications and fields, and to license or acquire
technologies to serve as a platform for the development of new businesses that
service our existing customer base. Our research and development focus is
principally on developing projects that improve our productivity or processes.
INDUSTRY SUPPORT AND ANIMAL WELFARE
Among the shared values of our employees is a concern for and commitment to
animal welfare. We have been in the forefront of animal welfare improvements in
our industry, and continue to demonstrate our commitment with special
recognition programs for employees who demonstrate an extraordinary commitment
in this critical area of our business.
We support a wide variety of organizations and individuals working to
further animal welfare as well as the interests of the biomedical research
community. We fund internships in laboratory animal medicine, provide financial
support to non-profit institutions that educate the public about the benefits of
animal research, and provide awards and prizes to outstanding leaders in the
laboratory animal medicine field. One of our businesses dedicates a portion of
its net sales, through a royalty, to support similar programs and initiatives.
EMPLOYEES
As of December 30, 2000, we had approximately 3,500 employees, including
over 100 science professionals with advanced degrees including D.V.M.s, Ph.D.s
and M.D.s. Our employees are not unionized in the United States, though we are
unionized in some European locales, consistent with local custom for our
industry. We believe that we have a good relationship with our employees.
9
COMPETITION
Our strategy is to be the leader in each of the markets in which we
participate. Our competitors are generally different in each of our business and
geographic areas.
In our research models business division, our main competitors include three
smaller competitors in North America, several smaller ones in Europe, and two
smaller ones in Japan. Of our main United States competitors, two are privately
held businesses and the third is a government-financed, non-profit institution.
We believe that none of our competitors for research models has our comparable
global reach, financial strength, breadth of product and services offerings and
pharmaceutical and biotechnology industry relationships.
We have many competitors in our biomedical products and services business
division. A few of our competitors in our biomedical products and services
business are larger than we are and may have greater capital, technical or other
resources than we do; however, many are smaller and more regionalized. We have a
small relative share in the biotech safety testing market, where the market
leader is a well-established company, and in medical device testing, where there
are many larger competitors.
We generally compete on the basis of quality, reputation, and availability,
which is supported by our international presence with strategically located
facilities.
REGULATORY MATTERS
The Animal Welfare Act governs the treatment of particular species intended
for use in research. The AWA imposes a wide variety of specific regulations on
producers and users of these species, most notably cage size, shipping
conditions and environmental enrichment methods. We comply with licensing and
registration requirement standards set by the USDA for handling regulated
species, including breeding, maintenance and transportation. However, rats, mice
and chickens are not currently regulated under the AWA. As a result, most of our
United States small animal research model activities and our vaccine support
services operations are not subject to regulation under the AWA. The United
States Department of Agriculture, or USDA, has agreed, as part of a settlement
of litigation, to propose a change to the regulations issued under the Animal
Welfare Act to include rats, mice and birds, including chickens. Congress,
however, has suspended the USDA's rulemaking authority in this area. Our animal
production facilities in the United States are accredited by a highly regarded
member association known as AAALAC, which maintains standards that often exceed
those of the USDA.
Our biomedical products and services business is also generally regulated by
the USDA, and in the case of our endotoxin detection systems, the FDA. Our
manufacture of test kits and reagents for endotoxin testing is subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act. We are required to register with the FDA as a device manufacturer
and are subject to inspection on a routine basis for compliance with the FDA's
Quality System Regulations and Good Manufacturing Practices. These regulations
require that we manufacture our products and maintain our documents in a
prescribed manner with respect to manufacturing, testing and control activities.
In 1999, we received a "warning letter" from the FDA for quality control
deficiencies with regard to our Charleston, South Carolina facility. We have
since taken corrective action satisfactory to the FDA with respect to these
deficiencies.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report on Form 10-K includes forward-looking statements. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words
10
carefully because they discuss our future expectations, contain projections of
our future results of operations or of our financial condition or state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or control and that may cause
our actual results to differ materially from those discussed as a result of
various factors, including contaminations at our facilities, changes in the
pharmaceutical or biotechnology industries, competition and changes in
government regulations or general economic or market conditions. These factors
should be considered carefully and readers should not place undue reliance on
our forward-looking statements. You should be aware that the occurrence of the
events described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" sections and elsewhere in this annual
report could harm our business, operating results and financial condition. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements and risk
factors discussed below contained throughout this annual report. We are under no
duty to update any of the forward-looking statements after the date of this
annual report or to conform these statements to actual results.
INDUSTRY AND MARKET DATA
In this Annual Report on Form 10-K, we rely on and refer to information and
statistics regarding the research model and biomedical products and services
industries, and our market share in the sectors in which we compete. We obtained
this information and statistics from various third party sources, discussions
with our customers and/or our own internal estimates. We believe that these
sources and estimates are reliable, but we have not independently verified them.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
IF WE ARE NOT SUCCESSFUL IN SELECTING AND INTEGRATING THE BUSINESSES AND
TECHNOLOGIES WE ACQUIRE, OUR BUSINESS MAY SUFFER.
We have recently expanded our business through the PAI and Primedica
acquisitions and we plan to continue to grow our business through acquisitions
of businesses and technologies and the formation of alliances. However,
businesses and technologies may not be available on terms and conditions we find
acceptable. Even if completed, acquisitions and alliances involve numerous risks
which may include:
- difficulties and expenses incurred in assimilating operations, services,
products or technologies;
- difficulties in developing and operating new businesses, including
diversion of management's attention from other business concerns;
- the potential loss of key employees of an acquired business and
difficulties in attracting new employees to grow businesses;
- difficulties in assimilating differences in foreign business practices and
overcoming language barriers;
- difficulties in obtaining intellectual property protections and skills
that we and our employees currently do not have; and
- difficulties in achieving business and financial success.
In the event that the success of an acquired business or technology or an
alliance does not meet expectations, we may be required to restructure. We may
not be able to successfully integrate acquisitions into our existing business or
successfully exploit new business or technologies.
11
CONTAMINATIONS IN OUR ANIMAL POPULATIONS CAN DAMAGE OUR INVENTORY, HARM OUR
REPUTATION FOR CONTAMINANT-FREE PRODUCTION AND RESULT IN DECREASED SALES.
Our research models and fertile chicken eggs must be free of contaminants,
such as viruses and bacteria. The presence of contaminants can distort or
compromise the quality of research results. Contaminations in our isolated
breeding rooms or poultry houses could disrupt our contaminant-free research
model and fertile egg production, harm our reputation for contaminant-free
production and result in decreased sales.
Contaminations typically require cleaning up the contaminated room or
poultry house. This clean-up results in inventory loss, clean-up and start-up
costs, and reduced sales as a result of lost customer orders and credits for
prior shipments. These contaminations are unanticipated and difficult to
predict. We experienced several material contaminations in our animal
populations in 1996 and a few significant contaminations in 1997 that adversely
impacted our 1996 and 1997 financial results. Since then, we have made over
$8 million in capital expenditures designed to strengthen our biosecurity and
have significantly changed our operating procedures. We have not experienced any
significant contaminations since 1997.
MANY OF OUR CUSTOMERS ARE PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES, AND WE ARE
SUBJECT TO RISKS, UNCERTAINTIES AND TRENDS THAT AFFECT COMPANIES IN THOSE
INDUSTRIES.
Sales of our products and services are highly dependent on research and
development expenditures by pharmaceutical and biotechnology companies. We are
therefore subject to risks, uncertainties and trends that affect companies in
those industries, including government regulation, pricing pressure,
technological change and shifts in the focus and scope of research and
development expenditures. For example, over the past several years, the
pharmaceutical industry has undergone significant mergers and combinations, and
many industry experts expect this trend to continue. After recent mergers and
combinations, some customers combined or otherwise reduced their research and
development operations, resulting in fewer animal research activities. We
experienced both temporary disruptions and permanent reductions in sales of our
research models to some of these customers. Future mergers and combinations in
the pharmaceutical or biotechnology industries, or other industry-wide trends,
could adversely affect demand for or pricing of our products.
NEW TECHNOLOGIES MAY BE DEVELOPED, VALIDATED AND INCREASINGLY USED IN BIOMEDICAL
RESEARCH THAT COULD REDUCE DEMAND FOR SOME OF OUR PRODUCTS AND SERVICES.
For many years, groups within the scientific and research community have
attempted to develop models, methods and systems that would replace or
supplement the use of living animals as test subjects in biomedical research.
Companies have developed several techniques that have scientific merit,
especially in the area of cosmetics and household product testing, markets in
which we are not active. Only a few alternative test methods in the discovery
and development of effective and safe treatments for human and animal disease
conditions have been validated and successfully deployed. The principal
validated non-animal test system is the LAL, or endotoxin detection system, a
technology which we acquired and have aggressively marketed as an alternative to
testing in animals. It is our strategy to participate in some fashion with any
non-animal test method as it becomes validated as a research model alternative
or adjunct in our markets. However, these methods may not be available to us or
we may not be successful in commercializing these methods. Even if we are
successful, sales or profits from these methods may not offset reduced sales or
profits from research models.
Alternative research methods could decrease the need for research models,
and we may not be able to develop new products effectively or in a timely manner
to replace any lost sales. In addition, one of the anticipated outcomes of
genomics research is to permit the elimination of more compounds
12
prior to preclinical testing. While this outcome may not occur for several
years, if at all, it may reduce the demand for some of our products and
services.
THE OUTSOURCING TREND IN THE PRECLINICAL AND NONCLINICAL STAGES OF DRUG
DISCOVERY AND DEVELOPMENT, MEANING CONTRACTING OUT TO OTHERS FUNCTIONS THAT
WERE PREVIOUSLY PERFORMED INTERNALLY, MAY DECREASE, WHICH COULD SLOW OUR
GROWTH.
Some areas of our biomedical products and services business have grown
significantly as a result of the increase over the past several years in
pharmaceutical and biotechnology companies outsourcing their preclinical and
nonclinical research support activities. While industry analysts expect the
outsourcing trend to continue for the next several years, a substantial decrease
in preclinical and nonclinical outsourcing activity could result in a diminished
growth rate in the sales of one or more of our expected higher-growth areas.
OUR BUSINESS MAY BE AFFECTED BY CHANGES IN THE ANIMAL WELFARE ACT AND RELATED
REGULATIONS WHICH MAY REQUIRE US TO ALTER OUR OPERATIONS.
The Animal Welfare Act imposes a wide variety of specific regulations on
producers and users of regulated species including cage size, shipping
conditions and environmental enrichment methods. Depending on whether the final
rulemaking in this area includes rats, mice and birds, including chickens, we
could be required to alter our production operations. This may include adding
production capacity, new equipment and additional employees. We believe that
application of the Animal Welfare Act to rats, mice and chickens used in our
research model and vaccine support products operations in the United States will
not result in loss of net sales, margin or market share, since all U.S.
producers and users will be subject to the same regulations. While we do not
anticipate that the addition of rats, mice and chickens to the Animal Welfare
Act would require significant expenditures, changes to the regulations may be
more stringent than we expect and require more significant expenditures.
Additionally, if we fail to comply with state regulations, including general
anti-cruelty legislation, foreign laws and other anti-cruelty laws, we could
face significant civil and criminal penalties.
FACTORS SUCH AS EXCHANGE RATE FLUCTUATIONS AND INCREASED INTERNATIONAL AND U.S.
REGULATORY REQUIREMENTS MAY INCREASE OUR COSTS OF DOING BUSINESS IN FOREIGN
COUNTRIES.
A significant part of our net sales is derived from operations outside the
United States. Our operations and financial results could be significantly
affected by factors such as changes in foreign currency rates, uncertainties
related to regional economic circumstances and the costs of complying with a
wide variety of international and U.S. regulatory requirements.
Because the sales and expenses of our foreign operations are generally
denominated in local currencies, we are subject to exchange rate fluctuations
between local currencies and the U.S. dollar in the reported results of our
foreign operations. These fluctuations may decrease our earnings. We currently
do not hedge against the risk of exchange rate fluctuations.
WE FACE SIGNIFICANT COMPETITION IN OUR BUSINESS, AND IF WE ARE UNABLE TO RESPOND
TO COMPETITION IN OUR BUSINESS, OUR REVENUES MAY DECREASE.
We face significant competition from different competitors in each of our
business areas. Some of our competitors in biotech safety testing and medical
device testing are larger than we are and may have greater capital, technical or
other resources than we do. We generally compete on the basis of quality,
reputation, and availability of service. Expansion by our competitors into other
areas in which we operate, new entrants into our markets or changes in our
competitors' strategy could adversely affect our competitive position. Any
erosion of our competitive position may decrease our revenues or limit our
growth.
13
NEGATIVE ATTENTION FROM SPECIAL INTEREST GROUPS MAY IMPAIR OUR BUSINESS.
Our core research model activities with rats, mice and other rodents have
not historically been the subject of animal rights media attention. However, the
large animal component of our business has been the subject of adverse attention
and on-site protests. We closed our small import facility in England due in part
to protests by animal right activists, which included threats against our
facilities and employees. Future negative attention or threats against our
facilities or employees could impair our business.
ONE OF OUR LARGE ANIMAL OPERATIONS IS DEPENDENT ON A SINGLE SOURCE OF SUPPLY,
WHICH IF INTERRUPTED COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on a single, international source of supply for one of our large
animal operations. Disruptions to their continued supply may arise from export
or import restrictions or embargoes, foreign government or economic instability,
or severe weather conditions. Any disruption of supply could harm our business
if we cannot remove the disruption or are unable to secure an alternative or
secondary source on comparable commercial terms.
TAX BENEFITS WE EXPECT TO BE AVAILABLE IN THE FUTURE MAY BE SUBJECT TO
CHALLENGE.
In connection with the recapitalization, our shareholders, CRL Acquisition
LLC and Bausch & Lomb Incorporated, or B&L, made a joint election intended to
permit us to increase the depreciable and amortizable tax basis in our assets
for federal income tax purposes, thereby providing us with expected future tax
benefits. In connection with our initial public offering, CRL Acquisition LLC
reorganized, terminated its existence as a corporation for tax purposes and
distributed a substantial portion of our stock to its members. It is possible
that the Internal Revenue Service may contend that this reorganization and
liquidating distribution should be integrated with our original
recapitalization. We believe that the reorganization and liquidating
distribution should not have any impact upon the election for federal income tax
purposes. However, the Internal Revenue Service may reach a different
conclusion. If the Internal Revenue Service were successful, the expected future
tax benefits would not be available and we would be required to write off the
related deferred tax asset reflected in our balance sheet by recording a
non-recurring tax expense in our results of operations in an amount equal to
such deferred tax asset. See "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO RETAIN THESE EMPLOYEES OR
RECRUIT ADDITIONAL QUALIFIED PERSONNEL, WHICH WOULD HARM OUR BUSINESS.
Our success depends to a significant extent on the continued services of our
senior management and other members of management. James C. Foster, our Chief
Executive Officer since 1992, has held various positions with Charles River for
25 years and became our Chairman last year. We have no employment agreement with
Mr. Foster, nor with any other executive officer. If Mr. Foster or other members
of management do not continue in their present positions, our business may
suffer.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. There
is intense competition for qualified personnel in the pharmaceutical and
biotechnological fields. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our business. The loss of
the services of existing personnel, as well as the failure to recruit additional
key scientific, technical and managerial personnel in a timely manner could harm
our business.
14
DLJ MERCHANT BANKING PARTNERS, II, L.P. AND ITS AFFILIATES HAVE SUBSTANTIAL
CONTROL OVER OUR COMPANY AND MAY HAVE DIFFERENT INTERESTS THAN THOSE OF OTHER
HOLDERS OF OUR COMMON STOCK.
DLJ Merchant Banking Partners II, L.P. and affiliated funds, which we refer
to as the DLJMB Funds, beneficially own approximately 30.0% of our outstanding
common stock. As a result of their stock ownership and contractual rights they
received in the recapitalization, these entities have substantial control over
our business, policies and affairs, including the power to:
- elect a majority of our directors;
- appoint new management;
- prevent or cause a change of control; and
- substantially control any action requiring the approval of the holders of
common stock, including the adoption of amendments to our certificate of
incorporation and approval of mergers or sales of substantially all of our
assets.
The directors elected by the DLJMB Funds have the ability to control
decisions affecting the business and management of our company including our
capital structure. This includes the issuance of additional capital stock, the
implementation of stock repurchase programs and the declaration of dividends.
The DLJMB Funds and the directors they appoint may have different interests than
those of other holders of our common stock.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information in this Annual Report on Form 10-K for
the periods prior to the recapitalization may not reflect what our results of
operations, financial position and cash flows would have been had we been a
separate, stand-alone company during the periods presented or in the future. We
made some adjustments and allocations to the historical financial statements in
this Annual Report on Form 10-K because B&L did not account for us as a single
stand-alone business for all periods presented. Our adjustments and allocations
made in preparing our historical consolidated financial statements may not
appropriately reflect our operations during the periods presented as if we had
operated as a stand-alone company.
HEALTHCARE REFORM COULD REDUCE OR ELIMINATE OUR BUSINESS OPPORTUNITIES.
The United States and many foreign governments have reviewed or undertaken
healthcare reform, most notably price controls on new drugs, which may adversely
affect research and development expenditures by pharmaceutical and biotechnology
companies, resulting in a decrease of the business opportunities available to
us. We cannot predict the impact that any pending or future healthcare reform
proposals may have on our business.
15
ITEM 2. PROPERTIES
The following charts provide summary information on our properties. The
first chart lists the sites we own, and the second chart the sites we lease.
Most of our material leases expire from 2001 to 2005.
SITES--OWNED
COUNTRY NO. OF SITES TOTAL SQUARE FEET PRINCIPAL FUNCTIONS
- ------- ------------ ----------------- ------------------------------
Belgium.............................. 1 16,140 Office, Production
Canada............................... 1 59,194 Office, Production, Laboratory
China................................ 1 19,372 Office, Production, Laboratory
France............................... 5 663,689 Office, Production, Laboratory
Germany.............................. 3 131,096 Office, Production, Laboratory
Italy................................ 1 46,700 Office, Production, Laboratory
Japan................................ 2 116,340 Office, Production, Laboratory
United Kingdom....................... 2 58,240 Office, Production, Laboratory
United States........................ 23 861,408 Office, Production, Laboratory
-- ---------
Total................................ 39 1,972,179
== =========
SITES--LEASED
COUNTRY NO. OF SITES TOTAL SQUARE FEET PRINCIPAL FUNCTIONS
- ------- ------------ ----------------- ------------------------------
Australia............................ 1 8,518 Office, Production
Czech Republic....................... 2 8,802 Office, Production, Laboratory
Hungary.............................. 2 11,567 Office, Production, Laboratory
Japan................................ 6 61,917 Office, Production, Laboratory
Netherlands.......................... 1 11,841 Office, Production
Spain................................ 1 3,228 Sales Office
Sweden............................... 1 8,072 Sales Office
United States........................ 23 586,345 Office, Production, Laboratory
-- -------
Total................................ 37 700,291
== =======
ITEM 3. LEGAL PROCEEDINGS
Our operations and properties are subject to extensive foreign and federal,
state and local environmental protection and health and safety laws and
regulations. These laws and regulations govern, among other things, the
generation, storage, handling, use and transportation of hazardous materials and
the handling and disposal of hazardous and biohazardous waste generated at our
facilities. Under such laws and regulations, we are required to obtain permits
from governmental authorities for some of our operations. If we violate or fail
to comply with these laws, regulations or permits, we could be fined or
otherwise sanctioned by regulators. Under some environmental laws and
regulations, we could also be held responsible for all of the costs relating to
any contamination at our past or present facilities and at third party waste
disposal sites. As a result of disputes with federal, state and local
authorities and private environmental groups regarding damage to mangrove plants
on two islands in the Florida Keys, we agreed to refoliate the islands at our
cost. Although we have not been able to completely replant, principally due to
the presence of a free-range animal population and storms, we believe that the
cost of refoliation will not have a material adverse effect on our business.
Although we believe that our costs of complying with current and future
environmental laws, and our liabilities arising from past or future releases of,
or exposure to, hazardous substances will not materially adversely affect our
business, results of operations or financial condition, we cannot assure you
that they will not do so.
16
We are not a party to any other material legal proceedings, other than
ordinary routine litigation incidental to our business that is not otherwise
material to our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange on
June 23, 2000 under the symbol "CRL." The following table sets forth for the
periods indicated below the high and low closing prices for our common stock, as
reported on the NYSE Composite Tape.
2000 HIGH LOW
- ---- -------- --------
Second Quarter (from June 23, 2000)...................... $ 22.00 $ 22.00
Third Quarter............................................ 33.06 21.19
Fourth Quarter........................................... 34.00 20.50
STOCKHOLDERS
As of March 23, 2001, there were approximately 70 stockholders of record of
the outstanding shares of Common Stock.
DIVIDENDS
We have not declared or paid any cash dividends on shares of our common
stock in the past two years except to our former parent company and we do not
intend to pay cash dividends in the foreseeable future. We currently intend to
retain any earnings to finance future operations and expansion and to reduce
indebtedness. We are a holding company and are dependent on distributions from
our subsidiaries to meet our cash requirements. The terms of the indenture
governing our senior subordinated notes and our credit facility restrict the
ability of our subsidiaries to make distributions to us and, consequently,
restrict our ability to pay dividends on our common stock.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected consolidated financial data and
other data as of and for the fiscal years ended December 28, 1996, December 27,
1997, December 26, 1998, December 25, 1999 and December 30, 2000. You should
read the information contained in this table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 and our consolidated financial statements and the related
notes contained in Item 8.
FISCAL YEAR(1)
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total net sales........................................... $165,563 $181,227 $205,061 $231,413 $306,585
Cost of products sold and services provided............... 107,736 121,974 134,307 146,729 186,654
Selling, general and administrative expenses.............. 28,327 30,451 34,142 39,765 51,204
Amortization of goodwill and intangibles.................. 610 834 1,287 1,956 3,666
Restructuring charges..................................... 4,748 5,892 -- -- --
-------- -------- -------- -------- --------
Operating income.......................................... 24,142 22,076 35,325 42,963 65,061
Interest income........................................... 654 865 986 536 1,644
Other income.............................................. -- -- -- 89 390
Interest expense.......................................... (491) (501) (421) (12,789) (40,691)
Gain (loss) from foreign currency, net.................... 84 (221) (58) (136) (319)
-------- -------- -------- -------- --------
Income before income taxes, minority interests and
earnings from equity investments........................ 24,389 22,219 35,832 30,663 26,085
Provision for income taxes................................ 10,889 8,499 14,123 15,561 7,837
-------- -------- -------- -------- --------
Income before minority interests and earnings from equity
investments............................................. 13,500 13,720 21,709 15,102 18,248
Minority interests........................................ (5) (10) (10) (22) (1,396)
Earnings from equity investments.......................... 1,750 1,630 1,679 2,044 1,025
-------- -------- -------- -------- --------
Income before extraordinary item.......................... 15,245 15,340 23,378 17,124 17,877
Extraordinary loss, net of tax............................ -- -- -- -- (29,101)
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 15,245 $ 15,340 $ 23,378 $ 17,124 $(11,224)
======== ======== ======== ======== ========
OTHER DATA:
Depreciation and amortization............................. $ 9,528 $ 9,703 $ 10,895 $ 12,318 $ 16,766
Capital expenditures...................................... 11,572 11,872 11,909 12,951 15,565
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................. $ 19,657 $ 17,915 $ 24,811 $ 15,010 $ 33,129
Working capital........................................... 48,955 46,153 42,574 27,574 55,417
Total assets.............................................. 196,981 196,211 234,254 359,096 410,608
Total debt................................................ 1,645 1,363 1,582 386,044 202,912
Total shareholders' equity (deficit)...................... 153,818 149,364 168,259 (110,142) 116,927
- ------------------------------
(1) Our fiscal year consists of 12 months ending on the last Saturday on or
prior to December 31.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS FILED FEBRUARY 14, 2001.
OVERVIEW
We are a leading provider of critical research tools and integrated support
services that enable innovative and efficient drug discovery and development. We
are the global leader in providing the animal research models required in
research and development for new drugs, devices and therapies and have been in
this business for more than 50 years.
We operate in two segments for financial reporting purposes: research models
and biomedical products and services. In addition, since services represent over
10% of our net sales, our consolidated financial statements also provide a
breakdown of net sales between net sales related to products, which include both
research models and biomedical products, and net sales related to services,
which reflect biomedical services, and a breakdown of costs between costs of
products sold and costs of services provided. The following tables show the net
sales and the percentage contribution of our segments, research models and
biomedical products and services, for the past three years. They also show costs
of products sold and services provided, selling, general and administrative
expenses and operating income for both research models and biomedical products
and services by segment and as percentages of their respective segment net
sales.
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
(DOLLARS IN MILLIONS)
Net sales:
Research models......................................... $144.9 $152.5 $187.7
Biomedical products and services........................ 60.2 78.9 118.9
Costs of products sold and services provided:
Research models......................................... $ 96.1 $ 96.5 $113.3
Biomedical products and services........................ 38.2 50.2 73.4
Selling, general and administrative expenses:
Research models......................................... $ 18.1 $ 22.2 $ 30.9
Biomedical products and services........................ 9.7 12.5 18.2
Operating income:
Research models......................................... $ 30.5 $ 33.7 $ 43.1
Biomedical products and services........................ 11.1 14.4 24.1
19
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
(AS A PERCENT OF NET SALES)
Net sales:
Research models......................................... 70.6% 65.9% 61.2%
Biomedical products and services........................ 29.4 34.1 38.8
Costs of products sold and services provided:
Research models......................................... 66.3% 63.3% 60.4%
Biomedical products and services........................ 63.5 63.6 61.7
Selling, general and administrative expenses:
Research models......................................... 12.5% 14.6% 16.5%
Biomedical products and services........................ 16.1 15.8 15.3
Operating income:
Research models......................................... 21.0% 22.1% 23.0%
Biomedical products and services........................ 18.4 18.3 20.3
NET SALES. We recognize revenue with respect to research model sales upon
transfer of title, which is when the risks and rewards of ownership pass to the
customer. We recognize revenues with respect to services as these services are
performed. Over the past three years, unit volume of small animal research
models has increased modestly in North America and has decreased modestly in
Europe. During the same period, sales in both North America and Europe have
increased, principally as a result of price increases and a shift in mix towards
higher priced research models. In recent years, we have increased our focus on
the sale of specialty research models, such as special disease models, which
have contributed to additional sales growth.
Our customers typically place orders for research models with less than a
week's lead time. Meeting such demand requires efficient inventory management
and strong customer service support. We improved inventory availability in the
last three years through better forecasting and production mix, and most
importantly, improved biosecurity, thereby reducing contaminations.
Biomedical products and services have grown at a compounded rate of 36.3%
from 1998 to 2000. Our growth in this business demonstrated our ability to
capitalize on our core research model technology and enter into related product
development activities undertaken by our customers.
PRICING. We maintain published list prices for all of our research models,
biomedical products and some of our services. We also have pricing agreements
with our customers which provide some discounts, usually based on volume. Many
of our services are based on customized orders and are priced accordingly. While
pricing has been competitive, some of our products are priced at a premium due
to the higher quality, better availability and superior customer support that
our customers associate with our products.
BIOSECURITY. Biosecurity is one of our highest operational priorities.
Prior breaches of biosecurity have adversely affected our results of operations,
and we cannot assure you that future breaches would not materially affect our
results of operations. A biosecurity breach typically results in additional
expenses from the need to clean up the contaminated room, which in turn results
in inventory loss, clean-up and start-up costs, and can reduce net sales as a
result of lost customer orders and credits for prior shipments. We experienced a
few significant contaminations in 1997 in our isolation rooms for research
models and in our poultry houses for vaccine support products. Since January 1,
1997, we have made over $8 million of capital expenditures designed to
strengthen our biosecurity, primarily by upgrading our production facilities. In
addition, we have made significant changes to our operating procedures for
isolation rooms and poultry houses designed to further minimize the risks of
20
contamination, including, for example, increasing the frequency of replacing
masks and gowns, and most importantly, increasing awareness and training among
our employees. These improvements to our operating procedures increased annual
ongoing biosecurity-related expenses by approximately $0.5 million in 1999.
While we cannot assure you that we will not experience future significant
isolation room or poultry house contaminations in the future, we believe these
changes have contributed to our absence of significant contaminations during
1998, 1999 and 2000.
ACQUISITIONS. Since January 1, 1998, we have successfully acquired and
integrated four companies, which contributed $47.4 million in sales in 2000,
representing 15.5% of total sales. On September 29, 1999, we acquired Sierra for
an initial total purchase price of $23.3 million, including approximately
$17.3 million in cash paid to former shareholders and assumed debt of
approximately $6.0 million, which we immediately retired. In addition, we are
obligated to pay $2.0 million in additional purchase price due to specified
financial objectives being reached by December 30, 2000. The additional
consideration was recorded as additional goodwill in the year ended
December 30, 2000. We have also agreed to pay (a) up to $10.0 million in
performance-based bonus payments if specified financial objectives are reached
in the five years following the acquisition date, with no payment in any
individual year to exceed $2.7 million and (b) $3.0 million in retention and
non-competition payments contingent upon the continuing employment of specified
key scientific and managerial personnel through June 30, 2001. Sierra became
part of our drug safety assessment area.
The $10.0 million in performance-based bonus payments, will, if paid, be
expensed during the periods in which it becomes reasonably certain that the
financial objectives will be achieved. Approximately $1.4 million of
performance-based bonus payments were made on December 31, 2000 and were
recorded as compensation expense in the year ended December 30, 2000. We
expensed $1.4 million in fiscal 1999 and $1.0 million in fiscal 2000 of the
$3.0 million in retention and non-competition payments. The $0.6 million
remaining will be expensed ratably through June 2001.
Effective January 8, 2001 we purchased 100% of the common stock of PAI. We
paid consideration of $37 million with respect to this acquisition, consisting
of $25 million in cash and a $12 million callable convertible note.
On February 27, 2001 we acquired Primedica for consideration of
approximately $52 million. The consideration is comprised of $26 million in
cash, $16.5 million in restricted stock (which we may repurchase through
July 1, 2001) and $9.5 million in assumed debt.
JOINT VENTURES. At December 25, 1999, we had two unconsolidated joint
ventures. As of February 28, 2000, we acquired an additional 16% equity interest
in one of the joint ventures, Charles River Japan, increasing our ownership
interest to 66%. The purchase price for the 16% equity interest was 1.4 billion
yen, or $12.8 million, of which 400 million yen, or $3.7 million, was paid by a
three-year balloon promissory note secured by a pledge of the purchased
interest. The note bears interest at the long-term prime rate in Japan. Charles
River Japan is engaged principally in the research model business. Our royalty
agreement provides us with 3% of the sales of locally produced research models,
and having acquired majority ownership, we have consolidated its operations for
financial reporting purposes from the effective date of the acquisition in the
first quarter of fiscal 2000. This contributed $36.6 million in sales in 2000.
We also receive dividends based on our pro-rata share of net income. Charles
River Japan paid dividends prior to the additional equity investment amounted to
$0.7 million, $0.8 million and $0.0 million in 1998, 1999 and 2000,
respectively. Our other unconsolidated joint venture is Charles River Mexico, an
extension of our vaccine support products area, which is not significant to our
business.
ALLOCATION OF COSTS FROM BAUSCH & LOMB. Historically, B&L charged us for
some direct expenses, including insurance, information technology and other
miscellaneous expenses, based upon actual charges incurred on our behalf.
However, these charges and estimates are not necessarily indicative of
21
the costs and expenses which would have resulted had we incurred these costs as
a stand-alone entity. The actual amounts of expenses we incur in future periods
may vary significantly from these allocations and estimates.
THE RECAPITALIZATION AND SIERRA ACQUISITION. The recapitalization, which
was consummated on September 29, 1999, was accounted for as a leveraged
recapitalization and had no impact on the historical basis of our assets and
liabilities. The Sierra acquisition was accounted for under the purchase method
of accounting with the purchase price allocated to the assets and liabilities of
Sierra based on an estimate of their fair value, with the remainder allocated to
goodwill. We incurred various costs of approximately $22.6 million (pre-tax) in
connection with consummating the recapitalization. We have capitalized and are
amortizing the portion of these costs that represents deferred financing costs
(approximately $14.4 million) over the life of the related financing. We have
charged a portion of the expenses related to the recapitalization (approximately
$8.2 million) to retained earnings.
DEFERRED TAX ASSETS. In conjunction with the recapitalization, CRL
Acquisition LLC and B&L made a joint election under section 338(h)(10) of the
Internal Revenue Code of 1986, as amended. Such election resulted in a step-up
in the tax basis of the underlying assets and a net deferred tax asset of
$99.5 million was recorded in the consolidated financial statements. The tax
purchase price allocation related to the election was not finalized until the
second quarter of 2000, and an adjustment of $4.5 million was recorded in that
quarter to reduce the net deferred tax asset balance and capital in excess of
par in accordance with the final allocation. In addition, we have used the
proceeds from our initial public offering to repay a portion of our outstanding
debt and expect to be more profitable in the future, due to reduced interest
costs. We therefore reassessed the need for a valuation allowance associated
with the deferred asset balance discussed above and reduced this valuation
allowance by $4.8 million. This reduction in valuation allowance was recorded as
a tax benefit in the second quarter of 2000. The net deferred tax asset
pertaining to the election under section 338(h)(10) of the Internal Revenue Code
as of December 30, 2000 of approximately $92.3 million is expected to be
realized over 15 years through future tax deductions which are expected to
reduce future tax payments. It is possible that the Internal Revenue Service may
challenge the availability of the section 338(h)(10) election. If the Internal
Revenue Service were successful, the expected future tax benefits from the
election would not be available, and we would be required to write off the
related deferred tax assets by recording a non-recurring expense in our results
of operations in an amount equal to such deferred tax assets. See Note (9) to
the consolidated financial statements. We believe that the reorganization and
liquidating distribution should not have any impact upon the election for
federal income tax purposes. However, the Internal Revenue Service may reach a
different conclusion. See "Item 1--Business, Tax benefits we expect to be
available in the future may be subject to challenge."
INITIAL PUBLIC OFFERING. The net proceeds of our initial public offering
were used to repay approximately $204.7 million in outstanding indebtedness,
including issuance discounts, in the third quarter of 2000. In connection with
this repayment we also have paid premiums and written off deferred financing
costs. We recorded an extraordinary loss of $29.1 million, net of tax benefits
of $15.7 million, in the third quarter of 2000.
22
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net sales for the periods shown:
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1998 1999 2000
------------ ------------ ------------
Net sales............................................... 100.0% 100.0% 100.0%
Costs of products sold and services provided............ 65.5 63.4 60.9
Selling, general and administrative expenses............ 16.6 17.2 16.7
Amortization of goodwill and other intangibles.......... 0.6 0.8 1.2
Interest income......................................... 0.5 0.2 0.5
Interest expense........................................ 0.2 5.5 13.3
Provision for income taxes.............................. 6.9 6.7 2.6
Earnings from equity investment......................... 0.8 0.9 0.3
Minority interests...................................... -- -- 0.5
----- ----- -----
Net income.............................................. 11.4% 7.4% 5.8%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES. Net sales in 2000 were $306.6 million, an increase of
$75.2 million, or 32.5%, from $231.4 million in 1999. Results for 2000 and 1999
on a pro forma basis for the strategic transactions, which include the
acquisition of Sierra in September 1999 and the acquisition of control of our
Japanese joint venture in February 2000, reflect a 10% increase for the year,
12.4% excluding the impact of foreign currencies.
RESEARCH MODELS. Net sales of research models in 2000 were $187.7 million,
an increase of $35.2 million, or 23.1%, from $152.5 million in 1999. Small
animal research model sales increased in North America by 12.3% due to continued
improved pricing, a shift to higher priced specialty units and an increase in
unit volume. Excluding negative currency translation of $7.6 million and the
reduction in lab equipment sales of $1.8 million which tends to be variable,
European small animal research model sales increased by 3.2%. Small animal
research model sales in Japan, which we began consolidating during the first
quarter of 2000, were $36.2 million in 2000. We also experienced an increase
during 2000 in our large animal import and conditioning business of 5.2%. Our
large animal breeding colony in Florida, which was sold in the first quarter of
2000, accounted for $2.8 million of sales in 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services in 2000 were $118.9 million, an increase of $40.0 million, or 50.7%,
from $78.9 million in 1999. Sierra contributed $26.8 million of sales growth in
2000 due to the full year impact of its acquisition. The remaining product lines
increased 18.3% in total in 2000 primarily due to increased outsourcing by our
customers.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided in 2000 was $186.7 million, an increase of $40.0 million, or
27.3%, from $146.7 million in 1999. Cost of products sold and services provided
in 2000 was 60.9% of net sales compared to 63.4% of net sales in 1999.
RESEARCH MODELS. Cost of products sold and services provided for research
models in 2000 was $113.3 million, an increase of $16.8 million, or 17.4%,
compared to $96.5 million in 1999. Cost of products sold and services provided
in 2000 was 60.4% of net sales compared to 63.3% of net sales in 1999. Cost of
products sold and services provided increased at a lower rate than net sales due
to increased sales volume resulting in improved capacity utilization.
23
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services in 2000 was $73.4 million, an
increase of $23.2 million, or 46.2%, compared to $50.2 million in 1999. Cost of
products sold and services provided as a percentage of net sales in 2000 was
61.7%, an improvement from 63.6% in 1999. The favorable cost of products sold
and services provided as a percent of net sales in 2000 is attributable to our
increased sales and improved Sierra profitability.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 2000 were $51.2 million, an increase of
$11.4 million, or 28.6%, from $39.8 million in 1999. Selling, general and
administrative expenses for 2000 were 16.7% of net sales compared to 17.2% of
net sales in 1999.
RESEARCH MODELS. Selling, general and administrative expenses for research
models in 2000 were $30.9 million, an increase of $8.7 million, or 39.2%,
compared to $22.2 million in 1999. The $8.7 million increase is mainly due to
consolidation of Charles River Japan in the first quarter of 2000 along with a
$1.3 million restructuring charge for a plant closing and personnel reductions
in one of our small animal research models locations in France. Selling, general
and administrative expenses for 2000 were 16.5% of net sales, compared to 14.6%
for 1999.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services in 2000 were $18.2 million, an
increase of $5.7 million, or 45.6%, compared to $12.5 million in 1999. The
acquisition of Sierra in the fourth quarter of 1999 accounts for $2.9 million of
the increase. Selling, general and administrative expenses in 2000 decreased to
15.3% of net sales, compared to 15.8% of net sales in 1999, due to greater
economies of scale realized though our acquisition of Sierra and increased
sales.
UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $2.1 million in 2000 compared to
$5.1 million in 1999. Unallocated corporate overhead has decreased mainly due to
pension income from favorable investment returns.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles in 2000 was $3.7 million, an increase of $1.7 million from
$2.0 million in 1999. The increase was due mainly to the full year effect of the
amortization of intangibles from our Sierra acquisition.
OPERATING INCOME. Operating income in 2000 was $65.1 million, an increase
of $22.1 million, or 51.4%, from $43.0 million in 1999. Operating income in 2000
was 21.2% of net sales, compared to 18.6% of net sales in 1999. Operating income
increased in total and as a percentage of net sales due to our sales growth,
acquisition of Sierra and improved capacity utilization.
RESEARCH MODELS. Operating income from sales of research models in 2000 was
$43.1 million, an increase of $9.4 million, or 27.9%, from $33.7 million in
1999. Operating income from sales of research models in 2000 was 23.0% of net
sales, compared to 22.1% in 1999. The increased operating income was
attributable to the growth in sales coupled with improved capacity utilization.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services in 2000 was $24.1 million, an increase of $9.7 million, or
67.4%, from $14.4 million in 1999. Operating income from sales of biomedical
products and services in 2000 increased to 20.3% of net sales, compared to 18.3%
of net sales in 1999. The increase is attributable to our acquisition of Sierra
as well as our increased sales.
INTEREST EXPENSE. Interest expense in 2000 was $40.7 million compared to
$12.8 million in 1999. The $27.9 million increase from 1999 was primarily due to
the additional debt incurred as a result of the recapitalization which occurred
on September 29, 1999 partially offset by the debt repayment in the third
quarter.
24
INCOME TAXES. The effective tax rate in 2000 excluding the reversal of the
deferred tax valuation allowance of $4.8 million was 48.3% as compared to 50.7%
in 1999. The impact of leverage in the first half of the year had an unfavorable
impact on our tax rate by lowering our pre-tax income, and increasing the impact
of the permanent timing differences on the tax rate. The effective tax rate did
improve in the last six months. The $4.8 million reversal of the valuation
allowance associated with the deferred tax asset, was recorded as a tax benefit
in the second quarter of 2000 due to a reassessment of the need for a valuation
allowance following our initial public offering.
INCOME BEFORE THE EXTRAORDINARY LOSS. Income before the extraordinary loss
in 2000 was $17.9 million, an increase of $0.8 million from $17.1 million in
1999. The increase is driven by the increase in operating income and the
reversal of the deferred tax valuation allowance, which is partially offset by
the full year impact of interest expense.
EXTRAORDINARY LOSS. We recorded an extraordinary loss of $29.1 million
during the third quarter of 2000. The pre-tax loss of $44.8 million is the
result of premiums related to the early repayment of debt and the write off of
deferred financing costs and issuance discounts associated with the debt
repayments, and is recorded net of tax benefits of $15.7 million.
NET INCOME (LOSS). The loss in 2000 was $11.2 million, a decrease of
$28.3 million from net income of $17.1 million in 1999. The increased income
from operations and the reversal of the deferred tax valuation allowance was
offset by the extraordinary loss associated with the debt repayment and the full
year impact of interest expense.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales in 1999 were $231.4 million, an increase of
$26.3 million, or 12.8%, from $205.1 million in 1998.
RESEARCH MODELS. Net sales of research models in 1999 were $152.5 million,
an increase of $7.6 million, or 5.2%, from $144.9 million in 1998. Sales
increased due to the increase in small animal research model sales in North
America and Europe of $7.1 million, resulting from improved pricing, a more
favorable product mix (meaning a shift to higher priced units) and an increase
in unit volume. We also experienced an increase in the large animal import and
conditioning area of $0.6 million, mainly due to pricing.
BIOMEDICAL PRODUCTS AND SERVICES. Net sales of biomedical products and
services in 1999 were $78.9 million, an increase of $18.7 million, or 31.1%,
from $60.2 million in 1998. At the beginning of the second quarter of 1998, we
made two acquisitions that contributed $3.4 million of this sales growth, and on
September 29, 1999, we acquired Sierra which had sales of $5.9 million in the
fourth quarter. The remaining increase was due to significant sales increases of
transgenic and research support services of $2.9 million and endotoxin detection
systems of $2.2 million, and sales from our contract site management services of
$1.8 million, primarily due to better customer awareness of our outsourcing
solutions.
COST OF PRODUCTS SOLD AND SERVICES PROVIDED. Cost of products sold and
services provided in 1999 was $146.7 million, an increase of $12.4 million, or
9.2%, from $134.3 million in 1998.
RESEARCH MODELS. Cost of products sold and services provided for research
models in 1999 was $96.5 million, an increase of $0.4 million, or 0.4%, compared
to $96.1 million in 1998. Cost of products sold and services provided in 1999
was 63.3% of net sales compared to 66.3% of net sales in 1998. Cost of products
sold and services provided increased at a lower rate than net sales due to the
more favorable product mix and better pricing, as well as improved capacity
utilization.
25
BIOMEDICAL PRODUCTS AND SERVICES. Cost of products sold and services
provided for biomedical products and services in 1999 was $50.2 million, an
increase of $12.0 million, or 31.4%, compared to $38.2 million in 1998. Cost of
products sold and services provided as a percentage of net sales was essentially
unchanged at 63.6% in 1999 compared to 63.5% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1999 were $39.8 million, an increase of
$5.7 million, or 16.7%, from $34.1 million in 1998. Selling, general and
administrative expenses in 1999 were 17.2% of net sales compared to 16.6% of net
sales in 1998. Selling, general and administrative expenses also included
research and development expense of $0.5 million in 1999 compared to
$1.4 million in 1998.
RESEARCH MODELS. Selling, general and administrative expenses for research
models in 1999 were $22.2 million, an increase of $4.1 million, or 22.7%,
compared to $18.1 million in 1998. Selling, general and administrative expenses
in 1999 were 14.6% of net sales, compared to 12.5% in 1998. The increase was
attributable to additional worldwide marketing efforts, additional salespeople
in the United States and the impact of selling efforts in Europe for ESD, a
business acquired at the end of 1998.
BIOMEDICAL PRODUCTS AND SERVICES. Selling, general and administrative
expenses for biomedical products and services in 1999 were $12.5 million, an
increase of $2.8 million, or 28.9%, compared to $9.7 million in 1998. Selling,
general and administrative expenses in 1999 decreased to 15.8% of net sales,
compared to 16.1% of net sales in 1998, due to greater economies of scale.
UNALLOCATED CORPORATE OVERHEAD. Unallocated corporate overhead, which
consists of various corporate expenses, was $5.1 million in 1999, a decrease of
$1.2 million, or 19.0%, compared to $6.3 million in 1998. The decrease was
principally from the increase in cash surrender value associated with our
supplemental executive retirement program.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles in 1999 was $2.0 million, an increase of $0.7 million, or
53.8%, from $1.3 million in 1998. The increase was due to the effect of
additional amortization of intangibles resulting from four recent acquisitions,
two in April 1998, one in December 1998, and Sierra in September 1999.
RESTRUCTURING CHARGES. There were no restructuring charges in 1999 or 1998.
During 1999, we charged $1.1 million against the previously recorded
restructuring reserves, bringing the balance at year-end to zero.
OPERATING INCOME. Operating income in 1999 was $43.0 million, an increase
of $7.7 million, or 21.8%, from $35.3 million in 1998. Operating income in 1999
was 18.6% of net sales, compared to 17.2% of net sales in 1998. Operating income
increased in total and as a percentage of net sales for the reasons described
above.
RESEARCH MODELS. Operating income from sales of research models in 1999 was
$33.7 million, an increase of $3.2 million, or 10.5%, from $30.5 million in
1998. Operating income from sales of research models in 1999 was 22.1% of net
sales, compared to 21.0% in 1998. The increase was attributable to the factors
described above.
BIOMEDICAL PRODUCTS AND SERVICES. Operating income from sales of biomedical
products and services in 1999 was $14.4 million, an increase of $3.3 million, or
29.7%, from $11.1 million in 1998. Operating income from sales of biomedical
products and services in 1999 decreased to 18.3% of net sales, compared to 18.4%
of net sales in 1998. This was primarily due to the acquisition of Sierra and
the impact of additional amortization of intangibles.
26
OTHER INCOME. We recorded a $1.4 million gain on the sale of two small
facilities, one located in Florida, and the other located in the Netherlands,
and a charge of $1.3 million for stock compensation expense.
INTEREST EXPENSE. Interest expense for 1999 was $12.8 million compared to
$0.4 million for 1998. The $12.4 million increase was primarily due to the
additional debt incurred in the recapitalization.
INCOME TAXES. The effective tax rate of 50.7% in 1999 as compared to 39.4%
in 1998 reflects the remittance of cash dividends of $20.7 million from our
foreign subsidiaries which, in turn, were remitted to B&L. The related amounts
were previously considered permanently reinvested in the foreign jurisdictions
for U.S. income tax reporting purposes. Therefore, we were required to provide
additional taxes upon their repatriation to the United States. In addition, in
1999, an election was made by B&L to treat some foreign entities as branches for
U.S. income tax purposes. As a result, all previously untaxed accumulated
earnings of such entities became immediately subject to tax in the United
States. The receipt of the cash dividends from the foreign subsidiaries and the
foreign tax elections made resulted in incremental United States taxes of
$2.0 million, net of foreign tax credits, in 1999.
NET INCOME. Net income in 1999 was $17.1 million, a decrease of
$6.3 million, or 26.9%, from $23.4 million in 1998. The decrease was
attributable to the increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal sources of liquidity were cash flow from
operations, borrowings under our credit facility and proceeds from our initial
public offering.
In September 1999, we received a $92.4 million equity investment from DLJMB
and affiliated funds, management and some other investors, we issued
$37.6 million senior discount debentures with warrants to purchase common stock
and $150.0 million units consisting of senior subordinated notes due in 2009
with warrants to purchase common stock, and borrowed $162.0 million under our
senior secured credit facility. We redeemed 87.5% of our outstanding capital
stock held by B&L for $400.0 million and a $43.0 million subordinated discount
note. We simultaneously acquired Sierra for an initial purchase price of
$23.3 million including $17.3 million paid to its former stockholders and
$6.0 million of assumed debt which we immediately retired.
Borrowings under the credit facility bear interest at a rate per year equal
to a margin over either a base rate or LIBOR. The $30.0 million revolving loan
commitment will terminate six years after the date of the initial funding of the
credit facility. The revolving credit facility may be increased by up to
$25.0 million at our request, which will only be available to us under some
circumstances, under the same terms and conditions of the original
$30.0 million revolving credit facility. The term loan facility under the credit
facility consists of a $40.0 million term loan A facility and a $120.0 million
term loan B facility. The term loan A facility matures six years after the
closing date of the facility and the term loan B facility matures eight years
after the closing date of the facility. In February, 2001, in connection with
the anticipated Primedica acquisition, we amended our credit facility to add a
$25 million term C loan facility and to increase the interest rate on the
term A loan facility to LIBOR plus 1.75% from LIBOR plus 1.5%. As of
January 30, 2001, the interest rate on the term A loan facility was 8.1375%, the
interest rate on the term B loan facility was 10.3875%, the interest rate on the
term C loan facility was 8.1375% and there was an aggregate of $116.1 million
outstanding under our loan facilities. The credit facility contains customary
covenants and events of default, including substantial restrictions on our
subsidiary's ability to declare dividends or make distributions. The term loans
are subject to mandatory prepayment with the proceeds of certain asset sales and
a portion of our excess cash flow.
In February 2000, the 13.5% senior subordinated notes were exchanged for
registered notes having the same financial terms and covenants as the notes
issued in September 1999. Interest on the notes is
27
payable semi-annually in cash. The notes contain customary covenants and events
of default, including covenants that limit our ability to incur debt, pay
dividends and make particular investments.
In the third quarter of 2000, we consummated an initial public offering of
16,100,000 shares of our common stock at a price of $16.00 per share. We used
the net proceeds from the offering of approximately $236.0 million to redeem a
portion of the outstanding senior subordinated notes, including associated
premiums and to repay our senior discount debentures, subordinated discount note
and a portion of our bank debt.
On March 21, 2001, we consummated a public offering of 3,500,000 shares of
our common stock, at a price of $19.00 per share. In the offering, 4,550,000
shares of common stock, which included the exercise of the underwriters'
over-allotment option of 1,050,000 shares were also sold by existing
shareholders. We received proceeds of approximately $62.5 million, which we
intend to use to repay a portion of our indebtedness, retire obligations
incurred in connection with recent acquisitions and for general corporate
purposes.
We anticipate that our operating cash flow, together with borrowings under
our credit facility, will be sufficient to meet our anticipated future operating
expenses, capital expenditures and debt service obligations as they become due.
However, Charles River Laboratories International, Inc. is a holding company
with no operations or assets other than its ownership of 100% of the common
stock of its subsidiary, Charles River Laboratories, Inc. We have no source of
liquidity other than dividends from our subsidiary.
FISCAL 2000 COMPARED TO FISCAL 1999
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of Charles River totaled $33.1 million at
December 30, 2000 compared with $15.0 million at December 25, 1999. Our
principal sources of liquidity were cash flows from operations, borrowings under
our credit facilities and cash provided by our initial public offering.
Net cash provided by operating activities for the year 2000 was
$33.8 million compared to net cash provided of $37.6 million in 1999. Net loss
for the year 2000 was $11.2 million compared to net income of $17.1 million in
1999. Net income was impacted by the extraordinary loss of $29.1 million net of
tax benefits of $15.7 million.
Net cash used in investing activities during the year 2000 was
$14.6 million compared to $34.2 million in 1999. On February 28, 2000, we
acquired an additional 16% of the equity (340,840 common shares) of our 50%
equity joint venture, Charles River Japan, from Ajinomoto Co., Inc. The purchase
price for the equity was 1.4 billion yen or $12.8 million. One billion yen, or
$9.2 million was paid at closing and the balance of 400 million yen, or
$3.7 million was deferred pursuant to a three year balloon promissory note. In
addition, we acquired $3.2 million in cash. In January of 2000 we sold our
primate colony in Florida for $7.0 million. In September of 1999 we purchased
100% of the common stock of Sierra for $23.3 million including $17.3 million
paid to Sierra's former stockholders and $6.0 million of assumed debt which was
immediately retired. Capital expenditures in the year 2000 were $15.6 million
compared to $13.0 million in 1999.
Net cash provided by financing activities during 2000 was $0.8 million
compared to cash used of $11.5 million in 1999. We received $236.0 million from
our initial public offering of which we used $204.4 million to pay down our
existing debt, including issuance discounts, and $31.5 million to pay premiums
associated with the early repayment of the debt. In 1999, we received a
$92.4 million equity investment from DLJMB and affiliated funds, management and
some other investors, we issued $37.6 million senior discount debentures, which
were retired in full in 2000, with warrants to purchase common stock. During
1999 we also issued $150.0 million units consisting of senior subordinated
notes, of which $52.5 million was retired in 2000, with warrants to purchase
common stock. Furthermore in
28
1999 we borrowed $162.0 million under our senior secured credit facility and
paid off $63.9 million in 2000. In 1999 we redeemed 87.5% of our outstanding
capital stock held by B&L for $400.0 million and a $43.0 million subordinated
discount note, which we repaid in 2000. Net activity with B&L, our 100%
shareholder up until the recapitalization in 1999, was $29.4 million in net
payments in 1999.
We anticipate that our operating cash flows, together with borrowings under
our credit facility, will be sufficient to meet our anticipated future operating
expenses, capital expenditures and debt service obligations as they become due.
FISCAL 1999 COMPARED TO FISCAL 1998
Cash flows from operating activities in 1999 were $37.6 million compared to
$37.4 million in 1998. Net cash used in investing activities in 1999 was
$34.2 million compared to $23.0 million in 1998. The increase was primarily due
to the acquisition of Sierra for $23.3 million. Capital expenditures in 1999
were $13.0 million versus $11.9 million in 1998.
Net cash used in financing activities in 1999 was $11.5 million versus
$8.0 million in 1998. The activity in 1999 consisted of payments for deferred
financing costs of $14.4 million and transactions costs of $8.2 million
associated with the recapitalization. We also paid a dividend of $29.4 million
to B&L, which was excess cash at the time of the recapitalization, and the
recapitalization consideration was $400.0 million. The above was offset by the
proceeds from the issuance of long-term debt of $339.0 million, the issuance of
warrants of $10.6 million, and the issuance of common stock of $92.4 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. This statement also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 30, 1999. However, Statement of
Financial Accounting Standards No. 137, "Deferral of the Effective Date of SFAS
No. 133," was issued to defer adoption of SFAS No. 133 to fiscal years beginning
after June 30, 2000. Based on the analysis prepared by the Company to date, the
adoption of this statement will not have a material impact on the Company's
results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates and
foreign currency exchange rates. Our primary interest rate exposure results from
changes in LIBOR or the base rate which are used to determine the applicable
interest rates under our term loans and revolving cre